Becton Dickinson and Co (BDX) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Becton, Dickinson fourth quarter 2006 earning results conference call.

[OPERATOR INSTRUCTIONS].

The phone numbers for the replay are (719)457-0820, and toll free (888)203-1112. The passcode to enter for the replay is 4839685. Again, that passcode is 4839685. At this time for opening remarks and introductions I would like to turn the conference over to Patricia Spinella. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us to review our fourth fiscal quarter and full year results. Today's call is being simultaneously webcast and will be available for replay through Thursday, November 9, on the Investor page of the bd.com Web site. During today's call we will discuss some nonGAAP financial measures with respect to our performance. A reconciliation of these nonGAAP to GAAP measures can be found in our fourth quarter press release and its related financial tables. A copy of the release including the financial tables is posted on the Investor page of the bd.com Web site.

We will also make some forward-looking statements and it's possible that actual results could differ from our expectations. Factors that could cause such differences appear in the fourth quarter press release and in the MD&A section of our recent SEC filings. Leading this call this morning are Ed Ludwig, Chairman, President and Chief Executive Officer, and John Considine, Senior Executive Vice President and Chief Financial Officer. Also joining us are BD Executive Vice Presidents, Gary Cohen, Bill Kozy and Vince Forlenza. I will now turn the call over to John.

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

Broadly speaking, there are four primary topics we'd like to address. I will address the first three and Ed will take the fourth. The first is. since there are certain items that affect the comparability of our diluted EPS for the continuing operations of the fourth quarter and 12-month periods of '06 and '05, we want to review the analysis we have provided in the press releases with you. Second, we will describe some of the key drivers of our revenue and earnings growth for the fourth quarter and full year. Third, we will review our guidance for 2007. And lastly, Ed will review our strategy, future direction and anything else that you would like to discuss.

Starting with our earnings I suggest that you turn first to the initial table in the press release that appears under the heading, analyses, fourth quarter and full year, 2006 and 2005 earnings. The fourth quarter of 2006 we begin with reported diluted EPS from continuing operations of $0.69, and add back the $0.17 charge resulting from our announcement on September 28 to exit the BGM market. Taking into account $0.01 of rounding we have diluted EPS from continuing operations excluding specified items of $0.85. For fourth quarter 2005, we begin with reported diluted EPS from continuing operations of $0.47, and add back $0.02 relating to tax related events that caused that quarter's tax rate to be somewhat higher than the effective tax rate for fiscal 2005. Next add back $0.27 related to the repatriation of the $1.3 billion under the foreign -- of foreign earnings under the American Jobs Creation Act. That was the tax charge.

As a result, our diluted EPS from continuing operations excluding specified items for the fourth quarter of '05 was $0.76. Comparing the $0.85 to the $0.76 in the prior year gives us an adjusted EPS increase of 12%. Moving to our full year 2006 results, we begin with reported diluted EPS from continuing operations of 2.95. We subtract $0.04 resulting from the insurance settlements related to our former latex glove business and add back $0.21 representing the in process R&D charge related to the GeneOhm acquisition. We then add back the charge of $0.17 related to the BGM market exit and subtract $0.01 due to rounding. This gives us diluted EPS from continuing operations excluding specified items for 2006 of $3.28. For '05 we begin with reported diluted EPS of 2.66. We then subtract $0.04 that was recorded due to the reversal of tax reserves no longer required due to the favorable conclusion of certain international examinations and add back the $0.27 charge related to the previously mentioned repatriation of $1.3 billion. Again, taking into account $0.01of rounding we have diluted EPS from continuing operations excluding these specified items of 2.88. Comparing the 3.28 in '06 to the 2.88 in '05 gives us an adjusted EPS increase of 14%.

One final comment on the fourth quarter and 12-month results. In both cases they include dilution from the GeneOhm operations, specifically about $0.03 in the fourth quarter and about $0.06 in the 12-month period.

Moving to the second topic, which is what drove our growth and keeping in mind everything being addressed is on an adjusted basis, that is excluding specified items, I'll begin with revenue growth of 8% for the quarter. This growth included about 1.5 percentage point benefit from foreign currency translation. Our revenues for the full year, which also increased 8%, were unfavorably impacted by about 1 percentage point from foreign currency translation. In the medical segment, fourth quarter revenues grew about 6% with about 1.5 percentage points coming from foreign exchange. The key drivers were pharmaceutical systems products and IV flush syringes. Overall global sales of safety engineered products grew about 5% to 158 million, reflecting a difficult comparison to a very strong fourth quarter last year in the U.S. which was offset in part by strong international growth this year.

For the year, revenues in the medical segment grew about 8% reflecting about a 0.5 percentage point unfavorable impact from foreign exchange. Our pharmaceutical systems, diabetes, safety and flush product lines, in particular, led growth. Global sales of safety engineered products grew about 7% to $613 million. Revenues in the BD Diagnostics segment grew about 9% in the fourth quarter with about 1.5 percentage points coming from foreign exchange. Diagnostic systems and pre-analytical systems units each reported revenue growth of 9%. Global sales of safety engineered products grew about 15% to 165 million due in large part to the continued success of our push button blood collection sets.

For the year, revenues in the BD Diagnostics segment grew about 6% reflecting a 0.5 percentage point unfavorable impact from foreign exchange. Global sales and safety engineered products grew about 15% to $627 million. Our ProbeTec and Viper platforms also contributed to the segment's growth.

Looking at combined medical and diagnostic global safety, sales grew about 10% for the quarter and 11% for the full year to 323 million and 1.240 billion -- hard to say that, $1.24 billion. In the BD Biosciences segment, worldwide revenues from continuing operations grew 11% for the quarter with about 1.5 of those percentage points coming from foreign exchange.

Research instruments and reagents continued to be the primary growth drivers. For the year, worldwide BD Biosciences revenues grew 10% reflecting about 1.5 percentage points unfavorable impact from foreign exchange. Similar to the fourth quarter, research instruments and reagents continued to be the primary revenue drivers with sales of -- cell imaging products also contributing. Moving to earnings and beginning with gross profit, a 30 basis point decline quarter versus quarter was primarily due to productivity and product mix improvements being more than offset by negative foreign exchange, a higher resin cost and some start up costs. You might remember the negative foreign exchange was also resident in last quarter and we can discuss that more fully in the Q. and A. SG&A, as a percentage of sales, improved 90 basis points and R&D spending increased about 9% in absolute terms over the fourth quarter of last year. In terms of cash flow, approximately 16 million was used to repurchase about 226,000 shares of common stock and we invested about 200 million in CapEx. For the year we experienced a 60 basis point improvement in gross profit due to product mix and productivity offset in part by higher oil base resin costs and unfavorable foreign exchange.

SSG&A as a percentage of sales improved 40 basis points and R&D spending increased about 13% in absolute terms over the prior year. For the year, approximately 450 million was used to repurchase 7.3 million shares of common stock and we invested about 460 million in CapEx.

The last topic I'd like to cover is our guidance for fiscal 2007. Once again, I'd suggest that you now turn to the second table in the press release which immediately precedes the conference call information. I've already described all of the specified items you will find in the table. Therefore, for fiscal 2007 diluted EPS from continuing operations are expected to increase approximately 12 to 14% to a range of $3.69 to $3.75. From last year's adjusted base of $3.28.

This estimate includes the minimal dilution related to the operations of TriPath Imaging which we expect to acquire by the end of this calendar year. Before ending we'd like to give you some additional guidance for 2007. Full year reported revenue growth for the Company is expected to be about 6% and that's on a reported basis. After excluding 102 million of BGM revenues for fiscal 2006, apples-to-apples revenue growth is expected to be about 8%. By the way, the BGM sales number excludes about 11 million of lancet business which we are keeping. The estimate also excludes any revenues related to sales made in connection with our commitment to provide test strips until patients final turn into BGM products. These sales are not expected to be significant. Full year's reported revenue growth for BD Medical is expected to be about 5%, again that's reported, again after excluding the 102 million of BGM revenues in fiscal '06, apples-to-apples revenue growth would be about 8%.

Full year revenue growth for BD Diagnostics and BD Biosciences is expected to also be about 8% each. We look for U.S. sales of safety engineered products to increase about 7 to 8% over 2006 and anticipate international safety to increase about 18 to 20%. Overall global safety would therefore increase in the range of 10 to 11% consistent with this year. We expect gross profit margin improvement of about 50 basis points and SSG&A is expected to improve by 80 to 100 basis points primarily driven by our exit from the BGM market. Our R&D spending is expected to increase about 12 to 14% on an absolute basis. Our effective tax rate is projected to be about 27% for the year and, as you know, it could and will vary quarterly.

We expect to generate about 1.2 billion in net cash from operations. Our CapEx are expected to be in the range of 600 to 650 million this year, obviously higher than in recent years, and that is due to significant investments in manufacturing capacity facilities expansion including arm systems and needles, bio nutrients and rapid manual testing. We also expect share repurchases to be about 450 million, and the average number of fully diluted outstanding shares to be in the 255 million range.

Finally, as you have probably noticed we haven't provided explicit guidance for the first quarter. We will, however, call out key assumptions for any given quarter as well as any underlying trends critical to an understanding of the comparison with the prior year. In particular to the first quarter of fiscal 2007, we would expect our earnings from continuing operations excluding specified items to be somewhat lower than our annual guidance. This would result primarily from last year's first quarter having grown by 24% due in particular to a very strong flu season in Japan in the first quarter. As you know, after that start our next three quarters' growth ranged between 10 and 12%.

Therefore with '07's first quarter expected to be somewhat lower than our annual guidance of 12 to 14%, you would expect the last three quarters of '07 to be somewhat higher on average than our first quarter. With that said I would like to now turn the call over to Ed.

Thank you very much, John. Good morning, everyone. Our strong results for the year just ended and our outlook for '07 validate our confidence that the strategy we've been implementing over the past several years is a sound one and it is being effectively executed by our team. This is the sixth year, the sixth consecutive year in which we've achieved or exceeded our quarterly and annual objectives.

Before turning to your questions I would like to expand a little bit beyond the fiscal '07 guidance that John has shared with you and briefly elaborate our strategic direction for the next few years. The first element of our strategy is to increase sustainable revenue growth by designing manufacturing and marketing innovative products that address significant healthcare problems. And deliver demonstrably higher benefits to improve the lives of healthcare workers, patients and researchers. The fundamental innovation strategy that I just described is enabled and fueled by the second element of our strategy which is our commitment to achieve outstanding operating effectiveness and productivity to accelerate our progress.

Our success in the operating effectiveness component of our strategy should result in outstanding customer satisfaction and strong cash flow and it will also very importantly enable us to increase our investments in innovation. Our strategy is primarily driven by organic growth and on occasion we will supplement this growth with well aligned acquisitions. As most of you are aware this year we announced two acquisitions that are strategically compelling and minimal dilution will be short lived. They will be implemented with rigor and discipline. In February we acquired GeneOhm Sciences, a pioneer in the development of molecular diagnostic testing for the rapid detection of bacterial organisms and specifically Methicillin Resistant Staph aureus, and these organisms have been known to cause healthcare associated infections, which I will refer to hereafter as HAIs. HAIs are a global and growing healthcare problem.

The GeneOhm acquisition, a natural complement to BD's core strength in micro biology and molecular diagnostics, delivers on our commitment to expand in molecular diagnostics and positions us to become a leader in the prevention of HAIs. GeneOhm is well-positioned as evidenced by many recent MRSA directed initiatives and events and I would just like to comment about a few of these external to the Company. First of all, the Centers for Disease Control and Prevention, the CDC, issued new guidelines for MRSA prevention on October 19. The CDC is calling on U.S. hospitals to, "take aggressive steps now to reduce rates of MRSA and to make comprehensive infection control programs a priority." Their new guidelines are supportive of our approach for active surveillance testing of all high risk patients, patients who are at risk for MRSA infections upon admission to hospitals.

Additionally, the Association for Professionals in Infection Control and Epidemiology, known as APIC, recently, on August 30 of this year, announced what they call a call to action to its 11,000 members across the U.S. to, "create a commitment to the elimination of MRSA." APIC recommendations will be consistent with CDCs and include active surveillance as a core intervention strategy opening up the opportunity for BD GeneOhm rapid molecular testing approach. And, finally, the Veterans Administration, the VA Hospital system, has initiated this month an 18-hospital pilot program to eradicate MRSA. The VA selected the BD GeneOhm rapid molecular platform for its pilot study led by the VA Hospital system of Pittsburgh. If successful, the VA plans on expanding the program to all 167 sites by the end of 2007. Moving on to the second transaction, which is the TriPath.

This past September we announced an agreement to acquire TriPath Imaging. This strategic acquisition will expand and advance BD's position in cancer diagnostics, aligning innovative new technologies with BD's existing business strategies. It aligns well with our flow cytometry business and other bio marker research programs at BD. Our cancer diagnostic strategy is to improve, through innovative solutions, the clinical management of cancer, including detection, diagnosis, staging and treatment. As John mentioned, we've received FTC approval last week and we are expecting to close the TriPath acquisition by the end of next month. In order to allow us to implement our strategy even more effectively and accelerate the pace of progress, we realigned our organization this year. This action included the creation of an Office of the Chief Executive Officer, we call it the O. C., which is a focused senior executive team responsible for global strategy formulation and execution. This new structure will allow members to take action on particular projects or initiatives for which they may be best suited.

Joining me in the Office of the CEO are John Considine, Senior Executive Vice President and Chief Financial Officer, and the three business leaders, Gary Cohen, Vince Forlenza and Bill Kozy. I have also asked John Hansen, who has successfully led BD's European operations for many years to be a member of the O. C. and to devote his full time to all of our international operations because this area, international growth, is so vital to our future success. Gary, Vince, Bill and John Hansen, have all been named BD Executive Vice Presidents.

Segment financial reporting will not change as a result of this realignment. We believe this new structure will better position BD to address future challenges to discover and optimize growth opportunities and to continue to achieve success. We are also taking disciplined steps to ensure that we are using the right processes to develop new products. We are making significant improvements to our innovation processes by continuing to implement our global product development system which standardizes and harmonizes product development practices and provides a more holistic view of our product development portfolio.

It will help us focus our efforts and critical product development resources on the opportunities that will fuel our growth objectives at all levels of the Company. We are in the early stages of this multi-year initiative and we are committed to becoming a best practices product development Company. So very importantly, we are not only increasing our investments in innovations, as evidenced by the increase in the R&D spending rate, in addition to that we are also improving the discipline in the way we manage these investments and the spending. Continuously improving operational performance goes hand in hand with investments and innovations to build platforms that will enable us to sustain double-digit earnings growth. A group of dedicated senior managers led by John Considine, is devoted to focusing on creating greater value and seamless integration of our end to end supply chain processes.

Driving excellence in operations will delight our customers, help fuel further investments in innovation and continue to provide value for our shareholders. We will continue to build on our core strengths and invest in new capabilities. By successfully implementing our strategy, we expect to continue to deliver strong results. Importantly, this should allow to us continue to increase returns to our shareholders in the form of share repurchases and increased dividends. In summary, we are always striving to improve and accelerate our pace of progress. Our fundamental strategy has not changed and we are staying the course that we've been on for the past six years. By continuing on this course we are confident that our progress should continue in the years ahead. The future holds many opportunities for BD to continue our quest for greatness and to pursue our purpose of helping all people live healthy lives. With that, we are happy to take your questions. In order for broader participation we appreciate if you would limit your questions to one plus a follow up. Thank you very much. Operator, please open the call for questions.

[OPERATOR INSTRUCTIONS].

Our first question is from Lee Brown from Merrill Lynch. Good morning, everyone. How are you? A quick question on the medical surgical safety products in the U.S. It did about 2% growth year over year which is typically low for that franchise. Can you tell me what happened in the quarter that made that a bit milder than we had hoped?

This is Ed. I will take a shot at some of these and I will ask Gary to elaborate. As John pointed out I think our last year fourth quarter was particularly strong as was this year's third quarter so in summary I think it's a bit of a challenging comparison. What's important to realize is that overall the safety strategy continues to represent a growth opportunity for us. All in diagnostics and medical, about 11% growth this year and we are guiding at ten to 11% next year. So this is a strong business but if there's any additional commentary I will ask Gary to elaborate.

Sure. Our view on this is that the third quarter was in particular was a little bit hot in U.S. medical safety and about 11%, that was above the trend for the year. It's been a little bit of a trade-off between third and fourth based on distributor inventory levels and that's the primary explanation. As we look to next year we see growth in the U.S. we are expecting six to 7% or so in medical U.S. and about eight or 9% globally, strong international growth. Fourth quarter in medical also is particularly song in international growth or safety. That's what we see. We are starting to see some momentum building around our device. That should lead to next years growth.

Thanks, I will follow up with normalized inventory levels and current levels after the call. I want to move on to immunosite Optometry . The international business was particularly strong particularly in the immunology and cell biology segment. Granted, it's a smaller base which catch rates the upside in terms of the year over year growth but can you tell me what's helping that business?

I think there's some structural issues going on in Japan with our distribution network but I will let Vince elaborate there.

Two things, let me take what Ed just mentioned first. You may recall last year that we repurchased the rights to our distribution for reagents in Japan and that had an impact that we were not recording sales to the distributor last year because we ended up buying back the inventory. So the impact on this quarter was the pharma-gen reagents that increased growth because we weren't recording those sales last year of $5.5 million and in the I S. Reagents, $1.9 million for a total impact of 7.4 for the quarter. That's where primarily that impact took place was in those, in this quarter and those two lines. The other reason that international is growing is that in each of the quarters this year we continued to have strong performance with our CD four testing program where we partner with governments around the world and as more money goes into these monitoring programs we plays more instruments and partnership with the governments. That's been happening in South America, China, India and now we are seeing the first tenders being won in Russia, as well. We expect that to continue.

Thanks for that great color. I'm sorry for not knowing this, but the change in the distributor relationship, when does that annualize? I'm missed when you said that went into effect, that's all.

That was the fourth quarter of last year. So that impact is over with this quarter. It's past us now.

So it's just a surprisingly stronger boost because I didn't see that upside in the past three quarters I recollect that's the mechanics of that, that happened in this quarter. I am going to try to represent the two call question but I have just one more if you will. I assume from the 46 million write off of the BGM inventory that you have enough supplies on hand to support the 30 to 50 million run rate next year without continuing to run any sort of manufacturing capacity. Is that correct?

We have enough inventory to fulfill our needs for the next year, yes.

So in light of that you shouldn't see any sort of margin compression tied to manufacturing see any sort of margin compression tied to manufacturing given reduced throughput and therefore it's save to assume that the $0.07 earnings hit that was estimated for fiscal '06 tied to BGM will go down significantly for fiscal '07?

Yeah, let me ask John to elaborate.

Thank you very much.

We actually don't think that the run rate of those sales will actual will be 40 million. We think it's going to be diminutive . Obviously, as time goes by we will tell you what it is. In terms of any compression on operations, no, it should have no effect there. And frankly the operating losses that we had with respect to that have really just been replaced by our investments in both, incrementally in terms of genome and anticipated in the earnings for TriPath. So what you see is what you get here. There should be no surprises based on BGM.

Let me clarify. When we give our sales guidance for next year we are anticipating no revenues in that guidance for blood glucose monitoring products. To the extent that we do have any residual revenues we will call them out on a quarter by quarter basis.

Super. That's a change from the previous forecast of 30 to 50, correct?

Yes.

Okay. Then so if there are any operational expenses will those be viewed as one timers and excluded from pro forma performance?

We wouldn't expect any of any significance.

Thank you everyone for your patience and I will get back into the queue.

We will go next to Peter Lawson from to me mass Weisel.

I wonder if you could walk through where the strong international sales were coming doctor by geography and if you see any issues going forward.

Well, on balance for the year we had, I guess our strongest two regions would have been Europe and Asia-Pacific. As we said, Japan net/net did struggle a little bit with their flume as it turn out it was strong in the first quarter but for the whole year it was not a great season so to speak, it was a good season to be healthy but not a good season to sell flu kits. The other two regions, north and South America were a little bit light because of their local issues but they are fairly small. But Europe, Canada and Asia-Pacific were above average growth in the international segment.

Thank you. For by sciences what was the growth for that internationally? By sciences, by.

The biggest business for bioscience would have been salt tickly in Europe, as Vince mentioned before, it has two areas, one is selling research tools to researchers, reagent systems, software, et cetera. There is also a growing business in CD four testing particularly in the developing world. And so perhaps there was some growth from that as well but let me ask Vince.

The reported change for international for biosciences is 15.5, the number that I just went through with the previous call, one time positive impact getting out of that distribution relationship, about $7 million impact in that 15.5 growth with some reported change that would take about $7 million off that growth. In terms of whereby I don't science is getting the growth as I mentioned, Asia-Pacific is doing very well, Europe is doing very well, specialty, Middle East, Africa and South America.

Thank you so much for the color. One very quick question, what was the effect of stock options in the quarter?

Let us get you that answer in a bit and move on to the next questioner. We will answer that in a minute -- we have it.

It's about $0.08.

I think you mean equity based accounting charge I recollect just on the bottom line for the EPS. About 8 cents.

That's from equity based accounting.

Thank you.

Mike Weinstein from JP Morgan.

Thanks, guys, Chris [inaudible]l here for Mike. Two questions, one, the diabetes business was a little weaker than we were expecting. What impact is the interaction of BGM having on your non BGM business there and do you think that will normalize?

I wouldn't over read any quarter by quarter aberrations frankly, in any of our businesses. We don't expect that the BGM exit will impact our Incilian delivery business and I will ask Gary to elaborate.

We don't foresee any carry over effect of BG and non B GM. The impact of the fourth quarter carry over from last year we had 21.5% growth in the quarter last year in the U.S. and globally so we were up against a very, very difficult comparison there that's a primary factor.

Then on the diagnostics segment, the '07 guidance is a little higher than we have been modeling and fairly decent acceleration over this year's results. Where do you see things improving there, what are the big components and how much of the acquisitions you made this year is built into next year's guidance?

It would be a couple of things. Remember that Ed mentioned that there was a significant impact of the flu season on this per year and we past year and we would hope to see a somewhat more normalized flu season and would you get a bit of a tail wind if you experience a normal flu season which is where we planned. You continue to get good growth from the pre analytical systems business both domestically driven by next-generation safety and internationally by conversion. You've got accelerating growth with your protect Viper platform in molecular diagnostics and some improving growth contribution also coming from the Phoenix platform next year. Those would be highlights in the coming year.

And impact from genome and TriPath built into guidance, or not built in?

Genome and TriPath are both into the '07 -- genome and TriPath not in until we closed, I'm sorry. Genome is in, TriPath to follow after conclusion of that transaction.

Just to clarify, the genome this year we said was full year effect of about ten, next year we are thinking it's in the 18 to 20 range and TriPath dilution is in our outlook but we haven't included any TriPath revenues in our revenue guidance. When when we close in December probably associated with our first quarter call we will tell you what the TriPath revenue is. As a public company I think everyone knows it's running at a rate of about 100 million a year.

Thanks.

I anticipated a modest dilution from operations from TriPath in the guidance that we gave. Obviously any write off or in process R&D would be above and beyond that.

Our next question is from Sarah Michelmore from Cowen and company.

Thank you. I guess I was happy to see that in your guidance for next year you are contemplating another year of double-digit R&D growth. Ed, I'm just wondering this is the third year that you guys are going to be able to increase R&D in a double-digit range, much higher than historical rates. I'm wondering if you can talk about where that incremental investment is going? Is there a particular place where the dollars are focused? And from a theoretical standpoint, do you think about the R&D allowing you to maintain a level of top line growth that you've had the last couple of years, 7, 8% or do you think will you get some additional productivity out of that R&D line that could possibly accelerate the growth rate long-term? Thanks.

Good. Let me give you a little summary then maybe each of you,whoever wants to supplement since we've got our three president's in the room. Our R&D spend is really spread quite evenly across all three segments. So there's no one area that is consuming a vastly disproportionate amount of the R&D. We continue to work on advanced drug delivery were devices, including insulin delivery devices. We are continuing to invest obviously, the genome business is an R&D intensive business and that's got a full year effect from genome. We are working in the area of bioscience so really it's all three segments and I will ask the three president's if they have any specific highlights. Frankly, we don't talk too much about the R&D pipeline until it gets to the point where it's just ready for approval and then we start talking more about things. We don't want to get the story ahead of the reality. Vince wants to talk a little bit about it.

On the bioscience side a lot of the increase of course has been going into the implementation platform. Over the last two years the increase of course went into bio imaging and that's this year's sales of $10 million. We seeing good progress there. We think that's going to be an important going forward. Of course, next-generation flow platforms, both on the analyzer side and for the developed world and the developing world are a major thrust in the bioscience business. Then new reagent platforms, then lastly we are going to anticipate spending again joint programs in the cancer area as we role in TriPath.

With respect to the impact on our growth rates I think what we've been saying is we should be expecting to sustain a 7 to 9% top line growth, some years a little more, some years a little less, next year we are saying eight all in, so right in the middle of that range. I would hope that over time that we would move in an evolutionary manner toward the upper end of that range but that's going going to happen in the next year or two. So that's one of the reasons that we are investing both more in R&D and trying to do it better by examining our product development processes.

Great. Understood. In terms of the guidance for next year, EPS ranging from 12 to 14% are there any specific factors that would cause you to be at one end or the other? I guess I mean, what would take to you 14% versus 12%? Is there a particular product line or cost line or something like that that could be a swing factor for you? Thanks.

Obviously revenue growth is the big, is the big mover of our business. So, if our revenue comes in stronger across the board if we get clearance on additional genome products, if we get clearance to sell our products in different countries around the world, we basically anticipated a reasonable but conservative level of approvals for new products and for products entering new countries. So for example safety catheter is not yet sold in Japan. If that gets approved that might be a slight upside. A long winded answer, but to the extent that we make or exceed our revenue target that would have an upward bias on our earnings growth. We've already anticipated a good productivity in our gross profit line, reasonable leverage in our S. SG&A and we have provided for a little more investment in R&D. So as far as I can see, these are good, conservative estimates and I think that range is a good one.

Great. Thank you for the color. I appreciate it.

Next, Glen Reicin from Morgan Stanley.

Can you give us an idea of what the normal operating losses were for BGM. In the quarter so we have an idea of that run rate.

We said it was about $0.07 for the year. I can you can derive it from that it would be a same assumption.

It's pretty evenly spread throughout the year, pretty that are that are wrote?

I think looking at John and his head is moving in an affirmative direction.

It's pretty straight line, yeah.

Just a couple of others. On the T. PTH acquisition, you obviously are more focused on cancer diagnostics than you would be, I would think on the cytology market. Is there any intension of jettisoning one of the businesses?

The answer is no, we bought the whole business. We are going to run both the current commercial business as they call it and work very hard with them to develop the new markers.

So would you anticipate that gynecology will now been another area that you are going to build off of?

Yes, I would like to point out that we already have a modest, but important product called the affirm in that space, but let me ask Vince or Bill to elaborate.

On the TriPath side an important part of the strategy, Glen, to build off that core the liquid Pap smear collection business and actually add cancer markers to that. That clinical trial has already started. So there's a very strong link to cancer bio marker piece to back to that core business and the core business also provides us with the distribution of the sales force that we need for that. We see that as a big opportunity, internal bio marker program that we think could be leveraged in that space so it's a critical part of creating value.

Got it. Got it. Two other quick questions. FX assumptions for 2007, on the top line, bottom line, and can you give us the end of year numbers for both protect and Phoenix for 2006?

I will do the FX, Glen, we have very little FX built into the plan. At current rates if they stay kind of in that area it should be negligible if you will. If it goes up from where we are right now that would be a benefit. If it dropped, we are covered a little bit below current rate. So if it drops, if it drops below that we are pretty much guarded by the hedges although as you remember me always saying in Europe we are 60% hedged but we are, our hedges is below this number right now. So we are pretty well protected.

Okay.

Let me let Bill talk about progress in Phoenix and Probe Tec.

The fourth quarter north going a little above 20% and that puts us on a sustained growth for the year of little over 17%. The good news there is it continues to be Viper. We have placed, during the course of the year, almost 60 new Vipers are in place and that really is the color and the highlight if you will to the Viper story for '06. On the Phoenix side, the fourth quarter has started to demonstrate a little more traction as have the is second half of fiscal year '06, just a few touch points, we've got about 44% panel growth which is a nice step up for us and if that you were to look at the second half of the year versus the first half, we are growing about 24% higher than we did earlier in the year.

We are starting to get a little traction in the U.S. as well as internationally. We've won a few important tends around the world including one in Asia in the fourth quarter.

Any way you can just tell us in the absolute dollars where we ended up for '06 on both Phoenix and ProbeTec.

I think we said that ProbeTec is just north of chin million dollars about now.

We just passed $100 million on the ProbeTec side. Phoenix for the year, we are just a little north of 23 million.

That's all international for the most part?

No, no, we are getting some traction in the U.S. at this stage. The bulk of it, the biggest contribution clearly continues to be Europe.

So of the 23 million the 100 million what's the break out in the U.S. roughly?

23 million is Phoenix, that's worldwide, 100 million is ProbeTec. The bulk of your sales on ProbeTec Viper are U.S. based. Phoenix continues to be Europe.

What's bulk mean? What does bulk mean? Greater than half.

The bulk of ProbeTec is in the U.S. Does that mean 52% or 70%? Give me a second. I've got that. I can get that number for you.

Great.

Let's go to the next question and we will get that answer.

Thank you, next question, operator.

That comes from Jason Wise from Robert W. Baird.

Congratulations on a good quarter. For the flu tests in the fourth quarter were there any significant levels of prebuying?

Not significant levels of prebuying, no.

With regard to the new CDC guidelines you discussed for M. R. S. A. could you talk a little bit about the feedback you might be rising from customers or hospitals for implementing these new guidelines and what kind of time line they might be looking at?

I will ask Bill to answer that. He's closer to the market on this one.

It's a very good question, I think Ed mentioned, this has all happened, everything he described happened essentially in the last six to eight weeks. The feedback at this stage from hospitals, people are basically processing this. I would say there's two things that are important, number one, we are seeing hospitals and certain networks start to create interest in running trials. Ed referenced the VA as one good example. There are other hospitals starting to respond that way and I think the other discussion at the hospital level is discussion about how they will modify or revise their infection control program and role the M. R. S. A. activity will play in the modification of infection control practices. Those are probably the two key topics that they look to react to some of these new guidelines.

I don't one follow up to that if the CDC guidelines were implemented do you have a sense of how big that market would be in the U.S.?

I got one follow up to that if the CDC guidelines were implemented do you have a sense of how big that market would be in the U.S.? It would be speculative on our part. Let me just say when we made this acquisition we discussed the business concept, the concept goes along this line: There are about, and I'm talking here, I'm asking Bill to verify this, there are about 100 million admissions in the developed world each year in the United States, western Europe and Japan, 100 million people go into the hospital every year. And the tests go for about $20, 20 to $25 a piece. So full saturation, and I'm not suggesting full saturation any time soon perhaps if ever, if you say that everyone that went into every hospital in the developed world, that would be a $2 billion idea. And about half of that idea lives in the United States. On the Bloom Berg interview this morning I said, it is well documented, it's not us, it's well documented in the medical literature that there's about a 5 or $6 billion price tag associated with healthcare acquired infection, 90,000 deaths a year, two million infections just in the United States. So my simple proposition was that if we tested everyone that went into the hospital to try to eliminate this through topical interventions and infection control, you take 50 million admissions multiplied by $20 million it's a a billion dollar theoretical opportunity. Obviously, every 10% that far is $100 million. So obviously, as we drive conversion that's the theoretical limit that we are excited about. That's just this assay if you test all patients going into hospitals. That is not to include other assays that have been approved for group B strep and we have a whole list of stuff that's going to be coming out in the next couple of years. So this acquisition excites us very much. And before going to the next question, do we have an answer to the last question?

We do.

We do. May I have the answer please.

The answer is for the FY '06 ProbeTec Viper sales in the U.S. as a percent of total global revenue is 69%.

Okay.

Next question, please, operator.

That will come from Rick Wise from Bear Stearns. Good morning, everybody. Let me start with, go back to the earnings guidance. I always appreciate the fact that you are conservative in your guidance, maybe I'm missing something but, I'm looking at a year just starting that revenue is going to grow pretty as much as they have in the past. GMs are going to continue to improve. You are going to continue to buy back stock. Yes, will you spend a little more on R&D but things look pretty much like they have. The last few years EPS have grown 15 plus minus, 14, 15% minimum and, yet, you are saying that in the current year EPS is going to grow 12 to 14%. That includes, if I understand it correctly, the $0.07 add back from BGM. You grew [inaudible]. Hello?

We just got cut off. Operator? Are you standing by?

You're still here.

Okay. Well, Rick got cut off but I think I got the gist of his question. Let me point out that we grew this year on a same store basis at a rate of 14% if I'm not mistaken. $3.28 final result on a 288 last year and we are guiding at 12 to 14. So I think that's very consistent. As regard,s the blood glucose monitoring business, yes, we did go through a reported loss last year of about $0.07, not all of that goes away. As I said during the call where we announced the discontinuation of the business or the exiting of the business, we are sustaining modest levels of research in our continuous program, continuous glucose testing program which in all likelihood we will partner with party or parties in various places where that technology might be resident. As is true with many of our businesses also anywhere in the world, there are some unabsorbed overhead that stays behind even if you discontinue the business. Also included in this guidance, Rick, we have anticipated what we are calling minimal dilution from genome. You know that on an operational basis last year it was about $0.06. We think it will be probably half of that rate next year, '07, about $0.03. Incremental, so it will go up to nine. So it's $0.03 more from genome and another probably three to $0.05 dilution anticipated on TriPath. I think if you add those numbers back and again we don't talk about it a lot, but as John pointed out we are spending more in capital, that's good news because we are putting more capacity in place for thing like ten needles and push button blood collection sets and distribution centers and a pharmaceuticals systems plant and those start up costs have also been contemplated in our guidance. So, again, first of all 12 to 14 is very much in line with what we did this year and it also, if you add in those other delusion on the, delusions on the acquisitions they have also been contemplated. So if you take them out it's higher to the tune of another 6 to $0.08. Operator, any more questions?

Yes, we do. Our next question will comes from Bruce Cranna from Leerink Swann.

Good morning. I promise I won't ask a guidance question.

Okay. We are proud of the guidance, frankly.

I just don't want to get cut off.

Too shay. We didn't do it. Rick, get back on and tell them we didn't cut you off.

I'm sorry if I missed this but were there BGM revenues in diabetes care this quarter?

Yes, there were.

What was that number?

25.

25.

100, and what was it for the year, '06 was 102 million recorded in the revenues for '06.

Okay. And then I guess on the med surg side, which I guess was little bit below what I was looking for, can you comment or can anyone there comment and maybe this is a Gary question, but can you can talk maybe talk about whether or not it was more on the infusion side or not? I'm always wondering if you guys have any exposure to Baxters calling situation maybe?

We do have a little exposure on our interlink it's a effecting sales a little bit in the fourth quarter. The other things that were notable on med surg, on the growth side international growth John mentioned, IV flush syringes were a contributor. I think that worked against us particularly in the fourth quarter the largest was Latin America, particularly south Latin America, the business is a little bit down there due to a number of factors some of them are external and in general that region for us tends to be somewhat cyclical so we are in a little bit of a down cycle there. I think that worked against us particularly in the fourth quarter the largest was Latin America, particularly south Latin America, the business is a little bit down there due to a number of factors. Some of them are external and in general that region for us tends to be somewhat cyclical so we are in a little bit of a down cycle there.

And then it sounded a little more positive on genome with your revenue guidance for next year. I think it was Ed, are you guys seeing something that makes you a little more confident even at this early stage or not? And can you give us some sense as to specific menu expansion goals for '07?

Let me let Bill answer that. he's closest to the action here.

Two parts of the question, I guess we are encouraged by the market development activities that are particularly starting to take place in the United States and in a few places in western Europe. We referenced the CDC guidelines and the fact that they aligned with the Shay Guidelines. This is an important educational as well as directional indication from the CDC on the importance of H. A. I. Ed mentioned the APIC. activity, they are very influential with their across the U.S. Associated with the arraticate being led by the N. H. S. And the government policy makers in the U.K.. The recent meeting in San Francisco had a primary theme or focus on these activities. It's basically the combination of these activities that do encourage us and we have plans in '07 to launch a V. R. E., the coccus as well as an M. S. A product to get into the under the current platform by the end of the year.

That puts you up to four assays.

That would be four including group B. strep and [inaudible], correct. There is C dip in the pipeline that will not appear in '07.

That's helpful. Thank you. Last question for me, on T. PT H., and I can't recall, I think they were spending somewhere around 13 or $14 million on the R&D line, are you guys going to push that number up? And I'm curious, I think Bill made a comment about aligning T. PT H., that business with your flow business. I'm confused as to how that could be done. I typically don't confuse the two.

Actually it was Vince and let me get him to answer it.

Let me talk a little bit about, first, let me take the R&D piece. They were spending around $16 million in R&D to support, most of that going into the cancer business for marker development. Okay? We will also be spending complimentary dollars that we budgeted, take those markers and put them on platforms. The biggest one, this gets at your second question, is to take the ovarian cancer markers and put them into what we call multiplex B. format, new product development with them and we have multiple flow type platforms at our potential instruments. So, a little context here. We started developing these fee based assays where it enables to you run multiple tests simultaneously on our flow platforms a few years ago. This would be the first clinical application of that technology. So, think ovarian as a blood based test, the possibility to go on what people call a [inaudible]. It could also go on a flow [inaudible] if we so choose and we will be making that decision over the next couple of months with them. Then of course the other piece is an imaging business with flow and that's their core business.

Okay. That's helpful. Thank you.

Good, good question. They are all good questions. Another one? We have a couple more. We have a few minutes left.

I apologize, just one moment. I'm having a computer problem on this end. Just one second. I apologize for the delay. I'm almost there. Just one moment. Rick Wise of Bear Stearns.

You again.

You are stuck with me again. I didn't get to get my second question in so I'm glad to be last. As you talk about new management structure and implying that this was you were getting ready for action, maybe two questions, one, talk about your strategic priorities? Should we assume this more action oriented focus group is ready to tackle additional acquisitions? Should we be prepared to see more frequent, larger acquisitions this year? Again, in what areas? Just help us think through all the implications of that. Thank you.

Our top strategic priority is growth through innovation, period the end. Both of that growth innovation comes through organic means with a 12 to 14% increase in R&D next year we will be approaching the $450 million year spend rate. A greater portion of that is being spend, significant line extensions and also a couple of new initiatives. And so the office of the CEO will along with my other direct reports by the way, but the office of the CEO will focus on growth through innovation in all three segments. Will as I said before, in addition to spending more on innovation we are trying to spend it more wisely. And so this whole new product development process is going to be overseen by this group to be sure it becomes imbedded and ingrained in our companies culture and also to the extent that we will do occasionally acquisitions to supplement our growth. I think the two last examples are good once, they are strategically compelling and I think the dilution is fairly short lived and fairly manageable. And so this group will be doing that, too. But the primary goal here is innovation through organic means occasionally supplemented by strategic acquisitions where that makes sense. Let me also point out that I did comment on the appointment of John Hansen to the position of EVP for international. That signals a greater focus on our international opportunity which I think is extraordinary. Particularly in some of the nontraditional places for BD such as India, China, Africa, Russia, very, very strong opportunities there to address some extraordinary healthcare problems. And finally don't forget that we've also now done a lot more what I would call hard wiring for our operating effectiveness. That still pays an awful lot of Bill's around here. In fact, all of them and that allows us to redeploy some of our resources into R&D at a great greater rate and still be able to report a 12 to 14% increase in our earnings.

Great. Just one quick minor follow up. You talked Ed, about increase in cash going toward, I think you used the word accelerating share repurchase but you are only leading us guiding toward a million net reduction share outstanding for '07. Help us reconcile those statements if you will.

I think the word acceleration was attached to the whole suite of activities aimed at where we are going strategically as a company. We want to develop more and better innovative products. We want to drive more operating effectiveness more aggressively and we want to sustain this high single-digit top line and double-digit bottom line, that's where the context of acceleration intensification and focus comes in. The guidance that John gave you is the operative guidance for repo which is about the same next year as it was this year for, 450, and I think it would also be reasonable to assume although we never want to prejudge what our board would do but it's not unreasonable to assume that our dividend in all likelihood would increase as a function of our last year's earnings growing on a sustaining basis.

Thanks so much.

Any other questions, operator?

[OPERATOR INSTRUCTIONS]. We do have a follow-up question from Glen Reicin from Morgan Stanley.

Just a clarification. The 5 million that we pro forma for blood glucose monitoring are you basically saying you discontinued that operation as of last month and that's what the 5 million is apportioned to and therefore you booked the remaining quarter in the results?

I'm having a hard time with the 5 million.

So in your pro forma, when you're normalizing for BGM, let me just look at the chart here, that you offer, you go through 2006 BGM cost and have a 5.2 on revenues.

Those are returns.

Those are returns.

Okay.

Provision for returns. I got it. Okay. Thank you very much.

Okay. Okay, operator, I think we are going to.

I have no further questions.

Thank you all for calling. The information is posted on our web site if you want to listen to replays. Everyone knows how that works. And we are going to sign off. Thanks again for joining us. We appreciate it. Signing off.

That does conclude our conference call today. Thank you all for your participation.