Becton Dickinson and Co (BDX) 2007 Q1 法說會逐字稿

Hello, and welcome to today's BD's first fiscal quarter 2007 earnings call. [OPERATOR INSTRUCTIONS]

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

Thank you. Good morning everyone and thank you for joining us to review our first fiscal quarter results. During today's call we will make some forward-looking statements and it's possible that actual results could differ from our expectations. Factors that could cause such differences appear in the first quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation of non-GAAP to GAAP measures can be found in our first quarter press release and the attached financial table. A copy of the release, including the tables, is posted on the bd.com website.

Leading the call this morning is John Considine, Senior Executive Vice President and Chief Financial Officer. Also joining us are BD Executive Vice Presidents' Gary Cohen, Vince Forlenza and Bill Kozy. I will now turn the call over to John.

Thank you, Pat, and good morning to everyone. I assume you've all had a chance to get our earnings press release and attachments that sent out this morning, and had an opportunity to review them. As usual, we'd like to were devote as much time today to answering your questions, therefore, I will be brief in my comments. Broadly speaking there are three topics we'd like to address. First, since there are certain items that affect comparability of our diluted earnings per share from continuing operations for the first quarter of fiscal 2007 and 2006, we want to review the analysis of these results we have provided in the press release. Second, we'll describe some of the key drivers of our revenue and earnings growth for the first quarter. And thirdly, we will review our guidance for the full year of 2007.

Now before we start you may recall we announced in September that we were exiting the blood glucose monitoring product line, BGM for short. Unexpectedly during the first quarter we received an unsolicited offer and ultimately sold BGM. As a result, we have classified the results of operations for BGM, including a relatively modest gain realized in connection with the sale, as discontinued operations in our 2007 quarterly financial results. Consistent with the prescribed accounting for discontinued operations, we have also reflected this change in classification in our prior year's quarterly and annual results. You will find the reclassified results in the financial tables attached to the press release, specifically the tables entitled 'Consolidated Income Statements Fiscal 2006, revised for blood glucose monitoring discontinued operations' and revised supplementary information revised for blood glucose monitoring discontinued operations.

As a separate matter I'd also like to point out that on the last table attached to the press release, which is entitled 'Segmentary Reclassification for Fiscal 2006 Revenues,' we describe a relatively small reclassification from the diagnostics systems unit of the diagnostics segment to the Discovery Labware unit of Biosciences. This is revenues related to advanced bioprocessing products of about $40 million for fiscal 2006.

Now turning back to our continuing operations, I begin with our earnings. I suggest that you turn to table one in the press release that appears under the heading 'Analysis of First Quarter Fiscal 2007 and 2006 Results.' For the first fiscal quarter of 2007 we begin with reported diluted earnings per share from continuing operations of $0.51 and add back the charge of $0.45 resulting from the in-process R&D charge of $115 million that was recorded related to the TriPath acquisition. This gives us diluted EPS from continuing operations, excluding that specified item, of $0.96. For the first quarter of 2006 we begin with reported diluted EPS from continuing operations of $0.87 and subtract $0.02 resulting from an insurance settlement related to our former latex glove business. After considering $0.01 due to rounding our comparative diluted earnings per share from continuing operations -- and again, excluding specified items for the first quarter of 2006 -- are $0.86. Comparing the $0.96 in this year's quarter to the $0.86 last year gives us an adjusted EPS increase of 12%.

Moving to the second topic, that is what drove our growth, we'll begin with our revenue of 8% for the quarter. That growth included approximately two percentage points of favorable impact from foreign currency translation, which affected all three segments. In the Medical segment first quarter revenues grew about 10%. In particular, key drivers were pharmaceutical systems, safety and flush products. Global sales of safety-engineered products in this segment grew about 13% to $173 million. Revenues in the BD Diagnostics segment grew about 2% in the first quarter. The segment's relatively low growth rate is due for the most part to the diagnostic systems unit report a 5% decline in revenues. This decrease is primarily related to a near $24 million decline in flu diagnostic test sales in Japan, which more than off-set double-digit growth from our ProbeTec, Viper and Phoenix platforms. There are a few factors that influenced flu results. In particular, you may recall that last year's first quarter grew by about 50% to $27 million, due almost entirely to the early purchases in anticipation of a strong flu season in Japan. As you may also recall, the season abruptly ended in the second quarter of that year. For fiscal 2006 overall our sales were down about 20%, which resulted in a carry over of some inventories at distributor level, which in turn affected this year. Adding to these factors the 2007 flu season has also been relatively mild this far, both in Japan and in the U.S.

Moving on to the preanalytical systems unit of the Diagnostic segment, revenue growth was 8%, fueled once again by safety. Global sales of safety-engineered products in this segment grew about 14% to $169 million, due in large part to the continued success of our push button blood collection set. Looking at combined medical and diagnostic global safety, sales grew about 13% to $343 million. U.S. growth rate was about 8%, in line with our guidance, and ex-U.S. was about 30%, exceeding our guidance. In the BD Biosciences segment worldwide revenues grew 11% for the quarter, and, again research, instruments and reagents continue to be the primary growth contributors.

Moving to earnings and beginning with gross profit we experienced an improvement of about 60 basis points from 52.8% -- to 52.8% from 52.2%. The improvement was primarily due to product mix and productivity, offset in part by negative foreign exchange and certain start-up costs. SG&A as a percent of sales is slightly up due to our -- primarily to our recent acquisitions of TriPath and GeneOhm. R&D spending, net of in-process R&D charge I referred to earlier, increased about 17% year on year. In terms of cash flow we generated about $275 million of net cash from operations. $112 million was used to repurchase about 1.6 million shares of common stock. We also used $340 million to acquire TriPath and invested $111 million in capital expenditures.

Last topic we'd like to cover is our guidance for fiscal 2007. Once again, I suggest you now turn to the second table in the press release, which immediately precedes the conference call information. As previously announced we completed our acquisition of TriPath Imaging in the first quarter. This table presents estimated earnings compared with prior-year periods and and includes TriPath's operations this year since December 20, 2006. The specified items enumerated and in the table that affect comparability for 2007 have also been described -- have already been described, with the exception of the $0.21 charge in fiscal 2006, resulting from the in-process R&D charge related to the GeneOhm acquisition. For fiscal 2007 diluted earnings per share from continuing operations are expected to increased by approximately 11% to 13% to a range of 30 -- I'm, sorry, $3.71 to $3.77 from last year's adjusted base of $3.34. This range exceeds our previous guidance by about $0.02.

Before ending we'd like to make additional guidance comments for fiscal 2007. Our full-year reported revenue growth is expected to be about 9% to 10%, with about 1.5 percentage points of growth coming from TriPath. Full-year reported revenue growth for BD Medical is expected to be about 8% to 9%. Full-year revenue growth for BD Diagnostics is expected to be about 12%, with about five percentage points of growth coming from TriPath. Full-year revenue growth for BD Biosciences is expected to be between 8% and 9%. We look for U.S. sales of safety-engineered products to increase about 8% over 2006, and international safety to increase at about 20% to 22%. Overall global safety would, therefore, increase in the range of -- in the area of about 12%.

We expect gross margin improvements of about 70 basis points, with TriPath operations accounting for 20 basis points. SSG&A is expected to increase by about ten basis points, with 20 basis points again coming from -- primarily from TriPath. Our R&D spending, excluding the R&D charge, is expected to increase by about 20%, with five percentage points coming from TriPath. And lastly, our effective tax rate is projected to be about 26.5% for the year and, as you know, this may vary on a quarterly basis.

Having said that I think it's time for us to begin the Q&A, and in order to allow for the broadest participation we'd appreciate it if would you limit your questions to one plus a follow up. So I thank you and, operator, please open the call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Lee Brown from Merrill Lynch.

Good morning everyone.

Morning.

Just a quick question on your diabetes care business. If we were to exclude the sales -- the Lancets sales that were reclassified, were there any BGM sales recognized in the quarter or was that completely pulled down and put into discontinued ops in terms of the top line?

It's completely pulled out and put into discontinued ops.

Okay, thank you. And then in terms of your Immunocytometry systems franchise that continues to perform extremely well, and I know in the press release you had stated that the research analyzers and the reagents are driving that growth, how much of that revenue base is now being generated by those recurring reagent sales?

You mean, are you trying to get at a break between the instrument side and the reagent side?

I just want to know how much of that strength we can expect to continue, because it's part of a recurring base that's fairly stable?

Why don't we have Bill or Vince comment on that.

Yes, I'll take that one. At this point, Lee, the strength of the instrument sales has been the strongest contributor in the overall growth. And you can best classify our reagent growth as continued solid steady growth in the ranges that we've experienced in the past, kind of that mid single-digit range.

Thank you. I know you made some comment-s on the weaker-than-expected flu season and it's negative impact on your DX systems franchise, particularly overseas, but I missed some of the color there. In the past when we've seen a weaker 1Q it tends to bode well for a bit of a stronger 2Q. Can you just clarify some of that?

Well, I'll let Bill talk about it or Gary, whoever. But I would just say that the color you might have missed is that last year our first quarter was incredibly strong and it was entirely due to Japan. And there was an abrupt end to the flu season in Japan, where most of our flu season, frankly, exists in the second quarter, such that it actually left some inventory with distributors and that inventory has carried over into this year. It's still saleable, it wasn't returnable. And that, coupled with the fact that this years flu season, in both the U.S. and Japan, has been light. And so, we've overcome that in the first quarter and, frankly, we believe we can deal with it in the second quarter.

Okay, and one last housekeeping question here. What are you targeting for full-year interest expense? It was -- actually the interest income versus net interest expense was a bit of a surprise to me in terms of our P&L.

Let me -- well, we had all that cash and then we -- that came through on the Job Creation Act when we moved it over, that dividend of $1.3 billion, and we used some to pay off TriPath and now we've taken some and we've paid off -- I'm sorry, with GeneOhm and now we've done TriPath. You're probably going to be in the range of net interest almost breakeven, slight interest expense versus last year, where we've had probably about $7 million net interest expense.

Okay. Thank you, gentlemen, I really appreciate it.

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

Good morning, everybody.

Hello, Rick.

How you doing? A couple questions. First, R&D obviously you've accelerated in recent quarters and I think I've asked you the last two calls, what the heck you're spending it on, but now you're guiding a even bigger step up to 20%. I think 12% to 14% previously. Is the acceleration that big or is this due to the restatement or -- and where's it going?

Well, part of it is the acquisition, Rick, the TriPath acquisition, and GeneOhm. You have very little bit of TriPath in the P&L this quarter, but you do have a full dose of GeneOhm running against no GeneOhm last year's first quarter. So when we go all through it, as we said, that about five of those percentage points of the 20 that we're talking about are coming from GeneOhm, so we really haven't moved at the guidance of the 15% that we were heretofore giving you.

Still, obviously you're making some heavy investments in general. Any sense of when we might hear about some of those?

We want to -- our philosophy on this is to ensure that we are far enough down the road so that there's really something to talk about in terms of research. We don't want to ever be in a position where it looks like, or is perceived that we are trying to hype anything. ,We are spending the dollars. These things obviously take sometime and we are hoping to, within the year, be able to talk a little bit more fully about the areas that we're concentrating on in terms of the research.

Just a quick last one. Just to make sure I understand, Diagnostic Systems did come in less than we looked for, even after reflecting our month on the adjustments and reclassification. Is this just the flu season comps or is there anything else going on that -- you know?

No, I think if -- you know, frankly, if you just took the numbers I gave you on flu and had we achieved those, the diagnostics unit of that segment would have been up 6.5% -- in kind of the mid-6% range and it's entirely the flu that really -- really drove that. And so much so that it over shadows very good growth on the Viper side and on the Phoenix side -- so ProbeTec, Viper and the Phoenix side.

Thanks so much and congrats on a great quarter, John.

Thanks.

Thank you. Next question comes from Bruce Cranna from Leerink,

Hi, good morning.

Good morning, Bruce.

John, the flu number last year was 27 million, is that correct?

Yes, it was total 27 million and most of that would have come from Japan.

Right, and was your comment that that was down 24 million year over year this quarter?

Well, yes, and matter for fact -- and Japan was just under 24 million when you looked at it quarter to quarter.

Okay. And then I guess normally in the press release -- and I'm sorry if I've missed it -- but normally there's a break out of safety sales by medical and diag by geography. Do you have those numbers?

We haven't -- you mean by domestic and international?

Yes, I think all I heard you say was that $169 million was the piece related to the lab business.

Yes, we can give -- I'd be glad -- let me just quickly tell you what they are. U.S. safety medical would have been up about 8%, diagnostics would have been up about 9% on safety, that's U.S. And medical on an international side would have been up about 40-43%, something like that, and diagnostics would have been 24%. So overall you would have had about a -- almost 30% increase on the international side and 8% on -- on U.S. side.

Okay, thank you for that.

If you want any more color on that you can get it from Pat.

All right. No, that's helpful. And then just two other quick things on TriPath. I wonder if someone could give us maybe a bit of an update or discuss a little bit about the regulatory status of the Focal Point GS that you guys sort of inherited from them. And then on GeneOhm, are we still thinking sort of $20 million's a good number for this year?

Why don't we have Vince take TriPath first and then Bill can comment on GeneOhm.

So we're still working through the submission with the FDA on the Focal Point GS, so I think that we're in fairly good shape on that from a data standpoint, but time will tell. So it has not been approved yet.

No, that I understand, but do you have a time frame as to when you will resubmit data?

Well, what I'm saying is that it depends on how fast the FDA moves on this.

Okay, and then on -- I guess, Bill, on GeneOhm, is $20 million still a decent figure to be thinking about sales for this year?

Yes, that's still where we are and the market development activity we described last quarter has continued. If you saw the Institute for Healthcare Improvement, the IHI five million life campaign as one example, there's a lot of activity in the market that's now developing, so we're going to stick with that $20 million number right now.

In your mind do you have a number of installations that that would represent?

No, it's a little trickier than that. I think the way you want to think about it is the number of surveillance tests. They're kind of the assay use, and you'll have some hospitals that are going to have significantly higher use than others. Some small populations, some hospitals will screen larger. Obviously we're spending a lot of our time in those areas or institutions that have planned programs for much higher application in the system. So it may not be as account number based as it is utilization based. I hope that makes sense.

It does, but I guess in your mind you haven't sort of a target revenue goal per hospital for GeneOhm?

Yes, we would like to think about -- the way most U.S. hospitals are characterizing it right now , think about around 15% of their patients who are admitted are potentially high-risk patients. So so flat-out target number we're using is we aspire with our sales organization is to secure that high-risk patient surveillance, recognizing that some hospitals will do less than that; some hospitals will do more than that. This is a very fluid market in a very early stage, and there's really not kind of a black and white definition that you can give to utilization at this point. We do think that'll evolve in the next 12 to 18 months, and we can give you a much better answer as hospitals make decisions on how they're going to utilize the technology.

Thank you.

Our next question comes from Mike Weinstein from J.P. Morgan.

Hi, everybody, it's Kim in for Mike. A couple of questions, I guess just housekeeping sort of on the blood glucose monitoring sale. First off, could we ask who you sold it to?

You could. It's a company called CCS Medical.

Okay. And was it right to this that we had been modeling probably $30 to $40 million in residual sales for that business and, obviously, that will now go away from sales for '07?

Well, we had -- from an operational standpoint we considered it a discontinued operations, although that accounting was not appropriate at the time. And we -- we hadn't really forecast those sales and we would have backed those -- as we said in the last call, any sales that would go through the top line we would have pulled out analytically for you, so we ne -- there's no real change to our guidance as a result of that sale.

Okay. Great. And then just a follow ups on GeneOhm. Obviously last quarter we talked a lot about the new MRSA initiative and I hear you saying today we're not changing our guidance in general for GeneOhm. How long does it take for initiatives like that to really translate into change of practice at the hospital level? And in terms of your own guidance and planning, are you thinking about sort of upside maybe to '08 versus your thinking when you initially acquired GeneOhm?

Well, I think Bill can maybe add some color to this, but I just refer you back to the time that safety was really, truly evident in the Company and it seemed like we were waiting and waiting for that upturn in safety. And in that case -- and somewhat contrast to this -- until there was an OSHA law, we really didn't get that up-take. This is one where the pressures are really coming from other angles than just the institution of any kind of law. It's really understanding the economics of identifying the diseases earlier -- or these infections, rather, earlier. And you're just going to have to bear with us, because this is kind of unchartered ground, but it isn't totally dissimilar from safety, where it takes awhile to get the speed up to hit an inflection point and really starting seeing these sales multiply.

That makes sense. And then I guess the last one on GeneOhm is that in terms of new product timelines, are you ready to talk about when you might start rolling out the next phase of new products from GeneOhm?

Sure. We've talked before and I guess we're probably still feeling comfortable with the approach. We said that by the end of our fiscal year '07 that we were hoping to launch the staff SR product as well as a BRE product, and those would be very, very late in the fiscal year. And if that leaks into the end of the calendar year that wouldn't be a surprise, because we just don't know what the FDA response is going to be to brand new technologies. These will be quite different. In the pipeline behind that continues [inaudible] and that would be an'08 release item. So that would kind of complete what you'd call a fundamental HAI panel by end of FY '08.

Great. Thanks a lot.

Thank you.

Thank you. Next question comes from Quentin Lai from Robert W. Baird.

Hi, good morning. Returning back to flow, a really strong quarter again, is the growth primarily coming from both the clinical and the research markets?

Bill, you want --

Sure. The question is pretty much on the mark, just a couple of quick comments. FACSCanto II we launched last year is really getting very high acceptance in both the research and and the clinical side. And we've had particularly nice uptick in Europe, where the demand was even greater than anticipated, over the last three, four months. So both clinical laboratories and researchers are getting a lot of basic benefits, particularly in terms of work flow, more tests per patient sample, and so forth. So we're getting a positive uptick on both sides. And then just a few quick comments on the clinical side, the [FACScount]. Now that's particularly our instrument targeted at the developing world, and specifically for CD4 monitoring. Continues to be very well accepted in the developing world, and we're seeing places such as China and India starting to make their initial investments in that area, so it is that broadband both consecutive.

Thank you very much for that color. And then switching to diagnostics, another double-digit growth for BD Viper. Is that growth also European U.S.-based and are you seeing any impact with the entrant of [AVID] in Europe?

The -- if you just looked at the color on the quarter, we just continue to have very strong quarters in both U.S. and Canada. We are getting healthy double-digit growth. Our growth in Europe is kind of at traditional levels in that mid high single-digit range. We have seen the AVID instrument in northern Europe gain some placements. We have not seen anything disruptive at this stage.

Thank you.

Thank you. Our next question comes from Peter Lawson from Thomas Weisel Partners.

Good morning. I was wondering if you could just talk about the strength you saw in the Pharmaceutical Systems division?

Sure. Gary, are you there?

Yes, I am And we, as you saw, have an exceptionally strong quarter in the U.S. and that was driven by a number of factors. There's no single factor, but a lot of strength across the board in bioengineered drugs, in new vaccines including the recently-launched HPD vaccine, which is in a prefill format, and even in the core underlying business area, such as which is [inaudible] Heparin. It's very solid across the board and we anticipate -- I wouldn't want to promise you 51% growth every quarter, but it's a strong business and we anticipate continued growth there. And we had, I would say, a solid quarter in the rest of the world, pretty much as expected/

And then just a housekeeping question on stock options. Wonder if you could get me any kind of break out for stock options for the quarter on the EPS line?

Oh, on the cost?

Yes.

Okay. It -- for the quarter it was $0.09 and about the same as it was -- exactly the same as it was last year. For the year you're kind of looking at a $0.28 versus last year at $0.29, but I'd remind you last year we had a little bit of a catch up because of the accounting on -- when individuals are retirement eligible you have to front-load the expense, essentially. So if it did it apples-to-apples it's about a $0.27 to a $0.28 this year.

Okay. Thank you so much.

Thank you. Our next question comes from Sara Michelmore from Cowen.

Hey, good morning.

Morning.

I guess, Bill, could you give us an update on Phoenix. You highlighted, or it was highlighted as a growth contributor to Diagnostics, I'm wondering if you've seen any pick up in the momentum in that system, particularly in the U.S.?

Sara, this is Vince, I'll take that one. So it was up 13% this quarter, and it's about $6.6 million in the quarter. And that growth was in the U.S. and in Europe. so that's about it.

Okay. And then, Gary, could you give us an update on the [Nexeva] catheter and any other new products in the safety products, medical products that we should be paying attention to?

Sure. Nexeva's doing quite well. In the first quarter, relative to our internal targets, we were a little bit ahead. We've gotten very strong adoption in the VA system, which seems to be looking at HAIs broadly, as well in some premium reference institutions, which we believe will ultimately help us to cascade adoption into other institutions. We also introduced recently in Europe a new [side port] safety catheter, and about half of the European capital market is a different type of catheter of side port, and we believe that will do well. So on the new product front, those were -- on the safety side, those were the primary things. We had also introduced earlier last year an injection -- safety injection device designed for the European market. The [eclipse] needle with a design change that facilitated use with [lower slip syringes]. We're the only manufacturer to have made a change for that purpose. In general, we're getting good safety growth internationally, in part driven by some regulatory activity or legislative activity in a few countries and a just general market adoption in others.

Okay. And is there still -- are you guys still getting a little bit of a lift from an ASP list, in terms of just the mix of products that you're selling, or is the growth now primarily still volume driven?

Well, there's certainly a positive mix impact with transition to safety because of the devices. They're in a different price category. They're different designs and they just sell for more than the conventional devices than they replace. So there is a beneficial impact both in mix ASP, well in GP, over and above that with transition to safety.

Well, I -- just within the safety products themselves, though, is there an ASP left with some of these newer products that you're rolling out?

There will be. That won't necessarily translate proportionately into a GP boost. In the earlier phases of the new devices, because they're typically not the same volume levels, therefore, not the same efficiencies early on. By example, Nexeva sells for over $4, and even if it replaces a safety catheter that we sell, the product that will be replaced sells for $1.50. So there certainly is a mix benefit to ASP, particularly with Nexeva.

Okay, that's great. And we've talked a lot about the revenue side of GeneOhm. Can we just get an update on where you guys are on cost side and if that's been tracking to your plan in terms of the investments that you've had to make there and the calculations of the dilution associated with that deal? Are we on track there or --?

Yes, I would say two things about that. One is the integration is going very well. And as Bill has already said, the revenues are tracking and the dilution is in line with exactly what we told you before, so there are no watch outs there.

Great. Thank you.

Thank you. Our next question comes from Glenn Reicin from Morgan Stanley.

Hey, folks Several questions here. By the way, the Phoenix number, the 13%, that's quarter over quarter or year over year?

Quarter over quarter.

Right, that's what I thought. Okay. Can you give us the same kind of update right now on ProbeTec placements, what you expect for the year?

Hey, Glenn, just wanted to correct, that's year over year.

Okay, I thought it would be a little bit better than that.

Glenn, it's quarter over quarter. It's the first quarter of fiscal '07 versus the first quarter of fiscal '06.

That's what I was trying to say. Now what was your que -- your second question?

You got distracted there. ProbeTec, what's happening over there? How many placements have you got, what are you expecting for the year, what growth are you seeing?

Okay, well, Bill will be glad to take that.

I have more after that.

We had a nice quarter in terms of Viper and ProbeTec. I mean, we've given you some highlights the last time, but think about us getting 18 more installations in 1Q '07, of which on the positive side seven of those were Viper. Those were all in the U.S. and Europe with the majority of those in the U.S. in 1Q.

Quest makes up what percentage?

All Viper placements at this point?

Yes.

I don't know, 35, 40ish.

Is that what's driving the U.S. growth?

Oh, for sure the -- remember that we started the implementation -- we just put our first first Vipers into Quest very, very late 1Q, so we didn't -- we weren't up against any Quest comp of any size in this quarter.

Some additional questions here. Diabetes, even if you ex out the discontinued operation, it was a little bit lighter than we had thought. It's always a tough business to model on. What is happening there?

John, you want no, sir take that?

Yes, go ahead, Gary.

We have a number of thing going on. First is we had a very tough comparison. If you looked at the diabetes care numbers from last year and taking out BGM, it was a very strong first quarter, so we were up against a tough comparison. That being said, if you decompose those numbers, within the diabetes care number we still have home health, which is the elastic support and thermometer business, which is more of a maintenance business, and that was down year to year, so that drew the numbers down. The pen needle growth, both U.S. and internationally was very strong. That's the key area that we're focusing on in that business. And then the core business, based on a tough comparison, didn't help growth at all in the first quarter.

Can you give us a perspective how much Bieta actually helps you from a year-over-year growth perspective?

I don't have that broken out with me but certainly Bieta and [Lanatis] for pen needles have both been key drivers for growth. And depending on what level of emphasis Lily and [inaudible] respectively are putting in various markets, that will help drive our outcomes for pen needles.

The reason I'm asking is do we have to start worrying about extended release formulations for Bieta hurting this business come '08, '09?

At some point Lily has been working on extended release formulations. When that may come to market is still unclear. There are other non-insulin diabetes treatment drugs that will be injectables that are coming to market, so all these are potential factors going out, but not in the near term.

Near term meaning?

Next two years I would say.

And then finally I've never really encouraged you to articulate the TriPath story and why you did it. Are you emphasizing the core gynecological business or could we expect that at one day you will jettison that?

Glenn, this is Vince. Listen, there's two parts to this story. One, we think we can continue to grow the core business, the pap smear collection business. Two, the second part of the story is related to the core business, as well, that there is a cervical cancer play and a series of what we call markers for a molecular path. So the idea is to convert that $4 collection device ultimately in a kit format to a $50 molecular cervical test. Okay? So you would build upon the same organization, the same instrumentation and add this molecular path on top of that. The next play, in addition to that, which also -- which is a different technology platform and more synergies with technology coming out of the flow business, is the ovarian cancer program. We think that's about a $500 million market. Timing on those is, cervical we are talking '08, '09 and the ovarian, '09, '10.

Okay, and you are -- through your due diligence, you are confidence that these guys know what they're doing from a regulatory perspective, because the history is horrendous here?

We think that the -- they certainly have been delayed a number of times. One of our major integration strategies, of course, was to get our regulatory affairs involved with that group. We think there's a lot of good data today. We think there's a lot on the process side that we can bring to this. We've already got that in place, reviews taking place of their submission, so the key ones looking forward will be the Focal Point GES, and then HPV off of their collection device. Those were the -- kind of the [inaudible] run clean-ups that we are working on and then we're working with them right now on the clinical for the cervical test.

And judging from your comments earlier you don't want to make any forward-looking comments on Focal Point?

No, not yet. Once all these reviews are done and I have a better feel for it, Glenn, I'll be happy to talk about it.

Okay, look forward to it. Thank you.

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

Yes, hi. Just a couple of quick things. Could you just talk about how you think the inventory levels are sitting of flu products out there at this point?

Most of it would impact Japan and we were talking about two to three million tests that might be sitting out there off an annual take of 13 million; something like that, Larry.

Okay. Okay. And then two other ones, and I think Gary answered some of this, but I just want to circle back. On the U.S. safety side, can you just, again, help characterize when you look at the growth that's going on in your products now, how do you think about just volume/penetration, and I guess really more penetration into new areas versus trading up of products that mix shifted that you're also talking about?

Well, I would say there's probably -- the fact, both our factors influencing our growth in the U.S. and it varies by product type. So for intravenous catheters we 'e getting very little new growth from market adoption -- market transition from conventional to safety because that market's pretty much fully transitioned, so there the growth going forward is primarily coming from the mix shift to higher value devices, such as Nexeva and [Q-site]. Within injection there's some growth coming from market transition. The transition in hospitals is higher than it is in alternate sites, although the rate of transition had been quite a bit higher in hospitals, so we're getting both there. We're getting a slight amount of price. The pricing in the safety-engineered device market is a little bit less intense than it is in the core device, because of differentiation and the value provided by those products, so you get a little bit there. And market growth, you get a little bit from market growth, as well. So you put those together and you get up into the U.S. growth range.

Okay, super. And last one, John, just -- just want to make sure I'm thinking about this correctly -- the $15 million pretax that you recorded from the sale of BGM, is that the $11.8 million that is reflected in the income loss on the discontinued ops? Or where is that flowing through?

That's on discontinued ops and it's part of that $11.8 million, yes.

When you look at your continuing ops of whatever it is, 50 -- let's say $0.51, that's ex that gain?

That's right.

Correct. Okay, great. Thanks.

Just to add to his safety question, just on the diagnostic side you have the same phenomena of a mix shift to a higher ASP -- higher value-added product with the push button blood collection set, and that is the primary driver of safety growth on the diagnostics side.

Thank you, Larry.

[OPERATOR INSTRUCTIONS] And our next question comes from Jeff Frelick from Lazard Capital Markets.

Good morning, folks.

Morning.

Gary, on the Nexeva product, has that been approved yet in Japan and if not ,do you have a timing on that?

We are selling the Q-Site device in Japan, which is also sold as part of Nexeva, and in the Japan market we're also selling it -- the Q-Site device with a range of intravenous sets that we are offering, particularly -- especially for the Japanese market. Nexeva's not yet being sold in Japan. I would have to check on timing. It wouldn't be far off.

Okay, and then just one question for, I think, Bill, on the GeneOhm trial within the VA, I think you want to start off about 18 center to say begin with. Are all 18 centers up and running and evaluating?

They have continued to do their evaluation and I can't answer the question if all 18 of them are up and running. I do know that the flagship sites in that organization are deep into their molecular evaluation. I could probably get more detail for you the next time, but everything we had hoped to see them do in terms of trialing the product has continued and it's pretty much on schedule.

Okay. Thanks.

Operator, are there any further questions?

And I show no further questions at this time, sir.

Okay. Well, we thank you all for your interest and we'll talk to you next quarter. Should you have any clarifications on this, please give Pat a call, and thank you very much.