Becton Dickinson F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

Becton Dickinson & Co. (BDX)

F4Q07 (Qtr End 9/30/07) Earnings Call

November 1, 2007 10:00 am ET

Executives

Patricia Spinella - Director, IR

Ed Ludwig - Chairman, President and CEO

John Considine - Sr. EVP and CFO

Bill Kozy - EVP

Vince Forlenza - EVP

Gary Cohen - EVP

Analysts

Rick Wise - Bear Stearns

Kim - J.P. Morgan

Glenn Reicin - Morgan Stanley

Bruce Cranna - Leerink Swann

Peter Lawson - Thomas Weisel

Larry Keusch - Goldman Sachs

Jason Weiss - Robert W. Baird

Jeffrey Frelick - Lazard Capital

Presentation

Operator

Hello, and welcome to BD's Fourth Fiscal Quarter 2007 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday November 7th on the investor's page of the bd.com website or by phone at 1-800-475-6701 for domestic calls and area code 320-365-3844 for international calls, using access code 889224.

I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment. Beginning today's call is Miss Patricia Spinella, Director of Investor Relations. Miss Spinella, you may begin.

Patricia Spinella

Thank you, Linda. Good morning, everyone, and thank you for joining us to review our fourth fiscal quarter and full year results. During today's call, we will make some forward-looking statements, and it's 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 of non-GAAP to GAAP measures can be found in our fourth quarter press release and its related financial tables. A copy of the release, which includes the financial tables, is posted on the bd.com website.

Leading the call this morning are Ed Ludwig, Chairman, President and Chief Executive Officer, and John Considine, Senior Executive Vice President and Financial Officer. Also joining us are BD's Executive Vice President, 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 like to devote as much time as possible to answering your questions, our opening comments will be brief.

Broadly speaking, there are four primary topics we would like to address; I will take the first three and Ed will cover the fourth. First, we will review our diluted EPS from continuing operations for the fourth quarter and 12 month period ended September 30, 2007. We will also review the items that affect comparability of the 12 month periods, fiscal 2007 and 2006. Secondly, we will describe some of the key drivers of our revenue and earnings growth for the fourth quarter of full year 2007. Third, we will review our guidance for fiscal 2008, and fourth, Ed will discuss our overall strategy and longer term prospects.

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

This gives us an adjusted diluted EPS from continuing operations of 384 for fiscal 2007. For fiscal 2006, we begin with reported diluted EPS from continuing operations of $3.18 and add back the charge of $0.21 resulting from the in-process R&D charge related to GeneOhm's acquisition and subtract $0.04 resulting from an insurance settlement related to our former latex business. Taking into account $0.01 of rounding, this results in an adjusted diluted EPS from continuing operations of $3.34 for fiscal 2006. Comparing the $3.84 in 2007 to the $3.34 in fiscal 2006 gives us an EPS increase of 15%.

Moving on to our growth drivers, our revenue increased by 13% for the quarter which included an approximate 3 percentage points favorable impact from foreign currency translation, primarily related to the Euro. Our revenues for the full year increased 11%, and we are also favorably impacted by about 3 percentage points from foreign currency translation.

In the medical segment, fourth quarter revenues grew about 11% led by sales of prefillable drug delivery devices in pharmaceutical systems and continued growth in pen needles. Global sales of safety engineered products in this segment grew about 11% to a 176 million.

For the year, revenues in the medical segment grew about 10% reflecting about a 3 percentage point favorable impact from foreign exchange. Our pharmaceutical systems, diabetes, safety and flush products lines led growth. Global sales of safety engineered products grew about 10% to 673 million.

Revenue in the diagnostic segment grew about 16% in the fourth quarter. Within the segment, the diagnostic systems unit reported revenue growth of 25% with TriPath revenues of about 29 million, accounting for 15 percentage points of that growth.

Global sales of safety engineered products in the diagnostics segment grew about 14% to $187 million, due for the most parts of the continued success of our Push Button Blood Collection Sets. For the year, revenues in the diagnostic segment grew about 11%, reflecting an approximate 2 percentage point favorable impact from foreign exchange. Global sales of safety-engineered products grew about 14% to $718 million. Our ProbeTec and Viper platforms also contributed to this growth.

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

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

Turning to gross profit, we achieved a 40 basis point improvement in gross profit margin due both to improved productivity and product mix, offset in part by start-up cost for media productions, farm systems in bionutrients capacity. This result is about 30 basis points below our previous guidance for gross margin improvement due for the most part to our reclassification of certain expenses from SSG&A to R&D and RG rather than to cost of product sold.

The reclassification covers all four quarters of the year and was recorded in the fourth quarter. The amount being reclassified relates to the new integrated TriPath and GeneOhm platforms and was recorded to confirm the accounting classification practices for those platforms to those followed by us at BD.

For SSG&A for the year, as a percentage of sales, we improved by 30 basis points. R&D spending increased by about 19% in absolute terms with about one-third of that increase relating to TriPath.

For the year, our operating income, adjusted for the items previously discussed, increased by 30 basis points from 20.5% to 20.8%. We generated about $1.2 billion of net cash from operations for the year end, consistent with our guidance, used approximately $450 million to repurchase about 6 million shares of common stock, while investing $556 million in capital and $340 million in making TriPath acquisitions.

Now, the last topic I would like to cover is our guidance for fiscal 2008. We expect diluted earnings per share from continuing operations for fiscal ’08 to increase by approximately 10% to 12%, from last year’s adjusted base of 384, which excludes the $0.48 of in-process R&D charges related to the TriPath acquisition.

Our full year reported revenue growth is expected to be between 8% and 9%, with BD Medical being about 8%, BD Diagnostics about 9% and BD Biosciences between 8% and 9%. U.S. sales of safety-engineered products are estimated to increase about 8%, and international safety should grow about 20%. Overall global safety would therefore increase by about 12%.

We expect our percentage gross profit margin to be about the same as it was in fiscal 2007. Now while our product mix and productivity will increase and should be very favorable, we expect it to be offset in part -- offset actually by an increased resin and steel cost, as well as manufacturing start-up cost. I would just add that this, and we can touch more deeply on it in the question period, that two of our three segments are positive to gross margin percentage, and that’s Diagnostics and Biosciences.

BD Medical is slightly under in terms of its gross margin percentage, and that has to do also with the startups that are going on in some other items that Gary will touch on when asked. Startup costs obviously go away so that as we look further out into 2009, we see gross profit margin percentage again beginning to increase.

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

Finally, while it's our policy not to provide explicit quarterly guidance, I want to point out that we do expect the first quarters EPS from continuing operations excluding specified items to increase at a somewhat lower rate than our annual guidance for 2008, which I'd remind you was 10% to 12%. And there are kind of three items that impact the first quarters earning growth.

Firstly, the gross margin as a percentage of revenues should be about 1 percentage point lower than the prior year. And somewhat similar to what we saw in the fourth quarter, some effect is certainly happening from the start-ups, which, as I said, do have an end to them. But we also have some of the impacts from unfavorable foreign exchange impact, not withstanding the fact that the Euro has strengthened against the dollar. We do get hit in the gross margin at this point in time for that. And also, that reclassification that we made in '07, as I said, in the fourth quarter, we accounted for our four quarters of the reclass, so therefore we have a bad comparison on that on a quarter-to-quarter basis.

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

So with all I have said now, I’d like to turn the call over to Ed.

Ed Ludwig

Thank you very much, John, and good morning, everyone. Our strong results for the year just confirm our positive outlook for '08 and continue to validate our confidence that the strategies we’ve been implementing over the past several years is a sound one, and it's being effectively executed by our team. We will continue to implement this strategy with rewards to both our customers and our shareholders. This is the 7th consecutive year in which we’ve achieved or exceeded our annual objectives.

Before turning to your questions, I’d like to expand beyond the fiscal 2008 guidance that John has shared with you, and I’ll briefly elaborate on our strategic direction. And as I have said to you before, our strategy has two core elements. The first element is to increase sustainable revenue growth by designing, manufacturing and marketing, innovative products that address significant healthcare problems and deliver (demands to higher) benefits to healthcare workers, patients and researchers.

Our plan is to grow revenue primarily organically, and we’ve been saying and continue to say that organic growth should be in the 7% to 9% range. We will compliment this primary organic growth strategy by making targeted acquisitions, which will enhance our key strategic capabilities, and I think GeneOhm and TriPath are excellent examples of strategic targeted acquisitions, which increase our basic capabilities. Acquisition of this nature will be strategically obvious, and any dilution is expected to be short lived and modest, and again, I would say GeneOhm and TriPath are good examples of these characteristics.

This fundamental innovation strategy is enabled and fuelled by the second element of our core strategy, which is our commitment to achieving outstanding operating effectiveness and productivity to accelerate our progress. Our success in the operating effectiveness component of our strategy should result in outstanding customer satisfaction, strong cash flow and expanding operating margins. And again I think '07 and '08 are good examples, of the evidence of this operating effectiveness. Achieving operating effectiveness will very importantly enable us to increase our investments in innovation, which in turn fuels our future growth.

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

Let me summarize few, what I have been describing to our shareholders and associates as what we are calling the BD success paradigm, and this success paradigm is present everywhere we are successful and has four essential elements. I think you can see these elements in all of our successful businesses.

First BD, I think, is most effective when we are identifying emerging or under-appreciated healthcare problems. We did this 20 years ago with healthcare worker safety; we are doing it again today with our healthcare-associated infections. The second thing is, we apply technology to solve these problems. This technology is principally developed organically but occasionally is supplemented by acquisitions, licenses, etc. The third element is we use our outstanding manufacturing expertise to produce these products with very high quality and very low cost so that can be affordable and available to people all over the world, therefore helping our people live healthy lives, which is our purpose. And finally, the fourth element of our paradigm of success is that we surround these products with outstanding service and support, and in fact, many of our sales associates look more like missionaries than they do like sales people. They are always converting from one level of healthcare to a higher level.

So if you take these four themes and apply them to the business, you can see that there are a finite number of areas of strategic focus, which really transcend even the business units. And these areas are number one, reducing the spread of infection, number two, enhancing diabetes treatment. Number three is advancing drug delivery. Number four, we are addressing unmet global healthcare needs. Number five, we are improving pharmaceutical and research efficiency; that's our Biosciences group. And most recently, we are significantly improving the clinical management of cancer, which was again expanded with our TriPath acquisition year ago.

Now while all six of these areas are important, in the interest of time, I'll elaborate on two of them just a bit, but we are with our management team here prepared to answer the questions you may have regarding any element of our strategy.

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

Over the past few years, recent introductions of the Vacutainer Push Button Blood Collection Sets in the [Saf-T-Intima] fully integrated IV catheter, are both examples, excellent examples of our ongoing commitment to continued leadership, innovation and growth in this arena.

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

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

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

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

In addition to MRSA, we are expending our manual test. We recently submitted the StaphSR assay to the FDA for 510(k) clearance. This test will enables clinicians to identify susceptible virus resistant Staph infections from a positive blood culture within two hours. And this will replace the current culture based method, which takes a day or more to produce a specific answer. We're also developing rapid test for the detection of vancomycin-resistant enterococci (VRE) and clostridium difficile (C. Diff) which are also causative agents in healthcare associated infections. We expect these tests for VRE and C. Diff to be approved and cleared by the end of 2008.

Another area of strategic focus is cancer diagnostics. Cancer remains one of the highest causes of death in the world; expanding BD's presence in cancer diagnostics is a key element of our strategy to drive growth through innovation. Our cancer diagnostic strategy is to improve through innovative solutions to the Clinical Management of Cancer, including detection, diagnosis, staging and treatment. We believe that the TriPath platform positions BD to have a significant impact in the marketplace, and to advance treatments through more accurate and timely diagnosis. We have an exciting opportunity to improve the diagnosis of cervical and ovarian cancers with new diagnostic tests in the years to come.

As you can see, with these two examples, and we can elaborate more, we are innovating for impact, and continued innovation requires continued investments. As John pointed out, we are investing for the future primarily through increasing the pace of our own R&D spending. And it is appropriate through strategic investment such as GeneOhm and TriPath.

Continuously improving operating performance as evidenced by increasing our operating margin goes hand-in-hand with investment and innovation to build the platforms that will enable us to sustain double-digit earnings growth and provide value to our shareholders. Starting now and going forward in the coming years, we are redoubling our efforts to drive value and productivity through our entire supply chain. These efforts will address every aspect of our business operations, beginning with procurement and category management through manufacturing in evidence of the marketplace and how we serve customers in markets all over the world.

We’re also taking a fresh look at how we deploy all of our G&A functions with the goal of improving service quality and reducing cost. We will continue to build on our core strengths and invest in new capabilities. By successfully implementing our strategy, we expect to deliver strong results. Importantly, this should allow us to continue to invest, to increase our returns to shareholders in the form of share repurchases and increase dividends.

So, in summary, 2007 marked another year of excellent progress. One of our values is we’re always striving to improve, and we will continue to do so and to accelerate our pace of progress. Our fundamental strategy has not changed, and we’re staying the course that we’ve been on for the past seven years. By continuing on this course, we are confident that our progress should continue in the years ahead. The future holds many opportunities for BD to continue our request for greatness and to pursue our purpose of helping all people with healthy-healthy lives.

So with that, we are happy to take your questions. In order to allow for broader participation, we’d appreciate that you limit your questions to one plus a follow-up. So operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Rick Wise from Bear Stearns. Please go ahead.

Rick Wise - Bear Stearns

Good morning Ed. Good morning John. Couple of things, first, you invited us to ask about startup costs at BD Medical and maybe you can help us quantify those and I know we should tie this back into gross margins but maybe a related a question is maybe you could amplify on a couple of issues there, you quantified the fourth quarter reclassifications. Can you tell us the impact on gross margin in the quarter how do we think about what normal gross margin would look like?

Ed Ludwig

I'll let John elaborate a little bit there.

John Considine

Yeah Rick, if you take a look at the fourth quarter prior year we were at 51.6 and you look at what happened we actually would have had productivity mix and other around 40 basis points what happened is the startup cost and they range throughout the medical there is also some in biosciences and other would be about 40 basis points and they are unique over these two year's. You might remember we had some of these when we first started safety when we were not yet achieving the gross margins that we now enjoy because we were in the startup phase. So that was about 40 basis points and then the reclassification of GeneOhm and TriPath these were costs that we have historically classified as charges against cost of good sold GeneOhm and TriPath both had these reflected on the, primarily on the SG&A line and maybe a little bit on the R&D line. So we took the entire amount of those charges from quarters one, two and three and what would have been in four and moved them up against quarter four's gross margin, so it had a large impact of about 40 basis points.

So if you think about a normalized gross margin, you wouldn't have the productivity in product mix and other of about 40 basis points, it would does not had startup although we may have startup again as we keep innovating. And you would not have had the reclass; you would have had probably 10 basis points of this instead of 40 basis points, because you would have had only one quarter, but it will be running against quarter. So I would have thought that it should probably be up 40 basis points on this quarter, if not for these discrete items.

Rick Wise - Bear Stearns

Okay. Two other quick questions. First, immunocytometry, both U.S. and international were particularly strong, especially since you had cautioned about last quarter but the tough comps probably the year ago in fact cancelled two launch. Is this market is it, your new product, is it -- I think Becton stumbled a little bit this quarter in deliveries did you benefit comparatively? And last, just a larger question. Ed you, highlighted the goal of reducing infections spread, maybe you could just give us a little perspective, how does -- how could we see Becton benefit over the next 6, 12, 18 months from concerns over MRSA, specifically? And, do all these issues accelerate have the potential to accelerate growth at some point, sort of beyond your kind of guidance? Thanks.

Ed Ludwig

Well, let me answer the last one first. And I'll ask, let me just answer last one, if there is a follow on question you can do that and then I will let Bill talk about our continued success in Biosciences. Now we had been guiding all year that GeneOhm, the HAI piece of our infectious disease business, would be about $20 million, put in perspective it’s still a relatively small business. And yes next year we haven’t mentioned yet, but yeah, next year we’re looking at that business to grow to be about $35 million to 40 million. So, on a year-on-year absolute percentage basis, there is some fairly dramatic growth. It will take a few years.

Now what we are dealing with here is changes in medical practice and we are proven to ourselves over our life here in this industry that that takes time. Notwithstanding, there is an extraordinary compelling a rationale behind active surveillance as one component of an informed and aggressive MRSA eradication program. And so active surveillance is most hospital start with it as a screening, what they refer to as high risk patients, patients coming from other hospitals, patients being in military emergency room an intensive care.

Number of hospitals started in this place and they found that, they were so many infections on the general ward and coming in from the community that they soon became involved in screening all patients. Now this is still a small number of hospitals doing this. Most of them are struggling a little bit with the issue of understanding how big the problem is and then knowing what to do when they find these patients. Very importantly, we recently participated with [Cardinal] in making an MRSA’s surveillance software, which is available through Cardinal. We’re now providing this on a pilot basis to any hospital who wants it's for the first four months and that’s very-very exciting.

You may recall, many-many years ago having a similar program, I think it was called EPINet, which we gave to hospitals to help them understand their under appreciated problem with health care workers safety and accidental needle stick. So I see extraordinary parallels to what we did for health care workers safety, now manifesting itself in a broader problem which is health care associated infections.

So again, small business for now, but we are very positive that being there as we are among the first players in the space with a very effective test and even now expending our menu is going to help us to grow in that space, but currently a fairly small business but we have high hopes for it in the future. Having said that why don't we, I am going to ask Bill to elaborate little bit on the success he is having in Biosciences.

Bill Kozy

Rick, good morning. Just to get your fourth quarter question on immunocytometry that the biggest positive story for the quarter was our reagent performance, and on that just reagent category, associated just within immunocytometry systems we have kind of mid 20% growth and that was driven by favorable and better than expected clinical reagent performance. Two key categories there, the largest and biggest contributor was our HIV reagent business and this is coming, as you know, from our worldwide presence in CD4 monitoring. We also had very favorable performance on cancer, on our [MNL] clinical reagents. Those two factors created a very favorable reagent impact for the quarter, additionally we were up against as you mentioned a tough analyzer comp year-on-year. However, our sorters for the fourth quarter performed well above expectation and actually grew kind of mid-teen range for the quarter. So it's the factors of the clinical reagents and the sort of performance that really offset the tough comp we had on the analyzers.

Rick Wise - Bear Stearns

Thank you very much.

Operator

Our next question will come from the line of Mike Weinstein from J.P. Morgan. Please go ahead.

Kim - J.P. Morgan

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

Ed Ludwig

Yes.

Kim - J.P. Morgan

Okay. Just a follow-up on the gross margin. Looking out to fiscal 2008, you're looking for flat year-over-year margins.

Ed Ludwig

Right.

Kim - J.P. Morgan

Is this the right way to think about it, this sort of organically would be driving probably, lets call it 40 to 50 basis points improvement, but these startup costs are probably what's going to hold that flat. And in the sense of, can you talk a little bit about -- just specifically kind of what are these startup cost? Is it mostly going to be TriPath and GeneOhm related our platforms and how they should play out through the course of fiscal '08?

Ed Ludwig

Yeah, well the topics, I'll let John to elaborate on this because he did such a good job on the fourth quarter analysis, we'll see if he can handle the '08 analysis as well.

John Considine

Okay. Alright. So a very similar analysis. If you look at the expected productivity and product mix benefit we would get, it would have -- we estimate it would provide about 80 basis points of improvement, net of some other cost, maybe about 70 basis points when you get off through it. There are two items, one is the startups and that's about 30 basis points. And to your question, what do they apply to? Well, as we ramp up Nexiva production, there are startup costs with that kind of leading edge catheter. Within pharmaceutical systems there is expansion going on and some of those costs end up in P&L before you really producing anything.

When you look at Biosciences business in terms of reagent manufacturing in Puerto Rico as we do that good project which should serve us well into the future, again they our period costs would end up going to the P&L without associated revenue. So, those types of things in terms of startup, bionutrients would be another where we were seeing that kind of thing, so we can take deeper if you want to talk to the business guidance on that. Media production is another and so there are those things that we get in there.

The other thing that gets in there this year is obviously no surprise to anyone resins cost have increased and resins cost and steel cost and like that among raw materials notwithstanding good productivity that we’re seeing. We estimate it will probably cost us about 40 basis points, so if you look at those two you’ve got 30 basis points for the startups of 44 resins matching against 70 basis points of improvement and that’s kind of why we are in the situation where as a percentage you don’t have that increasing. Again as I said before startup costs go away by their own design. Raw materials in terms of resins, these are resins we spend about $200 million currently on these resins, so we have a budget in there that has an estimate of some price. There's not a one for one correlation against oil, but as oil tends to move up we tend to get some kind of commensurate increase in those prices. Does that help?

Kim - J.P. Morgan

Yeah that’s helpful, just a follow-up on that though. It seems like some of these startup items Nexiva pharma systems expansion and certainly the rising costs on the other side of it, it should have been present in part in 2007 and you saw some improvements. So, I am wondering are you able to tell us what was the resin cost on pressure in '07 in basis point term and then perhaps its sounds like the startup cost of 30 to 40 basis points. And just maybe are there any other items that might drive the improvement in '08 and I guess looking forward to '09 do we expect that there were improvement in some of these startups drop off?

John Considine

Just lets look at the startups because they don't happen within one year so if you look at '07 in terms of just absolute dollars you have been talking about $16 million, $17 million, $18 million of startup costs and in '08 you are probably talking about $40 million of startup cost because the we are really in the final throws of instituting these improvements because these startups are obviously just to state the obvious design to improve our margins. In terms of the resin costs you were looking at in '06, oil around 66, in '07 you were looking at oil of about 65 although we were using more resins.

Right now in '08 we had in our budget in the resin does that relate to oil would probably be in the 75 or 80 kind of range even if you have oil up right now to breaking through 96 we haven't seen that. Kind of when we look at the overall budget, there is -- that's we have always started looking at risk. There is some risk there, but it's certainly manageable at 90, if there were a direct correlation, that could cost us $15 million or $20 million.

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

Kim - J.P. Morgan

Okay, that's very helpful. Thanks for the color on this to add on it.

Operator

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

Glenn Reicin - Morgan Stanley

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

Ed Ludwig

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

Glenn Reicin - Morgan Stanley

Bit too low in Q1 and bit too high in Q$?

Ed Ludwig

A bit too high in Q4.

Glenn Reicin - Morgan Stanley

Yeah.

Ed Ludwig

And I think you will see that and we will try to, as we move through the next quarter, if there are anomalies, we will fill in the blanks there.

Glenn Reicin - Morgan Stanley

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

Ed Ludwig

Yes we do.

Glenn Reicin - Morgan Stanley

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

Ed Ludwig

Well, I don’t know why, most companies moving it down may or may not be. This is just a balance of our U.S. income against our tax saving income. We will it get better overtime, it should, that’s one of the reason that we’re moving reagents to Puerto Rico, while more pending alliance went in to Ireland, while we are doing more at Singapore.

It’s very manageable, we had guided overtime that we should have that and in discreet to this year, we did have some extra benefits from the ketchup of the R&$D credits. So, I think all in all that’s not a major move for us.

Glenn Reicin - Morgan Stanley

There [inaudible] that’s $0.04, but are you assuming that the R&D tax credit that will be renewed?

Ed Ludwig

We’re assuming that the R&D tax credit will be renewed.

Glenn Reicin - Morgan Stanley

Okay. And then as we look out say in ‘010 or ‘011 timeframe, do you have any promise getting that number down to 25%?

Ed Ludwig

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

Glenn Reicin - Morgan Stanley

Okay. Getting back to sort of the businesses can you talk a little bit about the performance of ProbeTec and Phoenix for the quarter? And then, can you just give us the numbers for Medical and Diagnostics for U.S. International safety, sort of you put them all together, just lot of these specifics?

Ed Ludwig

Right. I'll ask Vince to cover ProbeTec and Phoenix and Gary can talk about safety on behalf of both segments.

Vince Forlenza

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

Glenn Reicin - Morgan Stanley

Okay. Very nice, thank you.

Gary Cohen

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

Glenn Reicin - Morgan Stanley

Yeah.

Gary Cohen

Okay. So where you asked, medical up 6, diagnostics up 8, company up 7, and international medical up 37, diagnostics up 23, company up 27.

Glenn Reicin - Morgan Stanley

Thank you very much.

Gary Cohen

Welcome.

Operator

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

Bruce Cranna - Leerink Swann

Hi, good morning.

Ed Ludwig

Good morning.

Bruce Cranna - Leerink Swann

John just simply, thinking about '08 and you're improving, I guess the assumption of improvement in EPS performance as the year goes on. Is this really a function of easier comps on oil or resin costs as the year goes on or is it, I guess a relative easing of startup cost as the year progresses?

John Considine

Well, as you know one thing I mean it's, we do -- the sales do build as we move on, some of the startup costs move behind us. As we move through, the gross margin does strengthen quarter-on-quarter as we start moving through the year. You do get rid of this, we do have that anomaly in well that's not really in earning I am just thinking of the optics. As we move forward we continue to get better leverage on our SG&A as we move forward, Bruce, that is very important. That's 70 basis points that we talk about for the entire year certainly helps us. LTI as I said was slightly, couple of pennies front loaded. So that will also impact U.S. So it is a kind of sled of things that gets better as we move forward throughout the quarters.

Bruce Cranna - Leerink Swann

Okay and then on TriPath just quickly, I guess a fairly decent number. Sales you were reporting there I assume is that just all liquid base pep or have you started showing some actual material amount of ASR sales from TriPath oncology?

Bill Kozy

No, this is Bill. Those are all liquid based pep revenues growing off the base of business that we acquired.

Bruce Cranna - Leerink Swann

Are you taking any share there?

Bill Kozy

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

Bruce Cranna - Leerink Swann

Okay, and can you guys where you part with the revenue number for GeneOhm for the year, I know it was small, but I am just curious?

John Considine

Yeah we said that the year just ended was about 20 as guided.

Ed Ludwig

21.

John Considine

21, okay so that was pretty close and next years 36 to 40, 35 to 40.

Bruce Cranna - Leerink Swann

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

John Considine

I'll let Bill to comment.

Bill Kozy

Sure on the first question I mean our comment on the Beckman thing that most of these instrument purchasing cycles are based over months and months of time. And I guess we would attribute the growth much more to the array of the product, the quality of the product, the service that we bring into customers and I don’t really know what we specifically capitalize on that but you heard the number, so its clear that we are gaining market share. We have been gaining market share against them for series of quarters. So I would like to think its maybe as doing some things very well.

Bruce Cranna - Leerink Swann

Okay, so that there it should be sustainable there?

Bill Kozy

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

Bruce Cranna - Leerink Swann

Okay and then on advanced bio processing can you cite for us?

Bill Kozy

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

Bruce Cranna - Leerink Swann

Great, thank you.

Operator

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

Peter Lawson - Thomas Weisel

Could you provide an update on GeneOhm sort of how many hospitals were dumped in contracts one and whether integrations been finished or not and when you are expecting to be breakeven?

Ed Ludwig

I'll ask Vince to elaborate on that.

Vince Forlenza

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

Peter Lawson - Thomas Weisel

When do you expect it to be breakeven?

Vince Forlenza

Couple of years.

Peter Lawson - Thomas Weisel

And then, one of you could just provide some color on the next generation instruments MRSA?

Ed Ludwig

Yeah sure. Well, let me just reiterate first with the menu, we do expect the StaphSR, that we did file back in the spring, we are in the last back and forth with the FDA we believe on that. So that should -- we are expecting that to be approved in the quarter and of course that's out. In Europe that is for the blood culture claim, we expect the nasal and wound assays to follow coming more likely in the second quarter and VanR and C. difficile, in Q2 and Q3. In terms of the instrument, we are moving ahead and we expect to meet our timeline to replace the Smart Cycler that contract is up in FY'08. Our target will be FDA submissions in the spring for the assays and so we will replace the Smart Cycler and we expect to be bringing forward improved sample handling at the same time.

Peter Lawson - Thomas Weisel

And then just generally on color for M&A. What are the metrics to look -- is it more of a technology play or do you think it will be more products in the general business, I guess that's for John or Ed.

Ed Ludwig

If you look at the way we went about recent acquisitions they were actually the outgrowth of strategic planning deliberations and discussion at the business unit level and also at the company level. You may recall that we now have an office of the CEO, which includes the three business Executive Vice Presidents plus John Hanson and John Considine and myself. And we are constantly engaging the business in discusses of strategic direction and growth and those discussions inevitably result in some opportunities, almost universally where your own internal growth can be supplemented on occasion with other additions.

And therefore, in both the molecular diagnostics space, coupled three years ago, those discussions eventuated in the acquisition of GeneOhm, that was something that we went looking for and found the business team and the strategy team known to be highly aligned with our own strategy and goals and it was a perfect fit. We we’re able to enter the market through that capability, expand our platform from our own amplification system SDA, it now include PCR and Vince just elaborated the menu expansion and the improvements in the instruments that are coming. So that’s a good example of a strategy driven acquisition and TriPath I think is another great example of business that we actually had a relationship with over numerous years; 6 years to 8 years at a minority investments, in the company dating back to those period of time. And it became obvious in working together that one plus one was going to make us something more than two. And so we were able to make that acquisition last year.

So these are good examples, the dilution in both these areas. Because they are new capabilities, there is some near-term dilution. But we’re able to offset them in the case of this year and as I said we should be able to explain these acquisitions very quickly. So they should therefore be strategically obvious. They should be capability driven and dilution, if any should be modest and short-lived. And I think you should expect future acquisitions to be accessed in the same basis.

Peter Lawson - Thomas Weisel

Do you think more of acquisitions are going to fall under the Bioscience division as oppose to the Diagnostics?

John Considine

We really can't tell. We have, we believe if you look out three, five years that the growth trajectories of all three of these segments is not similar, when we talk about seven to nine, next year, we are looking at an 8% to 9% growth, you will notice that all three segments are in that same ballpark and therefore also, we also know that acquisition opportunities are also resonate in the all three segments. So I wouldn’t emphasize one over the other.

Peter Lawson - Thomas Weisel

Okay. Thank you so much.

Operator

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

Larry Keusch - Goldman Sachs

Yeah, good morning guys.

Ed Ludwig

Hello.

Larry Keusch - Goldman Sachs

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

John Considine

About the quarter or the year or?

Larry Keusch - Goldman Sachs

The quarter.

John Considine

Well, let me just look at the quarter for one second here. The kind of those, the impact of moving the cost of TriPath and GeneOhm cost us about $6 million about 1.6%.

Larry Keusch - Goldman Sachs

Okay.

John Considine

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

Larry Keusch - Goldman Sachs

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

Ed Ludwig

I'll let Vince talk about the flu.

Vincent Forlenza

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

Larry Keusch - Goldman Sachs

Got you, okay.

Ed Ludwig

And it tells you where GeneOhm and TriPath ended, for the year I believe we came in pretty much on what we have been guiding.

Vincent Forlenza

Yeah, on TriPath essentially I am taking of course the capital out of it, but just it was about a penny of dilution for the year. GeneOhm it’s a little bit different deal because it doesn’t have the revenues yet and it’s both a product development as well as the market development efforts, so there is more spending on the SG&A line. To your point Ed though we come in about right where we -- what we thought we would maybe a penny or often it probably costing us overall about $0.09 or something like that.

Larry Keusch - Goldman Sachs

Okay, so if you are getting close on TriPath and GeneOhm obviously it will ramp it sales but sounds still like it will loose some money for couple of years. What should we be thinking just sort of ballpark next year that kind of in year '09 it's more like five or something like that that you are taking on in terms of dilution?

John Considine

It improves relative to this year.

Larry Keusch - Goldman Sachs

Right.

Vince Forlenza

Yeah it’s a little bit, you know because the market development of this -- it’s a lot more like I hate to bring what was the word of the evil empire Pharmaceuticals here but this is actually lot more like a Pharmaceutical where you have to drive that market first then you are going to spend investments spending or kind of the SG&A on these in particular on something like this is. Right now the world every papers full of it and there is great debate on for what the solution is for MRSA and AGI as a whole. So I think you are going to see more investment spending by us as we go through and continue to establish that.

Ed Ludwig

But the good news on this is that their investment spending sometimes shows up in a form of clinical trials and that’s a good thing, because that’s the last step before you get to the marketplace and the clinical trials for TriPath in particular are very intense because we are going through very claim so again directionally its really not a major force next year as we continue to marginally improve them but again the investments are benefiting the future periods.

Larry Keusch - Goldman Sachs

Okay, that’s really helpful, thanks guys.

Operator

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

Jason Weiss - Robert W. Baird

Hi, good morning. Can you give us a little insight as to how big you expect the market for the VRE and the C. Diff test to be with respect to MRSA, I mean are you anticipating that these will also be candidates for active surveillance?

Vince Forlenza

No they are not going to be, this is Vince. They are not going to be a screening tests because they are symptomatic. So with MRSA you have this colonization issue we had in the community and you want to do broad base screening these will be significantly smaller markets in terms of total test because there'll be diagnostic markets not screening markets. So it tend to size but very important assays for the hospital C. Diff is also a very deadly bug and is actually growing faster in the hospitals than MRSA is but having said that you are not going to screen a broad general populations.

Jason Weiss - Robert W. Baird

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

Ed Ludwig

Well its going to be sensitivity and timely result its going to be those two things its clearly going to be the two benefits for the hospital.

Jason Weiss - Robert W. Baird

Okay, great. Thanks for taking my questions.

John Considine

Okay.

Operator

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

Jeffrey Frelick - Lazard Capital

Yes first question for Gary and then a quick follow-up for Vince. So Gary maybe help me understand a little bit, so the gross margin benefit kind of lags with the Nexiva product line until we see some I guess automated manufacturing really kick in, when do we see that benefit and then kind of second question to that is the Japanese launch for Nexiva any timing on that?

Gary Cohen

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

Jeffrey Frelick - Lazard Capital

Okay. Thanks, and just for Vince. I think couple of quarters ago you guys have talked about some major IDNs undergoing some trials with BD GeneOhm, just want to know any update there how they are progressing, or the ideas that they are buying one GeneOhm for the core lab is from its multiple locations or do we expect several purchases under the IDN?

Vincent Forlenza

It's hard for me to answer that’s off the top of my head but I would say ultimately large integrated systems, you are certainly going to see them doing systems in the core labs. Whether or not they put some systems out in satellite areas that’s still a possibility. But certainly what's driving our growth is systems in the core lab and often backend, with multiple life cycle or so.

Jeffrey Frelick - Lazard Capital

Okay, great. Thanks.

Operator

And there are no further questions at this time, please continue.

Ed Ludwig

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

Operator

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using AT&T executive teleconference service, and you may now disconnect.

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