Becton Dickinson and Co (BDX) 2008 Q1 法說會逐字稿

Hello, and welcome to BD's first fiscal quarter 2008 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday, January 31 on the Investors Page of the BD.Com website, or by phone at 800- 475-6701 for domestic calls,and area code 320-365-3844 for international calls, using access code 905428. (OPERATOR INSTRUCTIONS)

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

Thank you. Good morning, everyone, and thank you for joining us to review our fiscal First 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 our 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 press release and related financial schedules. A copy of the release, which includes the financial schedules, 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, Bill Kozy and Vince Forlenza. I'll now turn the call over to John.

Thank you, Pat, and good morning to everyone.

We assume you all have our Earnings Release and the attachments which were sent out this morning and have had some opportunity to review them. We'd like to devote as much time as possible to answering your questions, so our opening comments will be brief. There are three primary topics we want to address first. Initially, since there is an item that affects the comparability of our diluted earnings per share from continuing operations for the First Quarter of Fiscal 2008 and 2007, we want to review the analysis of this result, of these results that we 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 revised guidance for the full year of 2008.

Starting with our earnings, I'd suggest you turn to Table 1 in the Press Release, and as you can see, diluted EPS from continuing operations for the First Quarter of 2008 is $1. 07

For the First Quarter of Fiscal 2007, we are adding back the charge of $.45 resulting from the in-process Research and Development charge related to the TriPath acquisition to our reported diluted EPS from continuing operations of $.51. This gives us adjusted diluted EPS from continuing operations, excluding that specified item, of $.96.

Comparing the $1.07 for this quarter to the $.96 adjusted amount for the prior years quarter gives us an EPS increase of 11%.

Moving to our growth drivers, our revenue increased by nearly 14% for the quarter, which included a near 6 percentage point favorable impact from foreign currency translation. This positive translation effects related primarily to the Euro, and to a lesser extent, the Canadian Dollar and certain Asia Pacific and South American currencies. All three segments benefited from positive foreign exchange 5-6%.

In the medical segment, First Quarter revenues grew about 10 % lead by sales of pre-fillable drug delivery devices in the pharmaceutical systems area and diabetes care products. Global sales of safety-engineered products in this segment grew about 8% to 187 million. Revenues in the BD diagnostics segment grew about 18% in the First Quarter. This growth includes about 5 percentage points from TriPath which was acquired near the end of the First Quarter of 2007. Strong sales of safety-engineered devices and molecular testing systems, which include GeneOhm, ProbeTec and Viper, also contributed to our growth.

Global sales of safety-engineered products in this segment grew about 16% to $196 million, due in most part to the continued success of the push-button blood collection set. Looking at combined medical and diagnostics global safety, sales grew about 12% to $383 million. The U.S. growth rate was about 7% and the ex-U.S. was about 24%. In the BD Biosciences segment, worldwide revenues grew at 18 % for the quarter. Research instruments as well as clinical and research reagents continue to be the primary growth contributors.

Turning now to earnings, consistent with our November 2007 guidance, our gross margin percentage for the First Quarter was lower than that of the prior year. At the time we issued the former guidance, we anticipated that our First Quarter gross margin would be approximately 1 % lower than the 2007 First Quarter.

Our reported results are actually an additional 40 basis points lower than that projection, and this difference relates to a number of one-time items totaling about $7 million which were recorded in the First Quarter of this year. Absent these items, our overall gross margin percentage would have been exactly in line with our expectations. SSG&A, as a percentage of sales, improved 90 basis points, primarily driven by very disciplined expense-control management.

Our R & D spending increased about 14% due in part to the impact of TriPath, which was acquired, as I said before, at the end of the First Quarter of 2007. Our operating income margin was just slightly lower than the prior year's adjusted margin due again to the unfavorable gross margin impact I previously discussed. In terms of cash flow, we generated approximately $450 million in net cash from operations in the quarter. We used $123 million to repurchase about 1.5 million shares of common stock and invested another $121 million in capital expenditures.

The last topic we would like to cover is our revised guidance for Fiscal 2008. We expect diluted earnings per share from continuing operations for Fiscal Year 2008 to increase approximately 11- 13% from last year's adjusted base of 384 which excludes $.48 of in process Research and Development charges related to TriPath and a small piece of that amount to [Plaso.] Our prior guidance was 10-12%. Our full year reported revenue growth is expected to be about 10% up from our previous guidance of 8-9%. We expect Medical to be about 9%, BD Diagnostics about 10% and BD Biosciences about 11%. These amounts would include about 2.5-3% of positive foreign currency benefits for the entire year.

U.S. sales of safety-engineered products are estimated to increase at 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 51.5% or about 20 basis points below the prior year and our previous guidance, reflecting, really, the impact of higher-than-expected [resin] costs for the year. SSG&A is expected to improve by about 70 basis points as a percentage of revenues. R & D spending is expected to increase by about 11%, and our overall operating margin is expected to improve by about 40- 50 basis points. Again, just slightly down from our previous guidance of 50-60 basis points as a result of the resin.

Our effective tax rate is projected to be about 27.5% for the year, and as you know, that can vary by quarter. Now, this is slightly higher than our previous guidance due to the expiration of the research tax credit effective 12/31/07, with no certainty as to when and how it might be reinstated.

We expect to generate about $1.6 billion of net cash from operations, and invest about $650 million in capital expenditures. And we expect share repurchases to be about 450 million and the average number of fully diluted shares outstanding to be between 253-254 million. With with that introduction, we would like to begin the Q & A. And as we have said in the past, in order to allow for the broadest participation, we would appreciate it if you'd limit your questions to one plus a follow-up. And, with that, thank you. And, operator, please open the call for questions.

Thank you.

[OPERATOR INSTRUCTIONS].

Our first question is from Rick Wise with Bear, Stearns. Please go ahead.

Good morning, John, how are you doing? Can you give us a little color on the gross margin of the resin and the outlook for the rest of the year?

Sure, Rick. Again, our initial guidance back in November was that our gross profit for the First Quarter would be down by about one percentage point, so to remind you, in '07, our gross margin was 52.8%. We actually came in at 51.4%, so another 40 basis points lower. As I said in the remarks, that 40 basis points, which amounts to just under $7 million, relates to some one-time items that we reflected in the cost of sales in this quarter,and they were some very minor recall-type costs that had to be charged against cost of sales as well as some asset write-offs that we had to take. Again, tiny numbers. $7 million, and that moved it down 40 basis points, which gets us back to about one percentage point difference.

We continue to have good productivity in mix giving us about 60 basis points, and then as we had said in our guidance back in November, we experienced about a negative 70 basis point impact from foreign exchange. And then had a number of other items, primarily resin and steel, which might have been 20 basis points or so. So the start-up cost is about 20 basis points, and then a bunch of other type items that run through the quarter. So you arrive at the 51.4.

When you look at the whole year importantly, again our mix in productivity continues. Last year, we had a 51.7% gross margin. We're looking for about an 80 basis point improvement in mix and productivity as we discussed at some length on the last call. Start-up cost costs us about 30 basis points. And then raw materials, particularly the resins and the steels, about 60 basis points, and then there's a little other in there but not much. That would give us a 51.5, about equal to last year, 20 basis points off. And that 20 basis points is just the additional increases we've had in resin from our initial guidance. So, we should be just about exactly where we said we would be back in November.

Got you. Very helpful. Turning to a different topic, could you give us a little more color on the GeneOhm uptake, and just some questions surrounding that? Any change in the regulatory landscape that would help? How excited are you about the Staph A launch and approval? What the would it take for GeneOhm to ramp faster? Again, any color on all that. Thanks.

So, this is Vince, and GeneOhm is going well. Last quarter, I think that I stated guidance of about $35-40 million. And I think, based on where we are at the quarter, how we see the market ramping up, we're more in the 38-40 range on that, so we're pleased with what we're seeing in the marketplace. The StaphSR that you asked about, of course, that's the Staph test from blood culture, and that was cleared by the FDA in December. We think worldwide, that's about a 50 million-dollar new opportunity, market opportunity.

There are two other claims that are submitted to the the FDA for the StaphSR test. Remember, SR means it's two versions. Both the it's two versions, both the susceptible and the resistant version.

There's a wound claim submitted to the FDA, and we think that's been an incremental $35 million market. So, not huge again, but where there's larger potential upside from a market standpoint is the StaphSR nasal swab which has been submitted to the FDA. And the application here is screening a high risk pre-surgical patient, and in this case, you want to know both resistant or susceptible, and there's some guidelines that are being published by, in the thoracic surgery area suggesting that people should start screening these patients.

They were not in the original high-risk category so we think that's an incremental U.S. Market of about $245 million. So, we're starting to think that the opportunity is bigger and that we're starting to see it ramp up a little faster than we thought.

Thanks, Vince.

Thanks, Rick.

Thank you. Next we'll go to the line of Mike Weinstein with JP Morgan. Please go ahead.

Thank you. Good morning, guys.

Hi, Mike.

Maybe just a couple of items. First, just want to clarify, so you decided on the R & D tax credit since the extension hasn't happened, to go ahead and pull that out of guidance. That's about 50 basis points, is that what I'm hearing?

That's exactly right, Mike. I should have said it like that. We've taken it out. We got it for the First Quarter because it expired at the end of the calendar year, but since it hasn't been reinstituted, and we don't know when it will and how it will, we've taken it out. And that's about 50 basis points.

That's, obviously-- It was in your old guidance, but now, that's not in your new guidance, right?

That's correct.

Can Vince spend a minute on Phoenix and ProbeTec, and how those are doing in the quarter?

Absolutely.

Sure. So, on a reported basis, Phoenix was up 16%. That's 8% on a performance basis, so it was just under $8 million. So, last year was a total year of about, I think, $28 million, so it's continuing kind of on the same pace that it has been. We had a good Fourth Quarter with that. We haven't seen a real large uptake yet in the U.S. marketplace. We're still looking to get that [auto prep] out this year in the Fourth Quarter, and we think that's going to be very important to us.

On the molecular side, the molecular growth was on a reported basis 15.7%, and about 12% on a performance basis, taking the FX out, so we continue to do well in the molecular space, so that's molecular, not including GeneOhm. That's the ProbeTec and of course Viper and the Firm product lines.

And could Gary spend a minute on safety in both segments?

Sure. Well, as John described, overall safety was up over the First Quarter last year, about 12% and Diagnostics growing about 16%, Medical about 8%. We had strong growth in both segments, both Medical, Diagnostics, internationally, both came in over 20%. In the U.S, Diagnostics was strong at around 10%. Medical growth of safety in the U.S. was about 5%, and what that was was a combination of very strong growth in Nixeva, albeit off a small base, but the sales more than doubled and were very much in line with our expectations. We are having a decline in Interlink sales, that's one of the safety products that has been around for awhile. That's more or less flat, flat to slightly declining and that offset some of the growth of Nixeva in the quarter. And our outlook for the year has been consistent with what we originally guided. (inaudible) U.S., and about 20% international.

Great, and last question. Last financial question. Any update on the cash flow guidance for the year? Or is that unchanged?

We did up it . From-- We were at $1.4 billion and we believe it's now closer to $1.6

Thanks, perfect.

Thank you. And next we'll go to the line of Jeffrey Frelick with Lazard Capital Markets. Please go ahead.

This is actually [Joel Herrick] with [Gutterman Research.] A couple of questions for you guys regarding your operational initiatives. What are you guys doing in terms of Lean Manufacturing and keeping in Six Sigma to overall help and improve results to the bottom line?

Well, each one of the business heads can chime in after I just give you just an idea that we've been after Lean and Six Sigma for a number of years under the, kind of the leadership, now, of our Head of Manufacturing. A guy named Jonathan Macy. We have a really concerted effort around driving variation out of all of our manufacturing processes. Some of what you see when I talk about gross margin, in terms of productivity, is related to that work, which is ongoing and will be for all of our business careers. Vince and Gary and Bill, there's nothing-- One specific item that I would mention but --

We were organized with Lean and Six Sigma leaders in our plants. It's just an ongoing part. It's just a part of the way that we do business, and I think some of the biggest impacts that we see at the operational level is the amount of space and throughput-- The space that we free up, and the productivity we get out to these lines, which pushes up the need for capital in these plants, and we expect that to continue to happen.

And this is Gary, just to add as John said, Lean and Six Sigma are a part of our operations culture. We have been working on both for over five years, and as Vince mentioned, we have Lean leaders working in our plants. We do value-stream mapping in all of our plants, which is one of the key components of Lean. And this is an evergreen process, and now, one of the things we're engaged in is very close benchmarking of both our costs and projections of competitive costs all around the world so that we can be benchmarking the absolute best practices. Not only in terms of operating efficiency, but also in terms of things like cost of raw materials, cost of molds, cost of presses. This is pretty much just baked into the DNA of BD.

Yeah, you mentioned throughput a minute ago. How are you guys measuring metrics like OE and RONA which are so highly critical in a business like yours?

Well, we could spend all day on metrics. We have a set of standard metrics that we look at, and we look at these quarterly. The operating guys are looking at them daily. And we do look at OE, we look at RONA. We're very much driven by our return on invested capital for the whole business.

Some of these efforts extend well beyond the manufacturing effort and into transactional Six Sigma processes. So, I mean , you could take it for being as Gary and others have described it. It's in the DNA and something that we just continue to drive, in an area where we have-- Prices not something that we can necessarily increase. We have to continue to drive inefficiencies and our price has to come from new and innovative

And final question. To accelerate your C.I. initiatives for the remainder of 2008, what systems and solutions are you going to be putting in place to make sure BD remains a leader like you always have been in the market?

When you say CI?

Continuous Improvement.

Okay. What other-- So, say again? I didn't--

To accelerate your CI initiatives, continuous improvement initiatives, for the remainder of '08, what systems and solutions are going to be put into place to make sure BD stays and remains number one in the market?

Well, you've got a lot of faces to start smiling around here, but so we put in our SAP system about eight years ago, seven years ago, and we're about to venture into the upgrade to 6 X, if you will, of SAP globally.

Certain operations were left out. There were certain older systems that weren't brought into the fold. This is an effort-- Will be one that will be all-inclusive for the entirety of BD, and it will facilitate a lot more immediate information and should really allow us to get to the next step on continuous improvement, which is just another-- We think o continuous improvement like we do Six Sigma, Lean and everything else. It's just part of the DNA around here, and that one extends actually into regulatory and quality and everything else.

Thank you. What were you going to say? Hello?

Yeah?

Okay, yeah. Congratulations on a solid quarter. Good luck down the road.

Thank you.

Thank you. We'll go to the line of Bruce Cranna with Leerink Swann. Please go ahead.

Hi. Thank you. Good morning.

Hi, Bruce.

I guess, John or Bill, or someone, could you possibly, maybe, part with an account number on the GeneOhm side? Or if not an actual account number, maybe talk about growth in the account base this quarter? And then, I recall you've launched in Germany and the UK, maybe a quick update on OUS GeneOhm?

So, as I say, we're not giving out account numbers, but the sales numbers, the guidance that I talked about, you should think about that we're not selling a lot of equipment. That's like 90% tests, so we think we're doing very well in the market. I will just say another large account and IDN, Henry Ford, out in Detroit, just decided to go with the system. So, I think consistent with the strategy that we've talked about of focusing on large, high-volume accounts, we're doing well with, and I'll repeat the guidance of about $38-40 million for the year is what we're thinking. Up from the 35-40 so moving towards the higher end of the range. So, that's where we are now.

Okay, and you still feeling pretty good about timing of new instrumentation sort of end of '08?

Yes, our internal program is on track at this point, and we think we've got a good transition plan in place.

Okay, and I guess one for Vince, if I could. The numbers in flow keep surprising us to the upside and I guess a couple things there. Are you seeing any weakness in the Far East in flow cytometry, and the strength you're putting up, is it more on the clinical side or the research side globally?

You really want Bill for that. He's running Biosciences now, and that was Vince talking about GeneOhm.

Sorry.

We kept switching chairs and confusing you, so Bill will answer that.

Yes. I'm here. The story for the quarter was around research instruments and particularly in U.S. and Europe, and it was continued to the comments of the earlier quarters around Canto 2 and Aria, which both had really positive double-digit growth. And then on the clinical side to your question, the clinical reagents were unusually strong. We had favorable timing, particularly on HIV monitoring in the Middle East and Africa, and we had a very strong quarter, particularly coming out of Africa on the clinical reagent side. Additionally, the cancer reagents in the U.S.... The L&L Had another good solid double digit quarter, so you've got both the L& L and HIV monitoring on a global basis performing just continually strong, and you've got Canto 2 and Aria kind of maintaining momentum.

Okay, thank you.

All right , thank you. And we'll go to the line of Glenn Reicin with Morgan

Hi, folks. Just a couple questions here. When I look at the constant currency results, I was really surprised with the strength of the diagnostics business, and I'm trying to understand the source of that strength. Because I think you gave a TriPath number, the implied number was roughly 26 million. And then you gave us the ProbeTec and the Phoenix numbers, just trying to understand what's driving that especially in light of a very light flu season and then on a more negative note, the reverse can be said about medical/surgical overseas. Can you give us some idea of what's happening there and whether those trends will reverse?

Glen, on the diagnostic side, this is Vince, if you pull out the impact of TriPath, the performance number would have been 8%.

So how big was TriPath? 26 or more?

Well, in the course, 29.1.

Oh, okay. So we're seeing, you know, now it was 4.6 in '07.

So you can do the math from there, but if you kind of normalize the all in for the sales that we didn't record in '07 because we didn't own it, it's up about 9-10%, exactly where we thought it would be so it's doing fine. The second part of your question is, you know, kind of unexpected strength would be microbiology on a reported basis was up 9.8 and almost 5% on a performance basis and part of what's going on there is one they just had a strong quarter in the core micro biology plate business and a chunk of that came from CHROMagar, and remember we continue to talk all the time about the molecular piece of HAI, but there's also a product that we've put out there this CHROMagar product, and as people start to do surveillance to understand their overall HAI, MRSA situation, they use CHROMagar, so we saw some really nice growth to about 4.5 million in the quarter up 195% on the CHROMagar product line.

So that's sustainable?

Oh, yeah.

And this is Gary. Go ahead, do you want to finish?

No.

On medical/surgical, there were two unique events in the First Quarter affecting international. One was, and the larger of the two, was that part of the sales that go through that business are sales of special types of syringes called [auto-disabled] syringes that are used for childhood immunization in developing countries, and Unicef has been procuring those types of devices for some time for most developing countries including India. And India pulled out of procurement through Unicef and is bringing it in through their own procurement system. Initially from UNDP, but then, ultimately it will be done through their own system. And that was a pretty substantial portion, and that hindering process is now ongoing in India but it wasn't included in Unicef, and we had a fairly large number in the First Quarter of last year that obviously didn't occur this year as a result of this.

Playing catch up going forward?

It's a little bit less predictable, because it's dealing with another entity, but this quarter, the impact was particularly felt on a year-to-year basis because there was a large amount for India in last year's Unicef purchases and this may come back. It may not, so we don't want to give a prediction on that. And then there was also a one-time order in Japan last year, of all places, in our critical care business which is a fairly small business to a customer who was exporting our critical care products as part of a larger system.

We knew that wouldn't return and that was actually a pretty significant number as well, so both of those drew down the international medical/surgical. In the U.S. med/surge, we had a tough comparison. We were up around 9% last year in the First Quarter, which for that business is quite a bit of bit of growth so we had some comparison there. Up for the full year, our outlook is more or less what you might expect on a performance currency neutral basis sort of in the 5% range.

Perfect, and then John just one quick follow-up. The tax rate situation, 27.5 for the year, do you play catch up in any one quarter, or do we just go 28% for the next three to get to 27.5? And also what did you say about SG&a and R & D? I missed that.

R & D, we expect for the year to be up about 11% year on year. SSG&A we said we thought we would be up improved by about 70 basis points and in terms of the tax rate, while it can vary in those quarters, it won't be exact but I would think the way you approached it is right, is to go like that number, 28 for the remaining three quarters. When we hear more and know more about the R & D credit, if it is indeed reinstated, we'll reflect that as upside in the tax rate.

Thank you.

We do have a follow-up from, Jeffrey Frelick with Lazard Capital. Please go ahead.

Hi, this really is Jeff this time, thanks, guys. Question for Vince. Vince, so if we look at the VA hospital -- That network, what's your take on the penetration rate? How many of the hospitals have adopted rapid MRSA using molecular?

I don't have the VA penetration of total hospitals off the top of my head. That's something I think we would have to get back to. My impression is that there's been a fair amount of equipment bought, but not that much testing that's been implemented yet. Okay, so we still have some runway , m correct? Yes, I think

And then as a follow-up, what is the mix on GeneOhm U.S versus OUS?

Sure. Just give me a second here. We are starting to see a little ramp up ex-U.S, mostly in Europe. And if you break out the 8.8, about 5.8 of that is the United States and the balance is the rest of the world. Most of that rest of the world is in Europe at this point, really being driven by Germany and the UK.

Okay, great. Thank you.

All right, thank you. And we'll go to the line of Clinton Lai with Robert W. Baird. Please go ahead.

Hi, good morning. Looking at your Biosciences business, and your exposure into the life sciences research side, could you kind of give a little background, Bill, on what you're seeing in the end-markets especially U.S. and Europe? And how new product traction like your media business is going?

Sorry, Quintin, I didn't hear the latter part of the question. Can you repeat the second half?

Sure, and then how new initiatives like your media business is coming along?

Yeah, the advanced bioprocessing business did have a nice quarter. They were up year-on-year a little north of 20%, and the outlook for the year is, continues to be pretty favorable. We've seen some of our emerging pharma customers fluctuating their demand.

Looks a little softer than what they had told us a year before, and that's based on their production scenarios as opposed to anything going on in our business. But the outlook for the business, and, of course, the continued biopharma growth continues to put a lot of our attention on this.

We do hope to have that Miami production facility that we described last year up and running in FY '09, so that we're really prepared to meet some pipeline demands that we see downstream.

And then, Gary, in the past there's been a lot of talk about inhaled insulin. And this, over the last few weeks, we've seen some therapeutic companies exit that area. Does that change any of your thoughts about the diabetes market and the BD strategy going forward?

I would say there's a few thoughts that are very consistent, and maybe a few things that have changed.

One thing we're very consistent, and we felt this way throughout, is that the precise control that's enabled by injection of insulin could not be replicated with inhaleable insulin. The ability to be very precise in administering doses and measurement has a direct impact on glucose control, which has a direct impact on avoidance of complications and that injection remains the method that allows for that control. And in that respect, even as inhaled insulin was getting a lot of, let's, say press, and was in the spotlight, our sense was it was alway better suited to people who were on orals and failing on orals as an entry point to insulin. Ultimately, leading to injection rather than something that would replace injection.

If anything, what's changed is that with Pfizer's withdrawal from the market and with some question marks emerging on some of the other inhaleable technology, it's less clear what role in the future inhaleable may play out. I would hesitate, it's not for us to say whether it will play a role or not, but what role it may play is less clear now. There are still some open questions about the long-term effects of inhaleable insulin, and our strategy going forward, in the near term, is to insure that injection of insulin is done in the most effective precise and least discomforting way. With our devices over the longer term, we have other developments and technologies that we don't routinely talk about that could further enhance both from the standpoint of effectiveness of the injection and comfort of the injection. So, there are things that the we continue to work on that can take things to the next level and what happens with inhale able over the long term will be determined by the markets and technology development, but it seems to be this year a little bit more in line with what we may have expected in past years.

Thank you.

All right, thank you. And we'll go to the line of Kristen Stuart with Credit Suisse. Please go ahead.

Hi, good morning. I was wondering if you guys could provide an update just on your progress with bringing out your own instrument. I know that the agreement ends later this year. Where do you stand on your own instrument?

Sure, this is Vince. The program is moving ahead as I've described in the past. We're doing this in a partnership, so we're going to be employing technology that is proven technology here. So, it's not an issue of us starting all over and developing an instrument from scratch, so we will be replacing the thermocycler, and then that's one piece of it and that's coming along fine.

We're really focused on the software development so it's an integration task, and then the second piece is on the up-front sample processing and, there, we're using a technology that's also been proven out in our customer hands. And in fact, we have some customers who self-validated that technology and in fact that's where the big improvement comes from in terms of work flow on the system. That's what we're focused on.

The back end of it, the thermocycling end is not a big deal from a work flow standpoint. It's really the up front sample processing piece, so we're about ready to go into clinical trials with that. That's where we stand.

Would you be willing to disclose who the partner is at this stage or when might we hear a little bit more details on that?

No. When we launch the system you guys will find out who it is.

Okay. Any update on how long you would expect the MRSA test to take on the new platform?

Well, there's nothing new here to report. I guess all I would, I don't know what you meant by how long it would take. Are you talking about, it shouldn't take, it shouldn't change the time to results. It's going to be a PCR-based test. What is going to, if that's what you were asking?

Yup. And VRE and C-Diff, are those still slated for clearance before the end of 2008?

Yeah, so VRE, we expect to submit to the FDA in March. So that will depend on how fast the FDA acts on it. And C-Diff, we're looking at probably around an April submission to the FDA.

Anything on MRSA or these two that just in terms of the market size that over the past couple of months with the continued, I guess, movement towards HAI that makes you think the market may be a little bit bigger than originally anticipated?

Yeah. There were two things that we're seeing, we're beginning to believe that the market is going potentially larger first on just the MRSA screening side. We talked about screening around 30% of admissions, and it's probably about 35% and $25 a test, but what we're seeing is the number per patient of tests is not one. It's 1.3 because when they get a positive, they're going back and retesting after they've done the de-colonization. So we're thinking the U.S. potential market is about $400 million or about 16 million tests.

The rest of the world could be ultimately as large as $750 million and about 30 million tests, but the only caution I've got there is they lag a number of years. That could be 3-5 years behind the U.S, just like we've seen in the safety area. And then, lastly, the other application that appears to be emerging could be this pre-surgical screening.

It's not done routinely right now, but a number of thought leaders, and there's papers that have come out-- Some initial guidelines that say that you should screen for not just MRSA , but also the susceptibile version. So, this new StaphSR test, when that gets approved in the nasal format, there may be a new market for that as

How about VRE and C-Diff? Where do you think those markets could be?

Yeah, so VRE, we think that it's about a $125 million worldwide market. The bulk of that is in the United States. That's just where the testing is and it's much more of a problem in the U.S. And C-Diff is probably about $75 million And $150 million outside the United States and of course that's primarily done by immuno-assay today.

And just to clarify, on the MRSA, that was-- The market sizes you were using were based on the 30-35% of admissions being screened?

Yes, that's right and 1.3 test per patient screened.

Okay. Perfect, thanks very much.

You're welcome.

[OPERATOR INSTRUCTIONS]. We'll go to the line of David Toung with Argus Research.

Yes, good morning. I think you've answered some of the questions about the TriPath growth, but I just wanted to get into a little bit more color on how TriPath, being part of the larger organization, what kind of opportunities have opened up? I think you talked about that when the acquisition was closed. I realize the numbers are, I think you've mentioned 9-10% growth organically.

Yes.

But I realize that the opportunities are probably larger than that given that TriPath has access to a lot more resources now.

Yes, so let me, I'll help you out there. So you're right. I gave 9-10% organic growth. Now remember, most of the sales in that business, over 80% are U.S. So, the next area in the core business that does leverage some BD resources is ex-U.S. And we're working to create plans in Europe, Asia Pacific, China. And taking that product into some new markets. So, we're kind of in a transition year in terms of figuring out country by country, exactly how we're going to do that. So that's one thing that we're working on.

Second area in terms of bringing this into BD was building up the regulatory staff, getting the clinical trial process under control, so that the Focal Point GS instrument, which of course has been launched in Europe. The Focal Point, of course, is the reader for the slides and GS stands for Guided Screening, and that trial is finished. It's been submitted to the FDA, and you can remember they had trouble finishing off their trials. And the FDA has done the site inspections so now we're waiting for approval on the GS for the United States. And lastly, we continue to work on the molecular path and we're-- As we work on the molecular path, we're running a simultaneous trial of both the molecular path and an HPV claim, and that trial should be finishing up in the next couple of months. It was lengthened by some changes in FDA requirements so we're making good progress there as well. We think that's a big opportunity.

Great, thank you.

Thank you. And our final question is from Mr. Peter Lawson with Thomas Weisel Partners. Please go ahead.

Hi, John. When you look across the different business lines, which business do you think has the most room for margin expansion ?

Which of our businesses have the most room for margin expansion? Well, I believe all of the business lines that we have right now do have margin expansion. If you take med/surge-- And I encourage my associates here to join if you like. When you take med/surge, they have core products that frankly are being looked at very closely in terms of trying to drive lower cost product out of where we are right now and make those core products as low as possible. Safety certainly has margin expansion, as we have higher impact products come along, so through our whole Sharps business, you see that type of thing.

Clearly, as you get into the diagnostic side, and you get into the, particularly the molecular side here, there's ample room for margin expansion. As is there in Biosciences in terms of the new and added instruments, instrumentation-- Kind of our consolidation of reagent manufacturing in Puerto Rico and things like that, so I wouldn't want to pick out any one specifically You probably could, but I think suffice it to say that all of them have reasonable opportunity for margin expansion.

And then if you look across the U.S. market, what was leading the growth? Was that within diagnostics? Was that just, say, flow or what was the real driver there?

Well, within diagnostics, remember flow of course is not reported in the diagnostics business. That's in the bioscience business. But in the U.S, that was the push-button. You know, the conversion to safety on the PA S side with the push button, it did very well. And then in the core micro businesses, I mentioned before we're starting to see that ramp up of some CHROMagar. And we just had a little bit of an unusually strong quarter in some other core media products there, so those were the things and we break out GeneOhm separately so obviously that and TriPath has got the growth as well.

And on the medical side in the U.S. Pharmaceutical systems continues to perform well. It's not the growth rate that was last year but if I'm correct First Quarter last year we grew 51% in the U.S. in pharm systems. This year, we grew 16.5%. So, that's 16.5% on top of that 51% from last year. That won't necessarily continue at the same pace, but other businesses are doing well like diabetes care is growing in the U.S. well above the rate that it did last year. consistent with the Fourth Quarter, but higher than the full-year rate. So, those are the two things that have been helping there.

Well, thank you, all for your attention and hope that this has helped. We look forward to talking to you next quarter and should you have any clarifying questions or want the spread on the Super Bowl, call Pat, and she will be glad to tell you where to place your bet. And we can only say " Go, Giants" and go BD , so talk to you later.