Becton Dickinson and Co (BDX) 2008 Q4 法說會逐字稿

Hello, and welcome to BD's fourth fiscal quarter, 2008 earnings call. At the request of BD today's call is being recorded. It will be available for replay through Wednesday, November 12, on the investors page of the BD.com website or by phone at 800-642-1687 for domestic calls and area code 706-645-9291 for international calls. Using conference ID 67742305. (OPERATOR INSTRUCTIONS) Beginning today's call is Ms. Patricia Spinella, Director of Investor Relations. Ms.Spinella, you may begin.

Thank you. Good morning, everyone, and thank you for joining us to review our fourth fiscal quarter 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 section of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and the related financial schedule. A copy of the release which includes the financial schedules is posted on the BD.com website.

Joining us this morning are Ed Ludwig, Chairman, President and Chief Executive Officer; John Considine, Vice Chairman and Chief Financial Officer; and BD Executive Vice Presidents, Gary Cohen; Vincent Forlenza, and William 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 we sent out this morning. We like to devote as much time as we can to questions, so my opening comments will be brief. Broadly speaking, there were four topics we're going to address in these comments. The first three will be covered by me and the fourth by Ed. First we'll review our diluted earnings per share from continuing operations for the fourth quarter and twelve months. Second we'll describe the key drivers of our revenue and earnings growth. Third, we'll review our earnings guidance for 2009, and fourth, Ed will elaborate on this morning's organizational announcements and then review our overall strategy.

Starting with earnings for the fourth quarter of 2008, we reported diluted EPS was $1.13 increasing by 15% over diluted EPS of $0.98 for the fourth quarter of 2007. For our full year 2008, I suggest you turn to table one in the press release. As you can see reported diluted EPS from continuing operations for 2008 were $4.46. For fiscal year 2007 we began with reported 2007 diluted EPS of $3.36, and added back the In-Process R&D charges of $0.48 for TriPath and Plasso. That gave us an adjusted diluted EPS of $3.84. Comparing the $4.46 to the $3.84 gives us an adjusted EPS of 16% up. Moving to our growth drivers, revenues increased by 11% for the quarter which included approximately 5 percentage points of favorable foreign exchange due primarily to the Euro. Our revenue for the full year increased 13% also being favorably impacted by about 6% of foreign currency translation. In our medical segment fourth quarter revenues grew about 10% led by sales of prefillable drug delivery devices and continued growth in pen needles. Global sales of safety engineered products in the segment grew about 8% to $192 million with particularly strong growth internationally.

For the year revenue in the medical segment grew about 11% reflecting six percentage points of favorable foreign exchange. Pen needles and our pharmaceutical systems products and safety products and international markets led growth. Global sales of safety engineered products grew about 10% to $749 million. Revenues in the Diagnostics segment grew about 11% in the fourth quarter led by safety engineered devices, cancer diagnostics, and infectious disease testing systems. Global sales of safety engineered products in Diagnostics grew about 13% to $213 million. For the year revenues in the Diagnostics segment grew about 13% reflecting an approximate five percentage point favorable impact from foreign exchange. Global sales of safety engineered products grew about 14% to $821 million. Looking at combined Medical Diagnostics global safety for the quarter, sales grew 11% to $404 million, the U.S. growth rate was about 3% while ex U.S. was about 26%. For the year combined Medical and Diagnostics global safety grew about 12% to $1.57 billion with the U.S. growth rate being about 5% and ex U.S. being about 29%. In the Biosciences segment, worldwide revenues grew 16% for the quarter, clinical and research instruments and reagents continued to be the primary growth contributors. For the year worldwide BD Biosciences revenues grew 16% including about a six percentage point favorable impact from foreign exchange. Consistent with the fourth quarter research and clinical instruments and reagents continued to drive growth.

Turning to gross profit, our gross profit margin for the year was lower than that of the prior year by about 50 basis points as improvements resulting from more favorable product mix and productivity were more than offset by the unfavorable impact of 50 basis points due to higher raw material costs that was primarily resins, 20 basis points of start-up costs and 30 basis points of asset write-offs. For the year SSG&A as a percentage of sales improved 120 basis points, and R&D spending increased about 10% in absolute terms. Also for the year our operating margin increased by 90 basis points to 21.7% from an adjusted 20.8% in 2007. We generated approximately $1.7 billion of net cash from operations for the year and consistent with our guidance used approximately $450 million to repurchase 5 million shares of common stock while investing $600 million in capital expenditures. The last topic I would like to cover is our guidance for 2009. Our full year reported revenue growth is expected to be between 1 and 2% reflecting 5 to 6% of unfavorable foreign exchange currency translation and about 7% on an FX neutral basis at current exchange rates. With BD Medical being about flat to 1% on a reported basis and about 6% FX neutral, BD Diagnostics expected to be 2 to 3% on a reported basis and about 7% on an FX neutral basis and Biosciences expected to be about 3 or 4% reported and about 9% on an FX neutral basis. We expect reported diluted earnings per share from continuing operations for fiscal 2009 to increase by 8 to 10% from the 4.46 in fiscal 2008.

I would like to now dive a little bit more deeply into our estimate of 5 to 6% negative impact from foreign currency translation we've included in our guidance. Consistent with past practices of hedging certain foreign currency exposures, we once again hedged about 60% of our Euro exposure and 100% of each of the Canadian dollar and Yen exposures. That 60% by the way reflects what allow us to do hedgable transactions for accounting purposes and not fall into speculative hedging. These hedges are in the form of forward contracts and designed to act as quasi insurance policies against the strengthening of the U.S. dollar against these three rates. The hedges cover about 50% of our international sales and operating income exposure. If that number seems a bit low to you, recall once again that we're only able to cover about 60% of the Euro exposure to allow for this hedge accounting treatment. In the past the strategy of covering 50% of our exposure worked very well as the next most significant currency exposure BD has would be the Australian dollar and that represents less than 5% of our overall exposure.

As you may recall, the July 24th third quarter earnings call we provided some preliminary guidance for revenue and earnings growth in fiscal 2009. At that time the U.S. dollar stood at $1.57 to the Euro and by our year end September 30th had strengthened to $1.40 to the Euro. More recently we have seen the dollar fluctuate between $1.25 and $1.30 to the Euro. In addition we have seen an extraordinary weakening over the first month of 2009 of nearly all other foreign currencies to which we are exposed. When we take into account all recent declines in foreign currencies and the effect of our hedges at the current rate versus the dollar, we estimate that we are facing a 5 to 6% possible reduction in our revenue growth. Importantly, this is an estimate at this point in time. As rates change, it will change. For example, at September 30th our hedges were valued at about $60 million. With the further strengthening of the U.S. dollar they're now worth more. On a positive side our hedging strategy will mitigate the overall impact of the decline of foreign currencies versus the dollar. Based on current rates for the Euro, the Canadian dollar and the Yen again being the currencies we hedge, and based on the current rates for all other currencies to which we are exposed, we expect the net impact of foreign exchange on our bottom line to be in the range of 3 to 4% obviously lower than what we see on the top line.

Moving on U.S. sales of safety engineered products are estimated to increase 5 to 6% and international safety should grow by 11 to 12%. Overall global safety would therefore increase by about 8 to 9%.

We expect our gross profit margin to improve by 40 to 60 basis points. Product mix and productivity again will continue to be favorable along with some price increase effect. We expect this to be offset in part by continued start-up costs as we've discussed before, and costs associated with a long-term manufacturing cost reduction program which we plan to initiate during 2009.

Regarding raw material costs and in particular resin costs, we do not currently expect any significant impact to our 2009 results. Consistent with previous guidance we spent about $230 million on resins in 2008 which represented an increase of $30 million over our 2007 spend. Using the price of oil as a rough proxy for our resins, our 2008 spend correlated to an average per barrel cost of about $110. Although oil is currently trading at approximately $70, we haven't yet seen corresponding reductions in our resin costs. Our current guidance assumes oil averages about $90 per barrel as a proxy over the last three quarters of 2009. Now, the reason I say the last three quarters is because the first quarter will take the inventory that was generated in the fourth quarter of 2008 which lags about three months before it gets into inventory, and that cost was about at a proxy of $118, so if the last quarters were to average $70 our-- our spend would decrease by just over $10 million, so unless something really changes significantly, we do not expect a major variation from this amount and a major benefit therefore to our P&L.

Moving on to SSG&A, we expect to improve that by about 80 to 100 basis points as a percentage of revenue. Our R&D spending is expected to increase about 9 to 10% which as a percentage of revenue increases by about 50 basis points. Our overall operating income margin is expected to improve about 100 basis points. Our effective tax rate is projected to be about 27.5% more or less consistent with 2008. On the balance sheet we expect to generate about $1.8 billion in net cash from operations. We should invest about $650 million in capital. We expect to repurchase about $450 million in shares, and the average number of fully diluted shares outstanding should be roughly 250 million.

Regarding our recent patent litigation, the last comment I will make before concluding, is our recent patent infringement victory over Tyco or Covidien. We're pleased the federal district court upheld the integrity of our intellectual property after six years of litigation and two favorable jury trials. We expect the matter to be appealed and the decision as a result will have not been included-- any decision will not have been included in any forecast that we have issued today, and any upside that may or may not result from one-time damages are also not included and we probably won't say anything other than that on this call. It is difficult for us to speculate regarding the viability of Tyco's plans to introduce substitute non-infringing product and at this point the only thing we can say for sure is the patent litigation is very long and expensive, and we're gratified with the progress towards an ultimate resolution of this dispute.

In summary therefore, I would say that except for the impact related to this precipitous decline in foreign currency rates, fiscal 2009 performance is, in all respects, very consistent with what we've achieved in recent years. Our foreign exchange neutral top line growth would be about 7%. Our bottom line growth, without the effect of foreign exchange, would be 11 to 13%. Our profitability again will come from expansion of our operating margin by roughly 100 basis points and we will again generate significant cash flow at least equal to if not greater than our $1.7 billion that we achieved in 2008. With those remarks, I would like to turn it over to Ed

Thanks very much, John and good morning everyone. Before turning to the discussion of our strategy I would like to say how pleased I am with the organizational changes we also announced this morning. As you may recall last March our CFO John whom you just heard from was promoted to Vice Chairman of BD's board. At that time we indicated that he planned to retire in 2010. To provide for a seamless transition of the CFO role we soon began a search for a new CFO, and I am very pleased to announce that search has successfully culminated in naming Mr. David Elkins as our new Executive Vice President and CFO effective December 1st. David joins us from Astra Zeneca where he most recently served as CFO of their $13 billion North American pharmaceutical business. David's financial and healthcare experience will serve us well as we continue to drive for excellence in financial performance and discipline.

I am also looking forward to continuing to work with John Considine as he focuses his considerable skills on strategic initiatives and our drive toward achieving world class capabilities in BD's integrated supply chain and IT and successfully implementing our global enterprise resource planning upgrade. The other major announcement concerning our organizational strengthening is the promotion of Vincent Forlenza to the position of President of our company. It has been my honor to work closely with Vince for the past 25 years in numerous capacities within BD. He has experience in all three business segments including living in Europe while working in the medical segment between 1986 and 1990. More recently, he led our Biosciences and Diagnostics segments, both of which have been growing very nicely. Vince's prior experience managing our technology and planning capabilities will further provide a good foundation for his expanded role as President. Today we're facing times of great challenge as well as great opportunity, and the BD board and I are confident that Vince has the ideal blend of experience and vision to play an even greater role in developing and achieving our strategic goals as a company.

I am also pleased our other most senior leaders will take on new roles. Gary Cohen will assume oversight for our Preanalytical Systems business unit. Gary will also assume responsibility for international operations as John Hanson has announced his intention to retire before the end of fiscal 2009. Gary brings extraordinary commitment and deep industry skills and experience to his new role. John Hanson has greatly strengthened our international operations and strategy over the past few years. As you know, international now represents over 50% of BD's revenues.

Bill Kozy, an outstanding 30-year veteran of BD, will assume responsibility for our Medical segment. Bill has deep and broad experience most recently in our Biosciences segment and has also led our manufacturing function and he was also the leader of our initial implementation of an ERP system in 2000. Bill will bring an insightful and fresh perspective to our industry-leading Medical segment. Few and blessed are the companies in any industry that can combine new leaders and proven performers in times of great opportunities and challenges such as we face today. It is my good fortune to be able to work with this outstanding team in the coming years.

Turning now to our strategy for growth in future success, our strong results for the year just ended and our outlook for 2009, continue to validate our confidence that the strategy we have 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 the strategy which rewards both customers and our shareholders. This is the eighth consecutive year in which we achieved or exceeded our annual objectives. Before turning to your questions I would like to expand beyond the fiscal 2009 guidance that John has shared with you and briefly elaborate on our strategic direction. As many of you know, BD is a 111-year-old global medical technology company. Our strategy is to serve the world's population as a global leader in developing and applying technologies to solve emerging, important, and sometimes under appreciated and fundamental healthcare problems. We are also striving to enable the discovery and development of medical therapies, facilitate faster and more accurate diagnosis to accelerate and improve the treatment of disease and provide unique and affordable devices to deliver drugs vaccines in the developed and developing markets. We are also striving to leverage and expand our deep expertise and distinctive capabilities across our device and life sciences businesses, for example, innovative design for quality, superior manufacturing, and extensive training and service. Finally, we're building on trusted relationships across the global healthcare community as a partner of choice to customers, governments, payers, and other companies.

Our strategy is focused on four specific areas of healthcare. They are as follows: reducing the spread of infection, number one. Number two, advancing global health. Number three, enhancing therapy, and number four, improving disease management with a particular focus on infectious disease,diagnostics and cancer and diabetes. As a result of pursuing this strategy we expect 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 revenue primarily organically in the 7 to 9% range on a performance basis. We will complement this organic growth by making targeted acquisitions which could enhance key strategic capabilities. Acquisitions of this nature will be strategically obvious, and any dilution from these acquisition is expected to be short lived and modest. We remain committed to continuous improvement in operating effectiveness and productivity which in turn will assist us in accelerating our progress.

Achieving excellence in operating effectiveness will result in outstanding customer satisfaction, strong cash flow, and expanding operating margins. It will also very importantly enable us to increase our investments in innovation to fuel our growth. Continuously improving operational performance as evidenced by increasing our operating margin goes hand-in-hand with investment in innovation to build the platforms that will enable us to sustain strong earnings growth and enhance our shareholder's value. So in summary we continue to make excellent progress as we implement and execute our strategy, which again is to enable the discovery and development of medical therapies, to facilitate faster and more accurate diagnosis, to accelerate and improve the treatment of disease, and to improve and to provide unique and affordable devices to deliver drugs and vaccines in both developed and developing markets. The future holds many opportunities for BD to support our purpose of helping all people live healthy lives. Thank you. With that, we are happy to take your questions and operator and Pat, please open the call for questions.

(OPERATOR INSTRUCTIONS) Thank you. Our first question is from Jon Wood with Banc of America Securities.

Thanks a lot. John, can Becton access capital at average historical rates in this environment?

Yes, we have no issues with accessing capital. Our CP balances out around $200 million at any one time, and I would say that we have been on the shorter end of it out through 90 days and not up to 364 day limits, but no issues with accessing capital at all, and by the way, as you'll see in our balance sheet, we have a billion dollars of cash on our balance sheet at the end of the year. We have no maturities of any long-term debt at all, and our long-term debt is at about 800, and we have about 200 of short-term debt. That stays, booked as short-term but basically stays there.

Great. With the valuation, the equity valuation about 15% below historical levels now, why not get more aggressive on the buybacks, if your capital rates are constant given the lower valuation here?

Well, obviously we consider that, like any other guidance. There is a potential for change here. We obviously agree with you in terms of the undervalued nature of this stock, and we'll be silent on everyone else's, but we certainly have the capacity to do that. We will consider it as we move along, but right now this is where our preliminary guidance would stand.

One quick follow-up. The cash dividend policy, I know you increase it in November pretty much every year for the recent past. Is there any potential that your dividend policy changes as you evaluate the different tax policy or the potential changes in tax policy on cash dividends? Thank you.

Well, what you're saying is correct. We have followed a pattern -- our board has followed a pattern of taking the change in earnings per share, the trailing change, and increasing the dividend along with that, so in plain English if our earnings are up 15% at least for the last five or so years, our dividend has gone up an equal amount. I would say right now there is no contemplated change. We'll have to see what changes in the tax law may transpire, if any, and whether or not how we might react to those, but it is in terms of our total cash flow, while around $300 million is not a small amount, it is certainly not anything that at all concerns us. We feel very strong about that dividend, and we've had an increase in that dividend over 30 years now, so it is certainly part of our knitting.

Thanks a lot for the comments.

Our next question comes from the line of David Roman from Morgan Stanley.

Good morning, everyone. Just wanted to get updated on maybe some of the more operational sides of the business, maybe we could get update on GeneOhm and TriPath?

I will ask Vincent to do that.

Sure. From the standpoint of sales for GeneOhm, about $42 million for the year. In terms of where we are from a product standpoint, let's start with the assays first, C-diff is already submitted. We've had the first round of questions, so is Van R, so I think we're making good progress on those assays. On the StaffSR, we've gone through a round of questions, and there was a request for additional data, so that one is moving ahead but has taken longer than we thought.

From the instrument standpoint, we did show the new instrument at AMP, and it was very well received. Just want to be clear that there are multiple steps here. The new chemistry and the thermocycler moving away from the instrument that contract is up. We have plenty of thermocyclers to get us through our transition phase. We're looking at Q1 for the new chemistry and thermocycler kind of the end of our fiscal year timeframe for launching that system, first in Europe and then in the United States a couple months after that, and then the automation, the multiplex automation that we showed (at AMP) is about a year after that.

So that's the situation on GeneOhm. From a market standpoint of course California has passed legislation on MRSA requiring screening of selected patient populations, so we think that's going to be an opportunity. The new JCAHO guidelines have now moved beyond just hand washing and requiring a complete program on infection control for HAIs that includes both C-difficile and MRSAs, so we think that's going to be an opportunity as well.

Moving over to TriPath, starting with the status on the Focal PointGS , we expect approval imminently, and our expectation is based on what we believe has been resolving all of the outstanding issues on performance and how they relate to the labeling, so we expect that in kind of an anyday mode and have started training our salesforce on that product. We're very excited about what we believe are going to be some very good performance characteristics on that instrument. Coming back to the Molecular Pap trial, I announced a few months ago that we had suspended that trial because of some issues in terms of workflow and difficulty of certain let's call them less sophisticated accounts in terms of using certain personnel on running that assay, so we were going to automate it, and we had talked about using an OEM instrument for that automation. Well, we've evaluated five different systems, and we're not satisfied with the performance of those systems, so we are modifying an instrument that we have, and we will be doing that, and that will delay us starting the clinical trial for about twelve months right now.

On the positive side, we're moving ahead with the ovarian program. You probably saw the announcement of the Luminex deal for the instrument for the zero marker screening program, so it will be for ovarian breast markers and hopefully a series of other markers. Beyond that, we've been making good progress on formatting that assay and we'll be doing some preclinical work out in customer labs during this quarter and starting that clinical trial the second half of the

Great. Just one follow-up for maybe John. On the July conference call you had talked about guidance sort of in the 7 to 9% range. I know it wasn't official guidance for 2009. Can you talk about what changed that sort of led you to the 6 to 8% constant currency number versus the 7 to 9% for next year?

Let me take a shot at that. This is Ed. What we have been saying in investor meetings over a fairly long interval of time is that we expect that on a trajectory basis and we look at this as sort of three-year intervals, we would be able to do a 7 to 9 top line and about a 10 to 12 bottom line, all things being equal FX neutral on a performance basis. Okay, freeze-frame that. So let's assess 2009 in light of that guidance. On the top line, if you look on an exchange neutral basis we're expecting 7%. Both the Diagnostic and Biosciences segments of the business are actually doing at or a little bit better than that. In the Medical segment, we're guiding at about 6% which is a little below the corporate average and that is because as we have also been discussing, the pharmaceutical systems component of the medical segment is-- tends to be cyclical as a function of new drug launches, et cetera, and we have been saying that '09, for that part of the business will be in the low end of the range. By that I mean sort of the mid to low single-digit growth as opposed to the teens sort of growth that it has experienced in the past. This year in fact was high single digits, so we also expect that pharma systems will recover with new drug launches we anticipate in 2010.

If you evaluate the 7% exchange neutral guidance for next year's revenue, it is in that 7 to 9 range and would be higher but for the performance in pharma systems. So if you look at the bottom line guidance of 8 to 10, 8 to 10 is the all-in number, and as John points out, that does include about 3 to 4% of FX headwind and so if you look at that on an exchange neutral basis, it is in that 10 to 12 envelope that we've been describing on a performance basis. That's basically a function of about a 60 plus basis point improvement in gross profit, but an 80 basis point improvement in SSG&A and about a 50 basis points investment in R&D which all adds up to about 90 to 100 basis points improvement in operating margin. So within that three-year plus trajectory, we're well within the envelope on a bottom line basis and a little south of that envelope on the top line basis and that's primarily a function of some trends going on in pharma systems.

That's extremely helpful. Thank you very much.

Your next question is from the line of Mike Weinstein from JPMorgan

Thank you. Thank you for taking the questions. Let me do maybe three quick ones here I wanted to understand the guidance on the operating margin 100 basis points as you're forecasting. How much of that would right now come from the FX hedges you have in place, how much of that shows up in operating margin versus the other income lines, how much of that 100 basis points is FX hedges versus the rest of the business have you to extract. Two, you didn't mention, John, the R&D tax credit which I would think would have helped your tax rate for 2009 but doesn't appear as if you're guiding that way if you can clarify and lastly the bigger picture question, I am sure we're all very interested in hearing what you're seeing in your different businesses in terms of the impact of the credit crunch and the economy, so if maybe you could talk about your different customers, the hospitals, the labs, the whole Life Sciences worl, what you're seeing, that would be great.

Let me start with the end and I will ask for a show of hands in the room that you can't see, for any elaboration. As of now, and it is still very soon to extrapolate but as of now we're not seeing any disruptive or troublesome trends in our primary demand factors. The spending in research continues. We are checking, you know, hospital census, hospital behaviors on the fundamental basis and there does not appear to be any unusual trends there. On the lab basis, again, we have not seen any unusual trends and I'm not hearing of any of my colleagues saying that they want to elaborate on this. So the bottom line is, we are highly vigilant of what's going on at the primary user level. If we were in the cosmetic surgery business, I think we'd be in a world of hurt right now because anything that has to do with elective out-of-pocket, discretionary funding, but we're not in that business, we're sort of the basic healthcare business. And so far, we have not seen anything extraordinary in our primary demand. As I said we're continuing to monitor this. We are also continuing to monitor as importantly the health of our supplier base. We deal with large companies and small companies who provide us with goods and services. We've had a few examples of some difficulties which we covered. We managed to sustain the supply, nothing we're alarmed about, but we're looking both upstream to the customers and downstream at the suppliers, and I will let John talk about the impact of the other two parts of your question.

On the tax rate, you're right, we do have the benefit in there which would be about 30 basis points for the R&D credit. However, we have some mix issue that is kind of eating that up, and one is obviously as I have said, we have the hedge gain which, while it takes care of foreign currency, exists here in the U.S. and we pay U.S. taxes on it, so it would be subject to the 35% rate plus the state tax impact, and that's basically what does that. So if that answers your question on the tax side, within GP, we have a net pick up on FX of about 20 basis points in our guidance and as I think Ed said, we continue to get good product mix and productivity in the 50ish basis points area there, a little bit on FX, and then there is a bunch of things that offset one another, so it is in there and at about that amount.

Let me clarify. On the R&D tax credit there won't be in the fiscal first quarter you won't have a catch up for FY '07, or will you?

A little catch up, yes.

Will the first quarter tax rate be lower than the balance of the year, fair assumption?

Yes.

Okay. And then just one last question. The one business you're forecasting organic acceleration in FY '09 is the diagnostics business, up 5% organic in '08, guidance 7% for '09, so any color on your thoughts there?

I will ask Vince to elaborate on that.

Actually the growth rate in diagnostics pretty consistent year-on-year. Elaborating a little bit we're expecting TriPath to be about $130 to 133 million in terms of total sales. GeneOhm we're going to guide at $60 to $65 million and of course we'll refine those estimates. Just one head's up. When you compare '07 to '08, you had TriPath in for three quarters of a year in '07, and not in '08, so if you pull TriPath out, and you normalize for that, diagnostics grew 7.4% on a performance basis.

In '08.

In '08, yes, 7.4 in '08. We're talking seven this year. We're pretty much consistent.

Okay. Thank you, guys.

Good.

Your next question comes from the line of Kristin Stewart with Credit Suisse .

Thanks for taking the call. On the CapEx guidance I think you mentioned $650 million. You've been running a higher rate of CapEx spending. Wondering if you can break that down into more detail and when should we expect CapEx might return to a more normalized level?

The CapEx has been, as I said last year, about $600 million. This is going -- the good news is it is going to productive capacity expansions. We are expanding capacity in our pharma systems business. We are finishing up most recently, for bionutrient manufacturing in Miami. We have expanded the productive capacity of GeneOhm in Canada and now are adding an R&D facility there. And I think in general across the board we just opened this year a new facility for antibody production in Puerto Rico. And so this is just a general, again the business is running at about over $7 billion with annual depreciation in the $400 million plus range, so $600 million may be a little bit high into the range. I don't think it is going to come down dramatically, but that's basically spending at a replacement rate, so if it goes down to $500 million in the future years, I think that might be something we would look forward to, but right now these are highly disciplined decision processes that we use to allocate capital and it is going for good productive capacity.

And then just touching again on the resin issues regarding the gross margin, you said you aren't seeing an impact of the lower oil flowing through to resin prices. When do you think you might start seeing that and I guess if you could walk through again kind of what makes up the 40 to 60 basis points movement in FX or I am sorry in gross margins that you expect for '09? Just in terms of the productivity mix and whatnot.

Right. So we use oil as a rough proxy, and I only say that because if you kind of plot oil against kind of our top five resins, there is obviously some correlation, but any one resin might not necessarily correlate in line with that movement. If you look at '08, we had a cost of about $230 million, and that equated to oil being on average about $110, let's say. And if you look at that, just start with that as I would say freeze-frame that, as we built our inventories in the fourth quarter of 2008, actually the reference price on oil would have been closer to $118. So that is what we'll run through our P&L this first quarter of 2009. After that we've cleared out that higher cost and there has been some movement, albeit not down to the $70 level, and frankly when we kind of feather in where we see it right now, we're conservatively around using $90 oil for the three quarters, and notwithstanding the $70s out there.

That would equate to about $110 oil on average for -- I am sorry -- $100 oil for the whole year. If it were to revert back to $70, you might remember that we said that every $10 in oil probably gives us, you know, 7ish million dollars or something like that, so over two quarters would probably impact us, probably talking 10 to $12 million, so we don't expect a lot of extra benefit on this. If oil sustains itself around $70 in future years, well, then, we'll see a little bit more, but that's really the answer there. Terms of how that kind of fits into our '09 guidance, again, productivity is going to give us and product mix about 50 basis points. We're going to get about 20 basis points as I said from net FX. We'll get a little bit from pricing, probably 20 basis points, and then the offset is about 30 basis points, and as Ed said we have a number of projects which we've talked about over the last couple years where there is certain period costs that have to be taken and not capitalized as part of the project. These range from our medical business where we are instituting in 2009 as we said this project to generate more efficient and lower cost products to the plants that we're putting in in other parts of the world to certain lines that are going in within Medical and we can add more detail to that, but that is what represents that last amount.

Okay. Great. Thanks so much.

Our next question comes from the line of Bruce Cranna with Leerink Swann.

Good morning.

Good morning, Bruce.

Just some clarification, Vince, so the GeneOhm number in the quarter was somewhere around $15 million, is that right?

So GeneOhm in the quarter on a reported basis was $12.5.

$12.5. My math must be wrong. Didn't you say $42 million for the year?

Yes.

I got 7, 10 and 10 for the first three quarters. What am I doing wrong?

I don't have the quarterly growth yet. Hold on a second and see if we can find that for you. It definitely was 42.1 for the year.

Okay. While you're looking for that, this quarter I am sorry was 12, is that what you said?

Yes.

And then maybe while I have got you doing that, could you part with the TriPath number also for the quarter? I am prepared to pick on someone else if you want a little more time.

Hold on a second here. So we've got 8.8, 10.4, 10.3, 12.5, 42.1. Okay?

Okay. Got it.

TriPath for the quarter?

Yep.

So TriPath for the quarter was 31.7.

Okay.

And just wanted to let you know that we have changed the reporting on TriPath, so that international sales are now reported in international. Of course when we bought the Company all of the sales were reported in the U.S., and as I said on a go-forward basis we're looking at $130 to $133 million next year.

Okay. And you guys still think you might have an HPV label in December or is that moving around?

In December? It is hard to say. It is somewhere around that timeframe.

So I guess maybe there?

Yes.

And then sorry to be so detail oriented here, but, John, can you run through the safety numbers again and what I am after is for the quarter, both Medical and Diagnostics U.S. and O.U.S..

Actually, Gary, has the detail right in front of him.

Whomever, yes.

So you want global, you want U.S. you wanted international, how do you want it?

U.S. , O U.S. and by the two pieces, Medical and

U.S. medical fourth quarter $142.6 million. U.S. diagnostics fourth quarter $118.4 million. International medical fourth quarter $49.2 million, international diagnostics 94.1, which totals up to medical global $191.8, diagnostics global $212.5.

Fantastic. And then can you comment at all? I know, John, I think it was John talking about the expected growth rates in safety going forward and obviously they're skewed towards O.U.S. , but can you comment at all on an FX neutral basis whether or not you get the same margin impact from a dollar of O.U.S. safety sales as you do from the

It is pretty similar. The difference being O.U.S. Diagnostics safety has a pretty significant component of plastic collection tubes, which are closer in margin characteristics to glass tubes, slightly better. Whereas the transition on the needle side, whether it is diagnostics or medical from a conventional device to a safety engineered device typically brings with it a boost in margins. We're getting that internationally as well as in the U.S. There is a little difference of product mix. There are a few devices that were designed, for example, specifically around European procedures, which vary in product times somewhat from the U.S. procedures but on the whole we're getting a margin boost internationally that is akin to what we've gotten or obtained domestically.

Okay. Thank you.

Our next question comes from the line of Sara Michelmore from Cowen & Co.

Thank you for taking the question. I think we discussed it briefly, but just in term of the pharm systems and the dynamics going forward, what specifically has gone on in terms of the - it sounds like you're heading into a little bit of a transition period, particularly in the U.S. what exactly is going on there and when should we think about you exiting that period? Does it occur in fiscal '09 or do we have to wait until fiscal 2010?

'09 is going to be light relative to past experiences. As I said it is all in on a performance basis and sort of the low single-digit. I will let Gary elaborate on some of the particulars.

We had spoken over the last several calls to ensure everyone would anticipate that at the end of '08 and through '09, the U.S. pharma systems business would show a reversal of the extraordinary growth that it has been obtaining over the last several years. It was for well characterized reasons, some of which are customer related such as the circumstances around EPO, and some of which you could say is timing related, and that involves a delay in timing for approvals of generic low molecular weight, and there are a few other factors not related to our position in this business but more so external factors with our customers. We do anticipate and we have pretty good visibility in this business that that will turn back the other way in 2010. You can expect negative sales growth in 2009 in the U.S. for pharma systems, but continuing good growth outside of the U.S. which is larger component for that business on the whole that will bring overall performance foreign exchange neutral growth to mid-, low to mid-single digits. With the international driving positive in that and driving exchange rates. As we said, we expect that to turn back the other way in 2010. The overall characteristics of the business are very healthy and as I mentioned as well we're in the midst of building a new plant, so that's a good sign of our confidence in future growth of that business.

And just as a follow-up, Gary, I know you mentioned that there - in this current upcoming fiscal year - that there are opportunities for costs manufacturing reductions in the medical products business. Can you give us an update on what the specific plans and opportunities are there?

I can give you some general response to that. First, productivity improvement is a constant drive in these businesses. It is the basis of competition as well. That is both a combination of ongoing productivity improvement that is coming from efficiency of our plants plus what I would characterize as programmatic or project based. We are in the midst of planning project based improvements that will roll out over a series of years that will further improve our overall cost position which will benefit both gross margins and also our general competitive position globally, but the details on that will follow as we progress. It is something that will roll out over several years.

Lastly, Gary, just an update on Nexiva and the product rollout there?

We're getting really good growth from Nexiva. We were very pleased with the results in 2008. We're expecting continued strong growth in 2009. That was masked somewhat by characteristics in some of the other safety devices as we described in past calls. There is one category of access systems needle-less IV access systems that has been declining, and that offset some of the Nexiva growth, but we had about a 50% growth rate in Nexiva in the fourth quarter, and we're expecting very strong growth in 2009, so it is going pretty much according to how we would have expected it.

Great. Thank you.

Our next question comes from the line of Eric Criscuolo from Thomas Weisel Partners.

Good morning. Actually thank you for taking my question, just filling in for Peter Lawson here. I was wondering on the interest income and other income lines, looks like the interest income was a little lower than usual. What was going on in the quarter and also what was going into the other income line?

All right. Let me just dig out those numbers. You're talking about the quarter?

Yes, the quarter please.

Our interest income in the quarter was about 7 million and interest expense about 9. In terms of other things, we have a deferred compensation program which is based on a program where we go out and buy investments within an insurance wrapper without getting too complicated here, trust on life insurance and there are investments in there. So when somebody defers salary or bonus, they invest in one of these things. We actually, so that we're not at risk, book the liability. So in situations where the investments go down, our liability goes down, and we will end up taking a benefit if you will on the liability side and we book the other side of the entry unfortunately because of the accounting goes on the interest income side. And I think in the fourth quarter we were looking at about a net of deferred comp of about $13 net of other interest type charges of $6, so there is another $7 in there. There is really no major change on that line. It just has to do with the interplay mainly on deferred comp between SG&A which is where it is being booked and here on the interest income line.

Okay. Great. Thanks. And I guess with the market gyration that has happened, any update or any insight into how that might affect your pension obligations?

Well, so we're locked in for our pension costs this year. Really no big difference between last year. We were fortunate. We put $75 million into the pension just before the end of the fiscal year and $75 million just after it. We put that into really a cash investment account, just obviously looking at not the tea leaves but the trees blowing around, so we didn't invest that, so we didn't take any hit on that. Of our pensions, we're without that we're typical 65/35 kind of equities versus fixed income. We probably lost a couple hundred million bucks on the equity side. That won't get us outside of the corridor from an accounting standpoint, so that will be going to the loss column and being amortized over years, so that will happen in the following year in 2009, but and it would be just -- I don't know what the discount rate will look like then but for 2010, rather for 2009, we'll be just about where we were in 2008 in terms of pension expense. The assets will go down but certainly on average not nearly as much as others might have since we were lucky enough to put that money into cash.

Okay. Thank you.

Our next question comes from the line of Jeffrey Frelick with Lazard Capital.

Thanks, good morning, everyone. Could you give us a breakout of instrument growth in your user segment, meaning clinical versus research?

Jeff, you're talking specifically just about the Canto platform. I can comment on growth on the clinical based instruments if that's helpful. If you were to look at our developing world activity particularly looking at the Caliber as well as the FACScount, we had strong double-digit growth in both of those platforms in the quarter and wrapped up the year again with strong double-digit growth on those. The Canto, which of course is a mixed instrument and goes to the clinical and the research side breaks half and half on both sides, CANTO equally strong for both the quarter and the year with strong double-digit growth, a little north of 20 some percent.

Great. Thanks, Bill. Just a quick question for Gary. Just a follow-up on Nexiva. What was the full year '08 sales growth?

Full year '08 sales growth.

I know it doubled previous year. Just curious for the full year. 60%.

6-0%.

And I understand we have one more question to go, operator.

Our last question comes from the line of James Baker from Neuberger Berman.

Gentlemen, I just wanted to ask a question about the first three quarters had a combined $17 million of inventory write-offs that affected gross margin, affected your EPS about $0.05 a share. So A, were there any such write-offs in the fourth quarter and, B, does your guidance for 2009 sort of incorporate a similar level of write-offs or are you assuming that level drops to a lower level or possibly zero?

I think the answer is no and no. As a matter of accounting principle you can't anticipate something that hasn't happened yet, and so in the future we have not anticipated any asset impairments on inventory. We look at that on a regular basis and so that '09 guidance, and we're looking at the fourth quarter to see if there might have been any nits or nats in there. Very small. It was a modest amount in the fourth quarter, and nothing in the future.

Thank you.

Okay. Thank you all for joining us. Again, it is a pleasure to welcome David Elgins to our team and to congratulate Vince on his new role and Gary and Bill on their new roles and we look forward to serving our investors and our customers with this new team in the future and in spite of the challenges we continue to find extraordinary opportunities in this space, and we're going to keep driving and look forward to talking with all of you in the future, so we're going to sign off. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.