Becton Dickinson and Co (BDX) 2007 Q4 法說會逐字稿

Hello. Welcome to BD's fourth fiscal quarter 2007 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through November -- pardon me, Thursday, November 7, on the investors page of the BD.com website or by phone at 1-800-475-6701 for domestic calls and area code 320-365-3844 for international calls using access code 889224. I would like to inform all parties that your lines have been placed in a listen-only mode until the question and answer segment.

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

Thank you, good morning, everyone. Thank you for joining us to review our fourth fiscal quarter and full year results. During today's call we will make some forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our fourth 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 fourth quarter press release and its related financial table. A copy of the release which includes the financial tables is posted on the BD.com website.

Leading the 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, Vince Forlenza, and Bill Kozy. I will now turn the call over to John.

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

Broadly speaking there are four primarily topics we would like to address. I will take the first three and Ed will cover the fourth. First, we'll review our diluted EPS from continuing operations for the fourth quarter and twelve-month period ended September 30, 2007. We'll also review the items that affect comparability of the twelve-month periods fiscal 2007 and 2006. Secondly, we'll describe some of the key drivers of our revenue and earnings growth for the fourth quarter and full year 2007. Third, we'll review our guidance for fiscal 2008. And, fourth, Ed will discuss our overall strategy and longer-term prospects.

Starting now with earnings for the fourth quarter, reported diluted EPS from continuing operations of $0.98 increased by 15% over diluted EPS from continuing operations of $0.85 in the fourth quarter of fiscal 2006. For our full year 2007 results I would suggest you turn to table number one in the press release. As you can see there, we begin with reported fiscal 2007 diluted EPS from continuing operations of $3.36 and add back the in-process R&D charge of $0.48 relating primarily to the TriPath acquisition. This gives us an adjusted diluted EPS from continuing operations of $3.84 for fiscal 2007.

For fiscal 2006 we begin with reported diluted EPS from continuing operations of $3.18 and add back the charge of $0.21 resulting from the in-process R&D charge related to GeneOhm's acquisition and subtract $0.04 resulting from an insurance settlement related to our former latex glove business. Taking into account $0.01 of rounding, this results in an adjusted diluted EPS from continuing operations of $3.34 for fiscal 2006. Comparing the $3.84, in 2007 to the $3.34 in fiscal 2006 gives us an EPS increase of 15%.

Moving on to our growth drivers, our revenue increased by 13% for the quarter which included an approximate 3 percentage point favorable impact from foreign currency translation primarily related to the euro. Our revenues for the full year increased 11% and were also favorably impacted by about 3 percentage points from foreign currency translation. In the medical segment, fourth quarter revenues grew about 11% led by sales of prefillable drug delivery devices in pharmaceutical systems and continued growth in Pen needles. Global sales of safety engineered products in this segment grew about 11% to $176 million.

For the year, revenues in the medical segment grew about 10% reflecting about a 3 percentage point favorable impact from foreign exchange. Our pharmaceutical systems, diabetes, safety, and flush product lines led growth. Global sales of safety engineered products grew about 10% to $673 million. Revenue in the diagnostics segment grew about 16% in the fourth quarter. Within the segment, the diagnostics systems unit reported revenue growth of 25% with TriPath revenues of about $29 million accounting for 15 percentage points of that growth. Global sales of safety engineered products in the diagnostics segment grew about 14% to $187 million due, for the most part, to the continued success of our Push Button Blood Collection set.

For the year revenues in the diagnostics segment grew about 11% reflecting an approximate 2 percentage point favorable impact from foreign exchange. Global sales of safety engineered products grew about 14% to $718 million. Our ProbeTec and Viper platforms also contributed to this growth.

Looking at combined medical and diagnostic global safety for the quarter, sales grew about 12% to $363 million. The U.S. growth rate was about 7% while ex U.S. was about 27%. For the year, combined medical and diagnostic global safety sales grew 12% to $1.39 billion with U.S. growth rate being about 7% and ex U.S. being about 26.

In the biosciences segment, worldwide revenues grew 14% for the quarter. Research instruments, reagents, bioprocessing continued to be the primary growth drivers. For the year, worldwide BD biosciences revenues grew 13%, again including about 3 percentage points favorable impact from foreign exchange. Consistent with the fourth quarter research instruments, reagents and bioprocessing continued to drive growth in this segment.

Turning to gross profit, we achieved a 40 basis points improvement in gross profit margin due both to improved productivity and product mix offset in part by start-up costs for media production, pharm systems, and bionutrients capacity. This result is about 30 basis points below our previous guidance for gross margin improvement due for the most part to a reclassification of certain expenses from SSG&A and R&D to cost of products sold. The reclassification covers all four quarters of the year and was recorded in the fourth quarter. The amount being reclassified relates to the newly integrated TriPath and GeneOhm platforms and was recorded to conform the accounting classification practices for those platforms to those followed by BD.

For SSG&A for the year as a percentage of sales we improved by 30 basis points. R&D spending increased by about 19% in absolute terms with about one third of that increase relating to TriPath. For the year our operating income adjusted for the items previously discussed increased by 30 basis points from 20.5% to 20.8%. We generated about $1.2 billion of net cash from operations for the year and consistent with our guidance used approximately $450 million to repurchase about 6 million shares of common stock while investing $556 million in capital and $340 in making the TriPath acquisition.

Now the last topic I would like to cover is our guidance for fiscal 2008. We expect diluted earnings per share from continuing operations for fiscal '08 to increase by approximately 10 to 12% from last year's adjusted base of 384 which excludes the $0.48 of in-process R&D charges related to the TriPath acquisition. Our full year reported revenue growth is expected to be between 8 and 9% with BD medical being about 8, BD diagnostics about 9, and BD biosciences between 8 and 9.

U.S. sales of safety engineered products are estimated to increase about 8%, and international safety should grow about 20%. Overall global safety would therefore increase by about 12%. We expect our percentage gross profit margin to be about the same as it was in fiscal 2007.

Now, while our product mix and productivity will increase and should be very favorable, we expect it to be offset in part -- offset actually by increased resin and steel costs as well as manufacturing start-up costs. I'd just add that this -- and we can touch more deeply on it in the question period -- that two of our three segments are positive to gross margin percentage, and that's diagnostics and biosciences. BD Medical is slightly under in terms of its gross margin percentage, and that has to do also with the start-ups that are going on and some other items that Gary will touch on when asked. Start-up costs obviously go away so that as we look further out into 2009 we see gross profit margin percentage again beginning to increase.

SSG&A is expected to improve by about 70 basis points as a percentage of revenues in 2008. Our R&D spending is expected to increase by about 11% in absolute terms. Importantly, overall, our operating income margin is expected to improve about 50 to 60 basis points. Therefore the improvements in SSG&A will more than offset the flatness of the percentage in gross margin. Our effective tax rate is projected to be about 27% for the year. As you know, that can vary quarterly. We expect to generate about $1.4 billion of net cash from operations and invest about $650 million in capital expenditures. We also expect share repurchases to be about $450 million the average number of fully diluted shares outstanding to be 253 or 254 million.

Finally, while it is our policy not to provide explicit quarterly guidance, I want to point out that we do expect the first quarter's EPS from continuing operations, excluding specified items, to increase at a somewhat lower rate than our annual guidance for 2008, which I would remind you was 10 to 12%. There are three items that impact the first quarter's earning growth. Firstly, the gross margin, as a percentage of revenues, should be about 1 percentage point lower than the prior year, and somewhat similar to what we saw in the fourth quarter.

Some effect is certainly happening from the start-ups, which as I said do have an end to them, but we also have some impacts from unfavorable foreign exchange impact, notwithstanding the fact that the euro has strengthened against the dollar. We do get hit in the gross margin at this point in time for that, and also that reclassification that we made last quarter in '07, as I said, in the fourth quarter we accounted for all four quarters for the reclass. Therefore, we have a bad comparison on that on a quarter to quarter basis.

Secondly, our R&D spending in the first quarter will increase at a higher rate than for the year. It will actually look like 20% versus 10, and that's really the anomaly of having bought TriPath at the end of the first quarter last year and we'll have a full quarter's worth of TriPath spending in this quarter. And lastly, in our SSG&A you will see a slight tick up, and that's with respect to our long-term incentive plan, the first three-year plan ends this year, and in accordance with the accounting principles we have to at that point in time book the related payroll tax costs, for that which costs us about $0.02. That will also even out for the rest of the year and our total LTI expense will be within $0.01 of what it was last year. With all that said, now I would like to turn the call over to Ed.

Thank you very much, John. Good morning, everyone. Our strong results for the year just ended and our positive outlook for '08 continue to 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. We will continue to implement this strategy which rewards both our customers and our shareholders. This is the seventh consecutive year in which we've achieved or exceeded our annual objectives. Before turning to your questions I would like to expand beyond the fiscal 2008 guidance that John has shared with you, and I will briefly elaborate on our strategic direction.

As I've said to you before, our strategy has two core elements. The first element is to increase sustainable revenue growth by designing, manufacturing, and marketing innovative products that address significant healthcare problems and deliver demonstrably higher benefits to healthcare workers, patients, and researchers. Our plan is to grow the revenue primarily organically, and we've been saying and continue to say that organic growth should be in the 7 to 9% range. We will complement this primary organic growth strategy by making targeted acquisitions which will enhance our key strategic capabilities, and I think GeneOhm and TriPath are excellent examples of strategic targeted acquisitions which increase our basic capabilities.

Acquisitions of this nature will be strategically obvious, and any dilution is expected to be short-lived and modest, and again I would site GeneOhm and TriPath as good examples of these characteristics. This fundamental innovation strategy is enabled and fueled by the second element of our core strategy which is our commitment to achieving 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, strong cash flow, and expanding operating margins, and again, I think '07 and '08 are good examples of the evidence of this operating effectiveness. Achieving operating effectiveness will very importantly enable us to increase our investments in innovation which in turn fuels our future growth.

We continue our commitment to return excellent value to shareholders through dividend increases, share repurchases, and growth in income. How are we going to do all this? Although BD is a complex institution comprised of three major segments with over a dozen global business units operating in over 50 countries, there are a much smaller number of focused strategies and themes which are aimed at specific areas of opportunity to improve human health.

Let me summarize for you what I've been describing to our shareholders and associates as what we're calling the BD success paradigm. This success paradigm is present everywhere we are successful and has four essential elements. I think you can see these elements in all of our successful businesses. First, BD, I think, is most effective when we are identifying emerging or underappreciated healthcare problems. We did this 20 years ago with healthcare worker safety. We're doing it again today with healthcare associated infections.

The second thing is we apply technology to solve these problems. This technology is principally developed organically but it occasionally is supplemented by acquisitions, licenses, et cetera. The third element is we use our outstanding manufacturing expertise to produce these products with very high quality and very low costs so they can be affordable and available to people all over the world, therefore helping all people live healthy lives which is our purpose. And finally, the fourth element of our paradigm of success is that we surround these products with outstanding service and support and in fact many of our sales associates look more like missionaries than they do like sales people. They're always converting from one level of healthcare to a higher level.

If you take these four themes and apply them to the business, you can see that there are a finite number of areas of strategic focus which really transcend even the business units, and these areas are. Number one, reducing the spread of infection. Number two, enhancing diabetes treatment. Number three is advancing drug delivery. Number four, we are addressing unmet global healthcare needs. Number five, we're improving pharmaceutical and research efficiency. That's where our biosciences group, and most recently we're significantly improving the clinical management of cancer which was again expanded with our TriPath acquisition a year ago. While all six of these areas are important, in the interest of time I will elaborate on two of them just a bit, but we are with our management team here prepared to answer questions you may have regarding any element of our strategy.

Looking first to the areas of focus, reducing the spread of infection, this is a major focus for BD, and it actually manifests itself in a number of our business units. This is demonstrated particularly, but not exclusively, by our products which enhance healthcare worker safety. We are very proud of the efforts of our associates over the years so that we have now global safety revenues have increased to $1.4 billion and last year increased 12% and we're projecting 12% again next year overall, and this is up from a base of $266 million in fiscal 2000.

Over the past few years recent introductions of the Vacutainer Push Button Blood Collection set and the Nexiva fully integrated ID catheter are both excellent examples of our ongoing commitment to continued leadership, innovation, and growth in this arena.

Another significant opportunity to reduce the spread of infection is in the area of healthcare associated infections or HAIs. These infections account for nearly 100,000 deaths per year and tens of billions of dollars in excess healthcare costs in the U.S. alone. The mortality rate for one specific type of HAI which is methicillin-resistant staph aureus, or MRSA, the mortality rate for this particular organism is 25 to 30%.

The CDC estimates that over 60% of staph infections occurring in hospitals are resistant to the drug methicillin. This prevalence rate is a national concern and is particularly troubling since it was only 2% in 1972, and the resistance rate is now 60%. The resistance rate is rising an alarming rate not only in hospitals but now in the community at large. While MRSA has long been recognized as a problem in healthcare settings, awareness of community associated infections has been significantly heightened in recent weeks by the extensive media coverage of tragic deaths of young people in Virginia, New York, and elsewhere due to MRSA.

On the policy front, much is happening in terms of recognition of this serious healthcare problem four states have passed legislation, and the New Jersey legislation, I would point out, was signed by Governor Corzine only yesterday, and New Jersey joins four other states passing legislation which requires reporting of hospital level infections. They require hospitals to have an active MRSA management program, and the important part of that program relative to BD and what we contribute to it is that active surveillance of high at-risk patients is a core element of these eradications. 27 states have mandated reporting, and 13 are in the process of discussion, and also we can point to numerous thought leaders and organizations around the country and around the world that have taken proactive stances regarding the the treatment and fighting of this particular problem.

Specific to BD our GeneOhm platform, and again this acquisition was made in February of 2006, this platform positions BD to play a leadership role in this developing market of HAI. GeneOhm was the first FDA cleared assay that can accurately defect MRSA in less than two hours, and it is the preferred approach for medium to larger-volume testing customers. Just to put the opportunity into perspective, there are 100 million hospital admissions annually in the United States, Canada, Western Europe, and Japan, so in the developed world there are 100 million annual admissions.

In addition to MRSA, we are expanding our menu of tests. We recently submitted the staph SR assay to the FDA for 5-10K clearance. This test will enable clinicians to identify susceptible versus resistant staph infections from a positive blood culture from within two hours, and this will replace the current culture-based method which takes a day or more to produce a specific answer. We're also developing rapid tests with the detection of vancomycin-resistant enterococcus, VRE, and Clostridium difficile, C-Diff. which are also causative agents in healthcare associated infections. We expect these tests for VRE and C-Diff. to be approved and cleared by the end of 2008.

Another area of strategic focus is cancer diagnostics. Cancer remains one of the highest causes of death in the world. Expanding BD's presence in cancer diagnostics is a key element of our strategy to drive growth through innovation.

Our cancer diagnostics strategy is to improve through innovative solutions the clinical management of cancer including detection, diagnosis, staging, and treatment. We believe that the TriPath platform positions BD to have a significant impact in the marketplace and to advance treatments through more accurate and timely diagnosis. We have an exciting opportunity to improve the diagnosis of cervical and ovarian cancers with new diagnostic tests in the years to come.

As you can see, with these two examples, and we can elaborate on more, we're innovating for impact and continued innovation requires continued investments. As John pointed out we're investing for the future primarily through increasing the pace of our own R&D spending and as appropriate through strategic investments such as GeneOhm and TriPath. Continuously improving operating performance as evidenced by our increasing our operating margin goes hand-in-hand with investment in innovation to build the platforms that will enable us to sustain double-digit earnings growth and provide value to our shareholders.

Starting now and going forward in the coming years, we're redoubling our efforts to drive value in productivity through our entire supply chain. These efforts will address every aspect of our business operations beginning with procurement and category management through manufacturing and out into the marketplace and how we serve customers in markets all over the world. We're also taking a fresh look at how we deploy all of our G&A functions with a goal of improving service and service quality and reducing costs. We will continue to build on our core strengths and invest in new capabilities. By successfully implementing our strategy we expect to deliver strong results. Importantly, this should allow us to continue to invest -- to increase our returns to shareholders in the form of share repurchases and increased dividends.

In summary, 2007 marked another year of excellent progress. One of our values is we're always striving to improve, and we will continue to do so and to accelerate our pace of progress. Our fundamental strategy has not changed, and we're staying the course that we've been on for the past seven years. By continuing on this course we're 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're happy to take your questions. In order to allow for broader participation we would appreciate it if you limit your questions to one plus a follow-up. Operator, please open the call for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from the line of Rick Wise from Bear Stearns. Please go ahead.

Good morning, Ed. Good morning, John. A couple things. First, you invited us to ask about start-up costs at BD medical, and maybe you can help us quantify those, and I don't know if we should tie this back into gross margins, but maybe a related question is maybe you could amplify on a couple of issues there, quantify the -- you quantified the fourth quarter reclassifications. Can you tell us the impact on gross margin in the quarter? How do we think about what a, quote, normal gross margin would have looked like?

I will let John elaborate a little bit there.

Rick, if you took a look at the fourth quarter prior year, we were at 51.6, and you look at what happened, we actually would have had productivity mix, and other around 40 basis points. What happened is the start-up costs, and they range throughout the -- medical -- there is also some in biosciences and other would be about 40 basis points, and they are unique to the -- over these two years. You might remember we had some of these when we first started safety where we were not yet achieving the gross margins that we now enjoy because we were in the start-up phase. That was about 40 basis points. Then the reclassification of GeneOhm and TriPath, these were costs that we have historically classified as charges against cost of goods sold, GeneOhm and TriPath both had these reflected on the -- primarily on the SSG&A line and maybe a little bit on the R&D line, so we took the entire amount of those charges from quarters one, two, and three, and what would have been in four and moved them up against quarter four's gross margin, so it had a large impact of about 40 basis points. So if you think about a normalized gross margin, you would have had the the productivity and product mix and other of about 40 basis points, and you would have not had start-up although we may have start-up again as we keep innovating, and you would not have had the reclass. You would have had probably 10 basis points of this instead of 40 basis points because you would have had only one quarter, but it would be running against another quarter, so I would have thought that you would probably be up 40 basis points on this quarter if not for these discrete items.

Okay. Two other quick questions. First, immunocytometry both U.S. and international were particularly strong especially since I think you cautioned about, last quarter about the tough comps related to the year ago FACSCanto 2 launch. This market, is it your new product, is it Beckman stumbled a little this quarter in deliveries. Did you benefit competitively? And last, just a larger question. Ed, you highlighted the goal of reducing infection spread. Maybe you could just give us a little perspective, how does -- how could we see Becton benefit over the next six, twelve, eighteen months from concerns over MRSA specifically and do all of these issues accelerate -- have the potential to accelerate growth at some some point, sort of beyond your kind of guidance?

Well, let me answer the last one first, and I will ask -- let me answer the last one if there is a follow-on question you can do that and then I will let Bill talk about our continued success in biosciences. We had been guiding all year that GeneOhm, the HAI piece of our infectious disease business would be about $20 million. Put it in perspective, it is still a relatively small business, and yet, next year, we haven't mentioned it, but next year we're looking at that business to grow to be about 35 million to $40 million so on a year-on-year absolute percentage basis there is some fairly dramatic growth. It will take a few years. What we're dealing with here is changes in medical practice, and we've proven to ourselves over our lives here in this industry that that takes time. Notwithstanding, there is an extraordinarily compelling rationale behind active surveillance as one component of an informed and aggressive MRSA eradication program, and so active surveillance is, most hospitals start with it as a screening what they refer to as high risk patients, patients coming from other hospitals, patients being admitted through the emergency room or in intensive care.

Number of hospitals started in this place and they found that there were so many infections on the general ward and coming in from the community that they soon became involved in screening all patients. This is still a small, small number of hospitals doing this. Most of them are struggling a little bit with the issue of understanding how big the problem is and then knowing what to do when they find these patients. Very importantly, we recently participated with Cardinal in making an MRSA surveillance software which is available through Cardinal. We're now providing this on a pilot basis to any hospital that wants it for the first four months, and that's very, very exciting. You may recall many, many years ago having a similar program -- I think it was called Epinet, which we gave to hospitals to help them understand their under appreciated program with healthcare safety and accidental needle sticks.

I see extraordinary parallels to what we did for healthcare worker safety now manifesting itself in a broader problem which is healthcare associated infections. Again, small business for now but we're very positive that being there as we are among the first players in this space with a very effective test and even now expanding our menu is going to help us to grow in that space, but currently a fairly small business, but we have high hopes for it in the future. Having said that, why don't I ask Bill to elaborate a little bit on the success he's having in biosciences.

Rick, good morning. Just to get to your fourth quarter question on immunocytometry, the biggest positive story for the quarter was our reagent performance, and on that just reagent category associated just with immunocytometry systems we had kind of mid-20% growth, and that was driven by favorable and better than expected clinical reagent performance, two key categories there. The largest and biggest contributor was our HIV reagent business, and this is coming, as you know from our worldwide presence in CD4 monitoring. We also had very favorable performance on cancer on our L&L clinical reagents. Those two factors created a very favorable reagent impact for for the quarter.

Additionally, we were up against, as you mentioned a tough analyzer comp year-on-year. However, our sorters for the fourth quarter performed well above expectation, and actually grew kind of mid-teen range for the quarter. It is the factors of the clinical reagents and the sorter performance that really offset the tough comp we had on analyzers.

Thank you very much.

Our next question will come from the line of Mike Weinstein from JPMorgan. Please go ahead.

Hi, guys. It is Kim here for Mike. Can you hear me?

Yes.

Great. Just to follow-up on the gross margin, looking out to fiscal 2008 you're looking for flat year-over-year margins. Is it the right way to think about it that organically you would be driving probably let's call it a 40 to 50 basis point improvement but these start-up costs are probably what's going to hold us flat? And if that's the case can you talk a little bit about just specifically kind of what are these start-up costs, is it mostly going to be TriPath and GeneOhm related platforms and how they should play out through the course of fiscal '08?

The topic -- I am going to ask John to elaborate on this because he did such a good job on the fourth quarter analysis we'll see if he can handle the '08 analysis as well.

Okay. All right. So it very similar analysis. If you looked at the expected productivity and product mix benefit we would get, it would have -- we estimate it would provide about 80 basis points of improvement net of some other costs, maybe about 70 basis points when you get all through it.

There are two items. One is the start-ups, and that's about 30 basis points, and to your question, what do they apply to, well, as we ramp up Nexiva production, there are start-up costs with that kind of leading edge catheter. Within pharmaceutical systems there is expansion going on, and some of those costs end up in P&L before you're really producing anything. When you look at biosciences business in terms of reagent manufacturing in Puerto Rico as we do that good project which should serve us well into the future, again, there are costs that are period costs that end up going through the P&L without associated revenue. There are those types of things in terms of start-up. Bionutrients would be another where we where we're seeing that kind of thing. We can dig deeper if you want to talk to the business guys on that. Media production is another, so there are those things that would get in there.

The other thing that gets in there this year is obviously no surprise to anyone resin costs have increased, and resin costs and steel costs and like that among raw materials notwithstanding the good productivity that we're seeing. We estimate will probably cost us about 40 basis points, so if you look at those two, you've got 30 basis points for the start-ups and 40 for the the resins, matching against 70 basis points of improvement, and that's kind of why we are in the situation where as percentage you don't have that increasing. Again, as I said before, start-up costs go away by their own design. Raw materials in terms of resins, these are resins, we spend about $200 million currently on these resins so we have a budget in there that has an estimate of some price. There is not a one for one correlation against oil, but as oil tends to move up, we will -- we tend to get some kind of commensurate increase in those prices. Does that help?

That's helpful. Just to follow-up on that, though, it seems like some of these start-up items, Nexiva, Pharm systems expansion, and certainly the resin costs on other side of that should have been present in part in 2007, and you saw some nice improvements. So I am wondering are you able to tell us what was the resin cost pressure in '07, in basis points terms and then perhaps sounds like the start-up costs were 30 to 40 basis points, and just maybe are there any other item that is might drive some improvement in '08 and I guess looking forward to '09 do we expect a bigger improvement as some of these start-ups drop off?

Let's look at the start-ups because they don't happen within one year. If you look at '07, in terms of just absolute dollars you would be talking about 16, 17, $18 million of start-up costs, and in '08 you're probably talking about $40 million of start-up costs because we're really in the final throes of instituting these improvements because these start-ups are obviously, just to state the obvious, designed to improve our margins.

In terms of the resin costs, you were looking at in '06 oil around 66. In '07 you were looking at oil of about 65 although we were using more resins. Right now in '08 we had in our budget in the resins as they relate to oil would probably be in the 75 or 80 kind of range even that you have oil up right now to breaking through 96. We haven't seen that. Kind of when we look at the overall budget there is -- that's -- when we start looking at risk there is some risk there, but it is certainly manageable at 90 if there were a direct correlation. That could cost us $15 or $20 million.

On the other hand if foreign exchange stays where it is, that would more than offset that kind of a risk, so we feel very good with this budget right now. We think it is well balanced in terms of its risk and upsides to the P&L both in those two categories in particular. I think that as we get to '09 to the final part of your question barring us starting up something that is not right now on the horizon we should see continued productivity outpacing other costs and you should see some increase in gross margin. I wouldn't forecast yet exactly what that would be.

That's very helpful. Thanks for the color on those two items.

Our next question will come from the line of Glenn Reicin from Morgan Stanley.

Good morning, folks. Two questions for John. Just, I'm processing all your guidance and in terms of the quarterly progression it looks to me like we're talking about low to mid-single-digit EPS growth in the first quarter, low double-digit in the second and third quarter, and then close to 20% growth in the fourth quarter. Does that sound about right?

Well, I think in the first quarter I would give you this color, Glenn, I don't think you're wrong. I think the reported numbers we don't want to get away from our policy, and so I won't guide specifically, but less than our average is what I had inferred in those comments, so less than the 10 or 12%. I think when we do the kind of peeling back of the onion when we have this call for the first quarter you'll see that there are certain discrete items that cause that. I think that the slope of the line that you're drawing from the first quarter through the fourth quarter is a bit too steep, but--.

Meaning a bit too low in Q1 and a bit too high in Q4?

A bit too high in Q4, and I think you'll see that, and we'll try to as we move through the next quarter if there are anomalies, we will fill in the blanks there.

Right. But we do have -- because of the reclassification we have got some really weird Q4 numbers.

Yes, you do.

The only thing I heard that surprised me on the guidance was the tax rate nudging up to 27%. Most companies are moving it down. Why is that going up and what should we expect longer term?

Well, I don't know why -- I mean, most companies moving it down it may or may not be -- this is just a balance of our U.S. income against our tax savings income. Will it get better over time, it should. That's one of the reasons we're moving reagents to Puerto Rico, why more Pen needle lines went into Ireland, why are we doing more in Singapore. It is very manageable. We had guided over time that we should have that. And as discrete to this year we did have some extra benefits from the catch-up of the R&D credit. I think all in all that's not a major move for us.

It is $0.04 but are you assuming that the R&D tax credit will be renewed?

We are assuming that the R&D tax credit will be renewed, yes.

And then as we look out, say, in the '010, '011 timeframe, do you have any problems getting that number down to 25%?

I think that's a little bit further out than I want to go right now. If -- however, that said, as we drive more product manufacturing through tax savings jurisdictions which is among the key elements of our plan, we should certainly see the balance of international income rise, so all other things being equal I think that we feel pretty confident. The tax rate is not, I think, at this point in time, a major hurdle on our horizon.

Okay. Getting back to sort of the businesses, can you talk a little bit about the performance of ProbeTec and Phoenix for the quarter and then can you just give us the numbers for medical and diagnostics for U.S. international safety sort of you put them all together? I'd just love the specifics.

I will ask Vince to cover ProbeTec and Phoenix, and Gary can talk about safety on behalf of both segments.

Let me start with Phoenix. Phoenix sales were $8 million for the quarter compared to $6.4 million in FY '06 or an increase of 24% and yearly sales were $28 million, Glenn, up 25% for the year. That's versus 22.5 in FY '06. What we started to see as we had discussed last quarter, this impact of the level playing field with the change in the software requirements on this, so for the first time we're starting to see a little bit of acceleration on the Phoenix growth rate in the United States. That was good to see. Then on ProbeTec, ProbeTec sales were $32 million compared to $30 million in FY '06 for the quarter and year-to-date sales were $125. Of course the total business is $148 million just to make sure we got all the details right and you also got the Affirm product line in there that's also doing well.

Very nice. Thank you.

Glenn, this is Gary. Were you looking for the fourth quarter on safety?

Yes.

U.S. Medical up 6, Diagnostics up 8, Company up 7, and International Medical up 37, Diagnostics up 23, Company up 27.

Thank you very much.

Our next question will come from the line of Bruce Cranna from Leerink Swann. Please go ahead.

Good morning.

Good morning.

John, just simply I think in about '08 in your improving or I guess the assumption of improving EPS performance as the year goes on, is this really a function of easier comps on oil or resin costs as the year goes on or is it I guess a relative easing of start-up costs as the year progresses?

Well, it is no one thing. We do -- the sales do build as we move on. Some of the start-up costs move behind us as we move through. The gross margin does strengthen quarter-on-quarter as we start moving through the year. You do get rid of this -- we do have that anomaly in -- well, that's not really in earnings. I am just thinking of the optics as we move forward. We continue to get better leverage on our SSG&A as we move forward, Bruce. That is very important. That's 70 basis points we talk about for the entire year, certainly helps us. LTI as I said was slightly, a couple pennies front loaded, so that will also impact us, so it is any -- it is a kind of a slate of things that get better as we move forward throughout the quarters.

Okay. And then on TriPath just quickly it was a fairly decent number. The sales you're reporting there I assume is that just all liquid based PAP or have you started showing some actual material amount of ASR sales from TriPath oncology?

This is Bill. Those are all liquid based PAP revenues growing off the base of business that we acquired.

Are you gaining any share, do you think?

Well, that market's fairly low single-digit type growth, so it is fair to say we're making some headway on the share, yes.

And can you guys -- will you part with a revenue number for GeneOhm for the year? I know it was small, but I am just curious.

We said that the year just ended was about $20M as guided.

$21M.

21. Okay. That was pretty close. Next year, $35 to $40M.

Right. I think the question was asked about the flow business and whether or not you had any -- you guys saw any impact from Beckman's issues. I didn't hear the answer there. And then secondarily within immuno, can you give us some sense actually how big is advanced bioprocessing within that number?

I will ask Bill to comment.

Sure. On the first question, our comment on the Beckman thing is that most of these instrument purchasing cycles are based over months and months of time, and I guess we would attribute the growth much more to the array of the product, the quality of the product, the service that we're bringing to customers, and I don't really know if we specifically capitalized on them, but you heard the numbers, so it is clear that we are gaining market share. We have been gaining market share against them for a series of quarters, so I would like to think it is maybe us doing some things very well.

Okay. So that theory should be sustainable then?

We think our revenue guidance for next year will look similar to this year. We were kind of in that 8 to 9% for this year, and we hope to be there next year as well.

And then on advanced bioprocessing?

It grew for the year a little north of 25%, so think about that right now at concluding FY '07 as roughly a $50 million business.

Great. Thank you.

Thank you. Our next question will come from the line of Peter Lawson from Thomas Weisel. Please go ahead.

Could you provide an update on GeneOhm sort of how many hospitals were adopting contracts one, and whether integrations been finished or not and when you're expecting it to be break even?

I will ask Vince to elaborate on that.

I am not going to get into the specific number of hospitals, but what we -- we saw a very strong quarter ramping up to $7 million. I had guided on the last call at $20M. We ended up at $21M. Most of that revenue is still heavily U.S. weighted. We do expect to see acceleration in Europe next year as the U.K. starts to move ahead, aggressively on some surveillance plans here and as Ed said we expect to be $35 to $40M, and what you're seeing in the revenue numbers is really, really a test, 85 to 90% of these revenues are more test revenues than instrumentation.

When do you expect it to be break even?

A couple years.

And wonder if you could provide some color on the next generation instruments for MRSA.

Sure. Well, let me just reiterate first with the menu we do expect the staph SR that we did file back in the spring, we're last back and forth with the FDA, we believe, on that, so that should, we're expecting that to be approved in the quarter, and of course that's out in Europe. That's for the blood culture claim. We expect a nasal and wound assays to follow probably more likely in the second quarter, and VRE and C-difficile in Q2 and Q3.

In terms of the instrument we are moving ahead. We expect to meet our time line to replace the smart cycler. That contract is up in FY '08. Our target will be FDA submissions in the spring for the assays, and so we'll replace the Smart Cycler and we expect to be bringing forth improved sample handling at the same time.

And then just generally on color for M&A, what are the metrics that are looked at? Is it more of a technology play or do you think there will be more products in the general business, I guess that's for John or Ed.

Well, if you look at the way we went about recent acquisitions, they were actually the outgrowth of strategic planning deliberations and discussions at the business unit level, and also at the Company level. You may recall that we now have an Office of the CEO which includes the three business Executive Vice Presidents plus John Hanson and John Considine and myself, and we're constantly engaging the businesses in discussions of strategic direction and growth, and those discussions inevitably result in some opportunities, almost universally where your own internal growth can be supplemented on occasion with other additions, and therefore in both the molecular diagnostics space, a couple of three years ago, those discussions eventuated in the acquisition of GeneOhm. That was something that we went looking for and found the business team and the strategy at GeneOhm to be highly aligned with our own strategy and goals, and it was a perfect fit. We were able to enter the market through that capability, expand our platform from our own amplification system SDA to now include PCR, and Vince just elaborated, the menu expansion and improvements in the instrument that are coming.

So that's a good example of a strategy-driven acquisition and TriPath I think is another great example of business that we actually had a relationship with over numerous years, six, eight years, had a minority investment in the Company dating back to this period of time, and it became obvious in working together that one plus one was going to make something more than two, and so we were able to make that acquisition last year. So these are good examples.

The dilution in both these areas because they're new capabilities, there is some near-term dilution, but we're able to offset them in the case of this year, and as I said, we should be able to explain these acquisitions very quickly so they should therefore be strategically obvious. They should be capability driven and dilution, if any, should be modest and short-lived, and I think you should expect future acquisitions to be assessed in the same basis.

Do you think more the acquisitions are going to fall under the bioscience division as opposed to the diagnostics?

We really can't tell. We have -- we believe if you look out three, five years that the growth trajectories of all three of these segments is not dissimilar. When we talk about a 7 to 9 or next year we're looking at an 8 to 9% growth, you will notice that all three segments are in that same ballpark, and therefore also we also know that acquisition opportunities are also resident in all three segments, so we wouldn't emphasize one over the other.

Okay. Thank you so much.

Our next question will come from the line of Larry Keusch from Goldman Sachs. Please go ahead.

Good morning, guys.

Hi, Larry.

A couple quick questions for you. On the SG&A, John, it was actually on an absolute basis down, and when I just look back over the course of the last several years, it tends to trend up, and is that a function of taking those SG&A costs and putting them into COGS or is there something else going on there as well?

Are you talking about the quarter or the year?

The quarter, the quarter.

Let me just look at the quarter for one second here. Kind of those -- the impact of moving the costs of TriPath and GeneOhm costs us about $6 million, about 1.6% for the quarter.

Okay.

But I think what you're seeing, your bigger question in terms of what we see with SSG&A is we look at this. Obviously there is a lot of focus on gross margin, but there is equal focus on the service excellence and what we're trying to drive through in terms of productivity on the SSG&A line as well as the G&A line itself, and that affords, as Ed said, us the opportunity to invest more in R&D. So there is in our plan a move to continue leveraging of the sales we get and therefore leveraging the costs that we have in SSG&A, and seeing them move down as a percentage of revenue over time and in '07 obviously we did achieve that, and we have that well resident in the plan for '08, and I would say you'll continue to see that beyond there.

Okay. Terrific. Just two quick ones. As it relates to the dilution from GeneOhm and TriPath, where did you ultimately come out this year and what's baked into your thoughts for next year and just the other quick one on flu in Japan which also can move around a lot for you guys. Is it too early to call where that's going and when do we really start to see that manifest itself?

I will let Vince talk about the flu.

I will talk about the flu. I will start with that. The flu was only $10 million for the year versus -- for this year, the flu business, so we're hoping to see some recovery. It is way too early to say where the flu season is going to come out, so we won't have a sense for that until the the end of the first quarter. It is a relatively small business now.

Got you. Okay.

In terms of where GeneOhm and TriPath ended for the year, I believe we came in pretty much on what we had been guiding.

Yes. TriPath essentially I'm taking the cost of capital out of it, but just about $0.01 of dilution for the year. GeneOhm is a little bit different deal because it doesn't have the revenues yet, and it is both a product development as well as a market development effort, so there is more spending on the SSG&A line. To your point, Ed, though we come in right where we thought we would, maybe $0.01 off, and it is probably costing us overall about $0.09 or something like that.

Okay. If you're getting close on TriPath and GeneOhm obviously will ramp its sales, but sounds still like it will lose some money for a couple of years, what should we be thinking sort of ballpark next year? Is that rather than 8 or 9, is it more like 5, something like that that you're taking on in terms of dilution?

It improves relative to this year.

Right.

Yes, a little bit. Because the market development of this, it is a lot more like, I hate to bring the word of the evil empire in pharmaceuticals here, but this acts a lot more like a pharmaceutical where you have to drive that market first and you're going to spend -- investment spend the SSG&A on these in particular on something like this. Right now the world, every paper is full of it, and there is great debate over what the solution is for MRSA and HAI as a whole, so I think you're going to see more investment spending by us as we go through and continue to establish that.

The good news on this is that that investment spending sometimes shows up in the form of clinical trials, and that's a good thing. That's the last step before you get to the marketplace and the clinical trials for TriPath in particular are very intense because we're going for very high claims. So again, directionally it is really not a major force next year as we continue to marginally improve them, but again the investments are benefiting the future periods.

Okay. Great. That's helpful. Thanks, guys.

Our next question will come from the line of Jason Weiss from Robert W. Baird. Please go ahead.

Good morning. Could you give us a little insight as to how big you expect the market for the VRE and the C-Diff. test to be with respect to MRSA? Are you anticipating that these will also be candidates for active surveillance?

No. They're not going to be -- this is Vince -- they're not going to be screening tests because they're symptomatic, so where with MRSA you have this colonization issue, it is out in the community, and you want to do broad-based screening. These will be significantly smaller markets in terms of total tests because they will be diagnostic markets, not screening markets. So a tenth of the size but very important assays for the hospitals. C-Difficile is also a very deadly bug and is actually growing faster in the hospitals than MRSA is, but having said that you're not going to screen broad general populations.

And could you talk about some of the advantages of using molecular testing for C-Diff.?

Well, it is going to be sensitivity and time to result. It is going to be those two things. It is clearly going to be the two benefits for the hospital.

Great. Thanks for taking my questions.

Sure.

Okay.

Our next question will come from the line of Jeffrey Frelick from Lazard Capital.

A first question for Gary and then a quick follow-up for Vince. Gary, maybe you can help me understand a little bit the gross margin benefit lags the Nexiva product line until we see some automated manufacturing really kick in. When do we see that benefit and second question to that is the Japanese launch for Nexiva, any timing on that?

You'll see the benefit of Nexiva automation starting in '09, through the process of process automation this year, but that will continue to carry forward because you generally do this one line at a time. Just to be clear and as we stated in the last call, although Nexiva is growing, it is growing nicely and actually slightly exceeded our expectations in '07. It has a negative effect on GP because the GP today with semi-automated processes is considerably lower than the average GP in the medical segment. Of course that will change with full automation, and at this point today our focus on Nexiva is on U.S. and Europe primarily being the largest markets. We're moving through the process of registration in Japan.

Okay. Thanks. Just for Vince, I think a couple quarters ago you guys talked about some major IDNs undergoing some trials with BD GeneOhm. Just want to know update there, how they're progressing, the IDNs are they buying one GeneOhm for the core lab to service multiple locations or do we expect several purchases out of the IDNs?

It is hard for me to answer that off the top of my head, but I would say ultimately large integrated systems you're certainly going to see them doing systems in the core labs, whether or not they put some systems out in satellite areas, that's still a possibility, but certainly what's driving our growth is systems in the core lab and often back end with multiple smart cyclers.

Okay. Great. Thanks.

There are no further questions at this time. Please continue.

Okay. Thank you very much. I think that concludes our call for today. You know how to find us on the web and to get replays, and with that, we thank you for your participation, and we are signing off. Thank you, operator.

You're welcome. Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using AT&T Executive teleconference service, and you may now disconnect.