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Becton, Dickinson and Co. (NYSE:BDX)

F3Q07 Earnings Call

July 26, 2007 10:00 am ET

Executives

Patricia Spinella - Director & IR

John Considine - Sr. EVP & CFO

Vince Forlenza - EVP

Gary Cohen - EVP

Bill Kozy - EVP

Analysts

Mike Weinstein - J.P. Morgan

Rick Wise - Bear Stearns

Glenn Reicin - Morgan Stanley

Peter Lawson - Thomas Weisel Partners

Sara Michelmore - Cowen and Company

Larry Keusch - Goldman Sachs

Bruce Cranna - Leerink Swann

Quintin Lai - Robert W. Baird

Jeffrey Frelick - Lazard

James Baker - Neuberger Berman

Presentation

Operator

Hello, and welcome to BD's third fiscal quarter 2007 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday August 2nd 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 879048.

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 Miss Patricia Spinella, Director of Investor Relations. Miss Spinella, you may begin.

Patricia Spinella

Thank you. Good morning, everyone, and thank you for joining to us review our third fiscal quarter results. During today's call, we will make some forward-looking statements, and it's possible that actual results could differ from our expectations.

Factors that could cause such differences appear in the third fiscal 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 third fiscal quarter press release and its related financial tables. A copy of the release, including the financial tables, is posted on the bd.com website.

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

John Considine

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'd like to devote as much time as possible to answering your questions, our opening comments will be brief. As is our practice, there are three primary topics we'd like to address this morning.

First, we'll review the items that affect comparability of our diluted EPS from continuing operations for the third quarter and nine-month periods of fiscal 2007 and 2006. Second, we'll describe some of the key drivers of our revenue and earnings growth for the third quarter. And lastly, we review our guidance for the full fiscal year 2007.

Moving first to earnings, I'd suggest you turn to the table number one in the press release that appears under the heading Analysis of Third Quarter and Nine Month Period Fiscal 2007 and 2006 Earnings.

For the third fiscal quarter of 2007, we begin with reported diluted EPS from continuing operations of $0.95, and add back the charge of $0.03 resulting from an in-process research and development charge, to arrive at an underlying earnings of $0.98.

The in-process R&D charge relates to our investment in May of approximately $10 million to acquire Plasso Technology, a small, privately held company that is developing the next generation of surface treatments useful for growing cells.

For the third quarter of 2006, reported diluted earnings per share from continuing operations were $0.83. There are no specified items in the 2006 quarterly results that impact comparability. Comparing the $0.98 this quarter to the $0.83 in the prior year's quarter gives us an adjusted EPS increase of 18%.

Moving to our nine-month results, we begin with reported diluted EPS from continuing operations of $2.38. We add back the in-process R&D charges of $0.03 related to the Plasso acquisition and $0.45 related to the first quarter acquisition of TriPath. This gives us an adjusted diluted EPS from continuing operations of $2.88 -- $2.86, rather, for the nine month period of fiscal 2007.

For the nine-month period of 2006, we begin with reported diluted EPS from continuing operations of $2.33. We add back the charge of $0.21 resulting to the -- from the in-process R&D charge related to the GeneOhm acquisition, and then subtract $0.04 of EPS, and that is $0.02 in each of the first and second quarters, resulting from insurance settlements related to our former latex glove business.

This gives us adjusted diluted EPS from continuing operations of $2.50 for the nine months of fiscal 2006. Comparing the $2.86 for the nine-month period of 2007 to the $2.50 in the prior year's quarter gives us an adjusted EPS increase of 14%.

Moving now to our growth drivers, we'll begin with our revenue increase of 12% for the quarter, which included an approximate 3 percentage point favorable impact from foreign currency translation, primarily related to the Euro. In the Medical segment, third quarter revenues grew about 10%, led by sales of prefillable drug delivery devices in the Pharmaceutical Systems business.

Sales of pen needles utilized for diabetes care also exhibited solid growth, and global sales of safety engineered products in this segment grew about 7% to $167 million, with strong international growth outpacing somewhat lower U.S. growth. Revenues in the BD Diagnostic segment grew about 15% in the third quarter. The Diagnostics Systems Unit of that segment reported revenue growth of 23%.

You should realize that TriPath revenues of about $27 million accounted for approximately 15 percentage points of that growth. Our Preanalytical Systems Unit of the Diagnostics segment had revenue growth of 9%, fueled once again by safety devices. Global sales of safety-engineered products in this segment grew about 15% to $187 million, due for the most part to the continued success of our Push Button Blood Collection set.

Looking at combined Medical and Diagnostics global safety, sales grew about 11%, $354 million in the quarter. The U.S. growth rate was about 5%, while ex-U.S. was about 29%. In the BD Biosciences segment, worldwide revenues grew 13% for the quarter. Research Instruments, reagents and bioprocessing continue to be the primary growth contributors.

Moving now to gross profit, we achieved an improvement of 90 basis points to 51.5% from 50.6%. That improvement was primarily due to product mix, including TriPath, productivity and foreign exchange, offset in part by certain start-up costs. R&D spending, which does not include in-process R&D charges, increased about 21% year-over-year. Once again, more than half of that increase relates to TriPath spending.

In terms of cash flow, we generated about $360 million of net cash from operations. $188 million was used to repurchase about 2.4 million shares of common stock, and we invested $131 million in capital expenditures.

The last topic we would like to cover is our guidance for fiscal 2007, the entire year. Once again, I'd suggest you now turn to the second table in the press release, which immediately precedes the conference call information.

All of the specified items enumerated in that table that affect comparability for 2007 have already been described. For fiscal year 2007, diluted EPS from continuing operations and excluding specified items are expected to increase approximately 14% to 15% to a range of $3.81 to $3.83 from last year's adjusted base of $3.34.

This new range exceeds our previous guidance by -- of $3.76 to $3.80. Our full-year reported growth is expected to -- revenue growth, rather, is expected to increase about 10.5% with about 1.5 percentage points of growth coming from TriPath and about 2.5 from foreign exchange. Full-year reported revenue growth for BD Medical segment -- Medical is expected to be about 10%.

BD Diagnostics is expected to be about 10.5%, with about 5 percentage points of growth coming from TriPath. And BD Biosciences is expected to be about 11%. We look for U.S. Safety sales to increase about 8% over 2006 and anticipate international Safety to be above 20%.

We expect our gross margin improvement for the entire year to be about 70 basis points. SSG&A is expected to increase about 10 basis points for the year, with about 20 basis points coming from TriPath.

And our R&D spending is expected to increase about 20%, with 8 percentage points coming from TriPath. We should generate about $1.2 billion of net cash from operations, we'll repurchase a total of about $450 million in shares, and invest about $600 million in capital expenditures as we continue to invest in additional Pharm Systems capacity, sterilization projects and other capacity expansion needs. Our effective tax rate, excluding the in-process R&D charges is expected to be about 26.5% for the year.

With all that said, we can now begin the Q&A. And as usual, we'd like a broad participation, and therefore appreciate it if you'd limit your questions to one, plus a follow-up. And I thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll go to the line of Mike Weinstein of J.P. Morgan.

Mike Weinstein - J.P. Morgan

I'd like to start on the MRSA opportunity. I think on our last update, you'd commented that some of the VA pilot programs for MRSA would have interim results in the July timeframe. I was wondering if you have any update there? Then I have a few follow-ups on the program.

Vince Forlenza

Well, what I'd -- this is Vince Forlenza. So, on the MRSA at the VA, I'd say they're moving ahead on their programs and we're seeing accounts now starting to scale up in volumes and consistent buying from those accounts.

Mike Weinstein - J.P. Morgan

Vince, could you spend a minute on a little bit on the genome pipeline as we should be looking at it over the next 12 months? And also would you mind spending a minute giving us an update on the litigation with BioMerieux, and how we should think about that?

Vince Forlenza

Sure. So first off, talking about this year, I would confirm, as we have said in the past, that we're comfortable with the $19 million to $20 million that we've been talking about. So our pipeline to achieve that number continues to grow. We see volume building in accounts. So I would say that from -- it's about where we expected it to be.

Second point that I would make is that from a market development standpoint, we see, I would say building momentum out there with this latest published APIC study, which showed that the problem was more widespread than thought. And in fact, prevalence rates were 10 to 13, or 11 to 13 times higher than they thought. 63% of the MRSA was on the medical wards.

So in terms of looking out over the next couple years in terms of market development, we see the factors being very strong, and we're starting to see thought leaders and movement in Europe. So, I think from that standpoint, things are on track.

And then over the next 12 months in addition to the MRSA -- well, we've also launched, of course, the susceptible task MRSSA, and that's been launched in Europe. We expect next quarter or so to launch that in the United States. We're waiting for FDA approval. And then lastly, in terms of menu expansion, you should be thinking VRE Q3 '08, and C. difficile Q4 '08.

John Considine

Yes, and as far as the litigation goes, just as a policy, Mike, it is our policy not to discuss ongoing litigation, and so we really have no comment on that at this particular time.

Mike Weinstein - J.P. Morgan

Okay. It was a good to overview of the pipeline. If I can switch gears, and then I'll let some others jump in here. It was obviously a good quarter for the Company, pretty broadly. One area maybe you could just talk for a minute on would be U.S. Safety, which is a little bit light versus our projection. Thanks.

John Considine

Gary?

Gary Cohen

This is Gary. I'd be glad to answer that. If you look back to last year, we actually had our strongest quarter in U.S. Safety, the third quarter of last year. The growth in the third quarter was well above the other three in '06. So we were up against a tougher comparison here.

That particularly affected Safety sales and infusion therapy, which were up, but were just up very modestly. We had a little bit stronger growth in the U.S. Safety on injection. So it was not unexpected that the growth would have been slower this quarter. And that was more than offset by stronger than expected international growth of Safety.

Mike Weinstein - J.P. Morgan

Great. Thanks for the questions.

Operator

And next we’ll go to the line of Rick Wise with Bear Stearns.

Rick Wise - Bear Stearns

First, maybe look at -- expand on your thoughts on the R&D, if you would. It looks like it's going to be up 18% to 20% this year, some of the strongest R&D spending we've seen in some time. Can you expand a little bit on where the spending is going? And does this elevate R&D spending levels as a percentage of sales permanently to the 6%, 5.76% kind of range as we look into fiscal '08, John?

John Considine

Well, I think, as you can see, even when you make provisions for the increase that relates to TriPath, which in the quarter was a significant -- more than half of the quarter's increase came from TriPath. If you take that out, our R&D is probably growing in the 12% to 15%, depending on which quarter you're in.

And that is starting to move our overall spend levels closer to 6. And while I'm not going to forecast exactly where we're going to be in '08 yet, Rick, it's fair to say that our strategy is to continue to drive innovation, and we know we have to spend more.

We know it's not just a money game, but we are going to have to spend more. And that's why we will -- we're going to drive operating effectiveness to be able to spend that. And you can probably look forward over the next number of years, that same kind of anywhere between 12% to 15%, depending on the year and what we're doing, what successes we've had, in addition to what other investments we may make along the way.

Rick Wise - Bear Stearns

Okay. Two other quick ones. Other income was positive this quarter. At one point obviously we expected negative. When's going on here, and how do we think about it going forward? And second real quick, Plasso Technology you recently acquired, can you maybe frame this in a larger context of when you are thinking about acquisitions or technology add-ons, it's like where are you guys going strategically? Is there a bigger thought -- larger thought process that we should have in mind? Thank you.

John Considine

All right. Let me take the first one, and then I'll move over to Bill. If you kind of look at all those numbers underneath the operating income line, you are absolutely correct that when you take interest income and expense as well as other income and expense, net-net on the quarter, they are up about $7.8 million.

We had on the one hand bigger write-offs in the prior year of certain equity investments and smaller business lines that we -- than this year. And we also had some smaller sales in the prior year.

When you finish it and go down to taxes, and you just take our tax rate, which has gone up 160 basis points in the quarter, and look at the -- just the prior year's income, and therefore its impact on that incrementally, that would cost us about $4.5 million.

So when you net all that stuff out, it's $3 million about to the bottom line. And $3 million would be about a $0.01. So we didn't call it out in the analysis, but if you took that $0.01 out, we dropped from 18% to 17% up. So it kind of, while the numbers looked bigger there, they're of really no consequence.

Rick Wise - Bear Stearns

So going forward staying at this level then, roughly, probably?

John Considine

It depends. That is a line on which we have to book some of these discreet items, where we make a venture decision to invest in a new technology-type company. And those things are, from a P&L standpoint can be fragile, and we may have to write one down for $3 million or $4 million, or we may sell one for $3 million or $4 million.

So it's very, very hard to predict that. Our interest income expense should be fairly stable as we go forward. We spent most of the money. When we get into next year, it will be fairly apples to oranges overall on where we were, albeit that the $600 million, round dollars, that we spent on those two acquisitions, obviously that interest income has come out of the P&L. And Bill, now. Bill, do you want to just take that question on Plasso?

Bill Kozy

Sure, Rick. This acquisition of Plasso augments the BD Falcon and BD BioCoat surface portfolio that we have today. But what it's designed to do is expand our capability so that we can manufacture innovative, synthetic, chemically defined animal-free surface treatments.

And these are much better at mimicking kind of the biological environment that will be used for future cell attachment and growth research. The products will eventually be targeted at stem cell biology and cell therapy applications. And we do know that these specific markets will require the synthetic chemically defined surfaces.

The coated vessels and media and so forth in the market today that are coming from animal sources do introduce some variability into the research process, and they'll be less acceptable over time for any cells being used for research.

And of course, they won't be -- animal-based products just won't be acceptable for anything that's possibly intended for human applications. So Plasso Technology helps us to serve this unmet stem cell biology and cell therapy market needs that we believe could be out there in a few years. And it's this combination of the surface treatment, the vessels, and then the media that we've got our strategic attention on.

Rick Wise - Bear Stearns

Thanks.

Operator

And next we’ll go to the line of Glenn Reicin with Morgan Stanley.

Glenn Reicin - Morgan Stanley

I have a bunch of them. I'll try to limit it and then get back in line here. With respect to guidance on Bioscience, you guided I think 11%. That implies a pretty big slowdown in the fourth quarter.

I see the international comps are a little bit difficult, but can you talk to that? Especially on the domestic piece, it sort of has not been getting out of that 70% growth range. So maybe talk a little bit about what's happening there.

John Considine

Bill, you want to do that?

Bill Kozy

Hey, Glenn. Yes, I think you might have touched on one of the things that we are up against in the fourth quarter. We did have an exceptionally strong fourth quarter last year, particularly in Europe.

And we're up against that in this fourth quarter. It was actually instrument-based and was associated with a really successful early launch of the Canto II. So that's what we're up against, and that probably reflects our thinking on that 4Q outlook.

Glenn Reicin - Morgan Stanley

Okay. And what about domestically? It has not really been growing all that rapidly. Can you give us a sense of what's happening, from either a market perspective or competitive perspective?

Bill Kozy

I don't think there's any issues on our part. Again, we did have a little bit of an early stage launch activity associated with Canto II. It's not as strong as the international side, but it is there. We are not right now reflecting any competitive concerns in any of the Bioscience, and particularly into the instrument side of the business, which is the much biggest piece.

Glenn Reicin - Morgan Stanley

Okay. For John, some simple financial questions. And I'll lay them both out. Tax rate, you didn't mention where we're going to end up for the year. Are we a little bit lower this quarter than we thought? Can you give us a little bit of insight there?

And then if I just look at your interest income in the quarter, let's just say round numbers, you have $500 million or $600 million on cash. 600 -- $500 million, $600 million of cash on hand. How are you generating $11 million to $12 million a quarter on $600 million in cash? What else is in that number?

John Considine

The first thing that you have just to do the tax rate, I did actually, you might have missed it.

Glenn Reicin - Morgan Stanley

I probably did.

John Considine

26.5%. We said any one-quarter might be different, but that's how the year should be, 26.5%. Which is, as I mentioned to an earlier question, is up about 160 basis points over the prior year's quarter and this quarter, in the third quarter. So in terms of interest expense, there are a number of -- and interest income, there are a number of elements.

In the interest income line, beyond just pure vanilla interest, we book up the -- we capitalized certain interest in connection with projects. We have some deferred compensation arrangements, where frankly the expense of those is recorded up in SSG&A, and the offsetting interest expense is located down in interest expense.

You'd ask why we don't put those together. It's because it's prohibited under the accounting rules. And there's things like that. And that's really the thing -- the pieces that you might not see, but that albeit are there.

Glenn Reicin - Morgan Stanley

And those aren't going away?

John Considine

They tend not to go away.

Glenn Reicin - Morgan Stanley

Okay.

John Considine

And you also have items like, if we do -- we have some interest rate swaps. I mean, they're small, small amounts. It depends where we're trying to lock in an interest rate. But by and large, I've given you the bigger components of that.

Glenn Reicin - Morgan Stanley

Okay. Can I get away with one other quick one? You talked about Safety in total. But you didn't give the U.S./international breakdowns for the two pieces. Can you do that?

John Considine

I thought I had.

Glenn Reicin - Morgan Stanley

Maybe I missed it.

John Considine

I'd be glad to do that again. For the year...

Glenn Reicin - Morgan Stanley

For the quarter.

John Considine

Oh, for the quarter. Let me just grab the quarter from Bill. You can do -- Gary, go ahead.

Gary Cohen

For the quarter, U.S. was up, total Medical and Diagnostics, 5%. International was up 28.5%.

Glenn Reicin - Morgan Stanley

And can you break that down between the two?

Gary Cohen

The U.S. Medical was up 2.6, Diagnostics 8.2. And international Medical was up 30.4 and Diagnostics 27.7.

Glenn Reicin - Morgan Stanley

Thank you.

Operator

(Operator Instructions) And next we’ll go to the line of Peter Lawson with Thomas Weisel Partners.

Peter Lawson - Thomas Weisel Partners

Bill, I wonder if you could talk about what's behind the growth for that BD Bioscience business, in particular the lab, (inaudible) is there some new initiative in that part of the business?

John Considine

Take that?

Bill Kozy

Sure. Yes, this is Bill. The key contributor on the Discovery Labware side is the advanced bioprocessing business that was started in 2006. And though it's on a very small base at this point in time, it's growing in the range of about 40% year on year.

Remember that these are the products -- these are media and supplements designed for biotech manufacturing. And so as this biotech pharma market continues to get traction, we're placing products into their production cycles for their bioprocessing needs.

Peter Lawson - Thomas Weisel Partners

Okay. And then, Vince, I wonder if you could talk again about the MRSA market, about possibly the VA contracts that you've won, and a new instrument platform for MRSA testing?

Vince Forlenza

Sure. As I was saying before, in the VA, we have over 15-signed contracts now in the VA. More in the pipeline. So we're doing well there. And then what did you want on the instrument side?

Peter Lawson - Thomas Weisel Partners

Oh, just an update where that stands.

Vince Forlenza

Oh, okay. So in terms of moving to the new instrument, you're talking about?

Peter Lawson - Thomas Weisel Partners

Yes.

Vince Forlenza

Sure. We've had our internal program for some time, where we're moving ahead, we're on schedule. And as we said, we expect to be out of that instrument at the end of fiscal year '08. We haven't announced who we're doing that instrument with, but it will be with a different outside partner, and we're probably not too far away from saying who that is.

Peter Lawson - Thomas Weisel Partners

That requires an amended FDA approval?

Vince Forlenza

We would get a new 510K for that.

Peter Lawson - Thomas Weisel Partners

Okay. And the organic growth for the quarter, what was that? Was that on the region of 7%, John?

John Considine

Yes. Yes, the underlying growth would be right around 7%, if you take TriPath and foreign exchange out.

Peter Lawson - Thomas Weisel Partners

Do you think that's sustainable for the rest of the year?

John Considine

Yes.

Peter Lawson - Thomas Weisel Partners

Super. Thank you so much.

Operator

And next we’ll go to the line of Sara Michelmore with Cowen and Company.

Sara Michelmore - Cowen and Company

I was hoping to get an update on a few specific products in, I guess Diagnostic if you could give us some additional color on ProbeTec and Viper, as well as Phoenix. And then Gary, if you wouldn't mind giving us an update on Nexiva and any other of the newer advanced safety products that we should be paying attention to.

Vince Forlenza

This is Vince, Sara. The ProbeTec business, instruments and reagents was up worldwide 16.5%. So we're doing well there. Viper's now over 100 placements worldwide. And we're still on track for a Q1 FY '09 launch for the new Viper system.

Sara Michelmore - Cowen and Company

And an update on Phoenix?

Vince Forlenza

On Phoenix, sure. Phoenix was up, off a small base, 23%. I would say things are consistent with what I've said. We continue to work on the up front automation. That's targeted for 4Q '08, and so total Phoenix sales for the quarter were around $7 million.

Sara Michelmore - Cowen and Company

Thanks, Vince.

Gary Cohen

And Nexiva is doing quite well. The sales versus the prior quarter have more than tripled. You won't see the same impact yet as it translates through the GP, because Nexiva, where we typically scale automation with volume.

So the fully automated impact -- or the full automation plans for Nexiva will occur some time in the future so that the GP will lag the revenue benefit. But Nexiva is slightly ahead of our internal plans.

Sara Michelmore - Cowen and Company

Great. And John, can you remind us in terms of some of the -- I'd characterize them as sort of one off Cap Ex build out expenses that you've undertaken this year, where we are in terms of the build out of the infrastructure for Pharmaceutical Systems, as well as GeneOhm.

John Considine

Yes, well, we're in the process of both of those, and Pharma Systems, it's multifaceted from -- more in the embryonic stages in Hungary to some other capital going in around the world. I'd say this, we're looking at $600 million for this year, gross capital. That would infer that we're going to spend just north of south of $250 million in the fourth quarter.

And that's not atypical for us. This quarter was about -- what was it, 130ish. We think capital will be heavy once again next year. And then in the following year will begin to come down. It is not inconsistent with our pattern.

If you actually looked at our maintenance capital, we have probably come over the last eight years from in the $200 million a year range to now probably $350 million, just to capitalize what exists within the Company.

We then have these times where things tend to peak and push our gross capital higher. Early in the 2000s and late '99, you saw the capitalization of the safety initiative. Right now, you're seeing Pharm Systems, you're seeing the sterilization projects going in, you see buildings going on.

You can see it in all of our segments, including Biosciences, as well as Diagnostics with GeneOhm. And, with our cash flows, we're blessed to be able to easily do that and still maintain share repurchases and dividends.

Sara Michelmore - Cowen and Company

Okay. But it is going to kind of be at a higher than maintenance level spending heading into fiscal '08, and then we should expect it to taper off at some point?

John Considine

Begin to come down. I mean, there always will be spending beyond maintenance, if you will. But it's more one off discreet projects than it is -- this is kind of the perfect, I don't want to say perfect storm, because it's not. But this is the convergence of all three segments spending more than the average capital in terms of major projects.

Sara Michelmore - Cowen and Company

Great. Thank you.

Operator

And next we’ll go to the line of Larry Keusch with Goldman Sachs.

Larry Keusch - Goldman Sachs

A couple questions, maybe mostly directed for Gary. Could you talk a little bit about what's going on with OUS Safety? And again, how you're thinking about the events and the ramp there?

And then just as an update on one of your future development projects, where do we stand with the microdelivery platform for the vaccine injections? Just help us maybe again with what needs to be done on that program, and help us, if you can, think about timing there.

Gary Cohen

Sure. Well, first, on the first part, OUS Safety, as noted, we're seeing solid growth. We're seeing it both in Medical and Diagnostics. In the quarter, growth was particularly strong in Europe, which we would characterize as being the most important safety market outside of the U.S.

We're benefiting both from the external trends of certain countries putting into place stronger regulations, and that would apply both in Spain and in Germany. Germany, which had implemented regulations a few years ago, has strengthened them. And Spain, although it's not country wide, it's in now the largest region and expanding to other regions of Spain.

And we've seen transition levels in those areas akin to what we experienced in the U.S. In that respect, I would say it's probably even gone faster than we would have anticipated in the transition from conventional to safety.

And even in some of the other countries that don't have regulations in place, like France, we've seen good levels of transition in particular product categories.

And all that being said, still the amount of unconverted market in Europe is much larger than the converted market. We're also seeing growth in other regions. I would say that's less important.

I mentioned there were two things. The other thing that is impacting us in a positive way other than the external, is that we have had some new platforms that we've introduced, and specifically around the needs of the European markets.

Over the past year, we've introduced both a safety catheter for primarily the European market, a safety catheter, as well as an injection device, which fits the types of syringes that are used in Europe. They tend to use a different type of tip. A Luer Slip rather than a Luer-Lock Tip. I don't want to get too technical. But we went through a lot of effort to design safety needles that fit specifically to Luer-Lock -- Luer Slip syringes.

In Europe, we're the only manufacturer that's done that work. So those are all helping us, and both of those products are growing.

Relative to your question about microdelivery, as you know, we had entered into a development agreement and partnership, in fact, with Sanofi Pasteur. A broad based partnership for vaccines. They've been doing clinical work, which has been very positive.

We can't go into too much detail on that, because really is up to them to disclose what they believe is appropriate around the clinical work. But suffice it to say, it's been very positive.

They are targeting launch probably around the turn of the decade. This requires essentially to go through the regulatory process of not quite a new drug, but it's putting -- it's different delivery mode for existing vaccines.

So you have to go through the full clinical and regulatory development process. Requires a lot of investment. But the testing results have been very positive. In general, the interest level in microdelivery has come up significantly, not only among our partner, Sanofi, but in general in the environment.

Larry Keusch - Goldman Sachs

Okay. And just two last ones. Just to finish up on that, Gary, what would be the advantages of the microdelivery? Is it just less pain? So that's question one. And then the other one, the Discovery Labware results for this quarter, which I think were around 8% growth, I'm not nitpicking, but I thought, John, perhaps you had indicated last quarter that you were thinking more like 10% growth rates for the second half of the year. So just again wanted to see if there was anything in the quarter that may have changed a little bit.

Gary Cohen

I'll take the first part of that question relative to microdelivery. When we started working on this technology back in the 1990s, our initial impetus was reducing pain. Because these needles are so tiny, they don't even reach the nerve endings that cause pain.

You can still feel the medication going in, but you don't really feel the needles. But what really piqued interest in the technology and actually created the potential for it was beyond that. Was that there were both antigen saving and therapeutic benefits associated with precise delivery into the space that these devices inject into.

That'll vary by vaccine, and will basically be proven out by the clinical studies around each vaccine. But reduced use of antigen and/or stronger therapeutic impact from the vaccine are both potential advantages of using this delivery method.

John Considine

Bill, you want to touch on that?

Bill Kozy

Sure. On the Discovery Labware question, we mentioned earlier, we were a little favorable on the advanced bioprocessing performance for the quarter, pretty much on a global basis.

Our core Labware business, particularly in the United States, was just a little bit below the expectation. We wouldn't see any significant impact on that the reminder of the year. I think some of that was some timing of research spending in the U.S., but we've got our eye on it.

Larry Keusch - Goldman Sachs

Okay. Great. Thanks, guys.

Operator

And next we’ll go to the line of Bruce Cranna with Leerink Swann.

Bruce Cranna - Leerink Swann

John, first of all, can you just take a stab at dilution in the quarter from TriPath and GeneOhm?

John Considine

Yes, it's about $0.02 incremental dilution year-on-year quarter-on-quarter. For the entire year, you'd be talking about $0.08 or $0.09 incremental. And that would include the operating profit or loss in this case, and the interest -- lost interest.

Bruce Cranna - Leerink Swann

So $0.02 on the quarter?

John Considine

Yes.

Bruce Cranna - Leerink Swann

John, did you say $0.02 on the quarter year-over-year?

John Considine

Yes, I did. And that -- for the combination of the two, it's $0.04 this year versus $0.02 last year.

Bruce Cranna - Leerink Swann

Oh, I thought we were thinking about $0.02 for all of second half for both. Did I have that wrong?

John Considine

I think there's another $0.01 in Q4. I think you can use 9 for the whole year and 2 in this year, Bruce.

Bruce Cranna - Leerink Swann

Okay. And then quickly for Bill, I know there's been a lot of GeneOhm questions. But I'm just curious in general, do you guys -- are you seeing greater interest in that product at this point in the U.S. or OUS, or is it really just similar?

Bill Kozy

So on the GeneOhm (inaudible), I'd say the U.S. market is ahead of the European market in terms of market development at this point, based on the APIC and Shay work that's gone on. We do see now increasing interest in Europe, in Germany, U.K., and France. But right now, the U.S. is ahead.

Bruce Cranna - Leerink Swann

Okay. And Vince, I know -- at least I think last quarter we talked about FocalPoint GS filing. Any update there? I seem to recall you thought it was imminent. Have you filed GS or not?

Bill Kozy

Yes, this is Bill. On the FocalPoint, we're a few months away from getting that filing completed.

Bruce Cranna - Leerink Swann

Have you run into some issues, or is it still on track in your opinion?

Bill Kozy

No, we think it's on track. We had talked before about getting that submission in, and a mid FY '08 FocalPoint GS launch. And that's the path that we're on right now.

Bruce Cranna - Leerink Swann

Okay. And then lastly, I apologize for my ignorance, but on Plasso, did you ever disclose revenue size there? And what did you guys pay for it?

John Considine

We paid about 10, we wrote off about seven in terms of required R&D. And I don't believe we gave any...

Bill Kozy

The revenues are just negligible. It's in -- they have one product on the market launched in November of '06, and it's not really applicable right now. It's a tech dev program for us.

Bruce Cranna - Leerink Swann

Is it mostly OUS sales or do you plan for mostly OUS sales from that company?

Bill Kozy

Longer term, we would hope for significant sales in both the U.S. and the developed markets, with particular focus on research and pharma applications in any market, including Asia.

Bruce Cranna - Leerink Swann

Great. Thank you.

Operator

And next we’ll go to the line of Quintin Lai with Robert W. Baird.

Quintin Lai - Robert W. Baird

Most of my questions have been answered. Just a couple of housekeeping questions. Have you ever broken out the percent of overall BD sales that go to China and India?

John Considine

Not to my knowledge we have not done that. And I think to go to or emanate in, we haven't done that, no.

Quintin Lai - Robert W. Baird

Okay. And then just diving a little deeper into especially the Biosciences side, a lot of the other tools companies have been increasing their presence in China and India, both through acquisition of some of the companies on the ground. Any thoughts or updates on your strategies in those areas?

John Considine

We would not have any immediate plans with partners or activity beyond our normal sales and marketing focus in those markets.

Quintin Lai - Robert W. Baird

Thanks.

Operator

And next we’ll go to the line of Jeffrey Frelick with Lazard.

Jeffrey Frelick - Lazard

Couple questions for Gary. Gary, kind of maybe revisiting the OUS Safety, I guess you talked about the external pressures and the European market kind of catching up to what the U.S. went through. Are they buying the traditional safety products? Or are they buying the next gen safety products? Can you touch on that?

Gary Cohen

Sure. And just to give also clear impressions, I think, as I said over the past several years, the predictability of the sales ramp outside of the U.S. I believe is lower than what we had experienced during the conversion process in the U.S. Because the U.S. followed a pattern for us state by state, and then nationally that became somewhat predictable.

So I just want to mention that upfront, although in general, the international growth has been even stronger than we had expected this year. What they're transitioning to, I would say, is really a combination, and it's not directly akin to what's going on to the U.S. where we had let's say, the first and second generation products.

And then we were coming with further generation products. Whereas in Europe, we did some development that essentially are catered towards that market around the two big categories, which are injection, infusion on the medical side.

So specifically around injection, as I mentioned, we have a special Luer Slip version of the Eclipse needle, which is also the fastest growing safety device for us in the U.S. That's the primary focal point, although we also sell our other devices there. In infusion, it's a combination of Insyte Autoguard in the markets that use straight IV catheters.

And then about half of the European market uses something called a side port IV catheter, and that's where we've developed a new safety side port catheter that's being well accepted, which was introduced this year into the market.

We're also selling Nexiva in Europe, as well as in the U.S. We anticipated the sales growth to be faster in the U.S. than in Europe, and that's what's occurring so far. Though, our plan is to sell Nexiva everywhere in the world. It's truly a unique device relative to anything else available on the market.

And then on the blood collection side, the devices are for the most part, similar to what we're selling here. They're the Eclipse needle for multi-sample needles, and both the Safety Lock and Push Button Blood Collection sets for wing set blood drawing. So it's really a combination. But I would emphasize that the newer devices that we're developing, we're not just selling in the U.S.

Our plan is to roll those out around the world. The exception being in some of the developing markets, we've tailored lower cost safety devices into those markets.

Jeffrey Frelick - Lazard

Okay. And then just one follow-up, Gary on the Nexiva product. With respect to adoption in the U.S., how would you characterize that so far between last year and this year? More of a current customer adoption? Or are you getting a decent percentage of competitive accounts?

Gary Cohen

To date, we're getting more in competitive accounts. Over time, we would expect that to also include more current accounts, given our market position. With the rollout, as you might expect, we're tending to put a little bit more focus on competitive accounts.

But also in any existing accounts that have interest in this device, we will transition over. Even if we're replacing an Autoguard safety catheter, those -- the ones we sell today, sell for $1.50 or so, and Nexiva sells for over $4. So it's an equitable changeover for us, even in existing accounts. But to date, more than half has been into competitive accounts.

Jeffrey Frelick - Lazard

Okay. Great. Thank you.

Operator

And next we’ll go to the line of James Baker with Neuberger Berman.

James Baker - Neuberger Berman

John, I just wanted to clarify on that acquisition dilution for the full year. You said it would be $0.09 incremental. Would that be $0.16 versus $0.07, is that correct?

John Considine

Yes, it would be -- let me just double check my numbers here. It would be -- I have $0.15 versus $0.06. We're in the same range, yes.

James Baker - Neuberger Berman

Okay. Very good. And the other thing is on, I know you don't disclose this until the 10-Q, but on the segment operating margins in the two areas where you have not done acquisitions, which were BD Medical and BD Biosciences, you had very significant operating margin improvement in the March quarter.

And I wonder whether that continued here in the June quarter? I wonder if you could just comment on that? I know you will eventually disclose that. But could give us some color on that?

John Considine

I haven't rolled it up that way. The numbers are in the house. But I would expect it not to be different than what we saw in the second quarter. Everything in this quarter looked an awful lot like prior quarter. So I would expect that to be there, Jimmy.

James Baker - Neuberger Berman

Okay. And then on -- do you have a nine-month number for cash flow from operating activities?

John Considine

Yes. Give me a second.

Operator

And next we’ll go to the line of Glenn Reicin with Morgan Stanley.

John Considine

Jim, I know you're still out there. Net cash provided by ops for the nine months is $875 million. CapEx was $366 million, acquisitions $340 million, and the dividend was about $180 million. And you're welcome, because I know you said thank you.

Glenn Reicin - Morgan Stanley

Okay it's Glenn. Can I ask two follow-ups now? Just one clarification. I went back to those Safety numbers from last year and put in the percentages you gave. The percentages all work on a worldwide basis, but I'm coming up with $164 million. And you said on your introductory comments $167 million. Was that just a mistake, or is the $167 million the right number?

John Considine

Okay. We'll check numbers again. What are you coming up with…

Glenn Reicin - Morgan Stanley

$164 million worldwide for Safety.

John Considine

For what?

Glenn Reicin - Morgan Stanley

For Safety.

John Considine

For what…

Glenn Reicin - Morgan Stanley

For the quarter.

John Considine

For medical?

Glenn Reicin - Morgan Stanley

No, both together.

John Considine

Total Safety for the Company for the quarter, you are coming up with $164 million of total revenues or growth?

Glenn Reicin - Morgan Stanley

Total revenues, I think. That's what you said, right? Sorry, let me just check my notes, here.

John Considine

I may have given you percentages, not absolute dollars.

Glenn Reicin - Morgan Stanley

No, in the introductory comments, you said Safety, sorry, Safety was $167 million for Medical.

John Considine

$167 million, that's correct. That's correct.

Glenn Reicin - Morgan Stanley

That is the right number? Okay. Then I have got to go back.

John Considine

You are dealing in tenths of digits that cause the difference.

Glenn Reicin - Morgan Stanley

Okay, fine. Second question is on diabetes. Can you talk a little about what's happening internationally? If you look at the numbers on a constant currency basis, it's not growing all that rapidly. And I would just think, I know your position with pen needles isn't as strong overseas. But I just think because of demographics, that would be a strong market for you. Why is it not?

Gary Cohen

Well, first, we do have a strong position in pen needles internationally. And we had strong growth in pen needles, even in the quarter internationally. There were a few things going the other way, both U.S. and international. We actually had declines in our home healthcare business, and it's reported in diabetes care business.

And although that's not that large internationally, there was a pretty big international decline in that. We also had some Lancet business that was OEM to one of the BTM manufacturers that we had lost in the quarter. It was a relatively low margin business, but that went elsewhere.

And then we have a little bit of a lingering effect of a recall that we had in Japan earlier in the year. We expect to fully recover from it. But that did have a little bit of an effect. It had a bigger effect of the cost of the recall earlier in the year.

But that also -- that impacted our sales a little bit in Japan. And in general in south Latin America, things have been soft for us across the board. So put the whole picture international together, strong pen needle growth, strong pen needle position by the way, we are the leading supplier of pen needles internationally and in the U.S.

Strong patterns in certain countries in particular, U.K. and Italy were strong. The downside was home health, the loss of some of some of our Lancet OEM business, and softness in Japan.

Glenn Reicin - Morgan Stanley

So how long does that last, and then what would you characterize the normalized growth rate of that business on a constant currency basis overseas?

Gary Cohen

I think in general, if you look at insulin delivery on a constant basis, upper single-digits would be the right range to think about. And that's double-digits on pen needles, offset by very limited growth on syringe delivery.

Glenn Reicin - Morgan Stanley

Okay. And when do the issues get past us?

Gary Cohen

Well, depends on the issue. The Lancet business that was a third quarter event. In Japan, we are already back in recovery mode. So I can't project it out by quarter for you. But I think the impacts you've seen in the third quarter are not going to be repeated again by order of magnitude in our view.

Glenn Reicin - Morgan Stanley

Okay. Thank you.

John Considine

Okay. Thank you very much for your questions. We're kind of out of time right now. So should you have other questions, obviously, give Pat a call, and we'd be glad to help you with those. And thank you very much for your interest. Bye.

Operator

Thank you. And ladies and gentlemen, this conference is available for replay through Thursday August 2nd 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 879048. That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.

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