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CR Bard (NYSE:BCR)

Q4 2012 Earnings Call

January 31, 2013 4:30 pm ET

Executives

Timothy M. Ring - Chairman, Chief Executive Officer and Chairman of Executive Committee

John H. Weiland - President, Chief Operating Officer and Director

John A. DeFord - Senior Vice President of Science Technology & Clinical Affairs

Christopher S. Holland - Chief Financial Officer and Senior Vice President

Analysts

Michael Matson - Mizuho Securities USA Inc., Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Matthew Taylor - Barclays Capital, Research Division

David L. Turkaly - JMP Securities LLC, Research Division

Jonathan J. Palmer - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the C. R. Bard Inc. Fourth Quarter 2012 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for future on-demand replay through the Bard website.

Today's presentation will be hosted by Timothy M. Ring, Chairman and Chief Executive Officer; along with John H. Weiland, President and Chief Operating Officer; and Christopher S. Holland, Senior Vice President and Chief Financial Officer. Also in attendance today are John A. DeFord, Senior Vice President, Science, Technology and Clinical Affairs; and Todd W. Garner, Vice President, Investor Relations.

Today, Bard's management will discuss some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on management's current expectations including multiyear projections of revenue, earnings per share and other financial measures, which include certain assumptions regarding the timing of financial resolution of Bard's patent infringement suit against Gore. The accuracy of these statements are necessarily subject to risks and uncertainties. These statements are not historical in nature and use words such as anticipate, estimate, expect, project, intend, forecast, plan, believes and other words of similar meaning.

Many factors may cause actual results to differ materially from anticipated results including product development; sales efforts; income tax matters; the outcome of contingencies such as legal proceedings, including with respect to the Gore matters; share repurchases; acquisitions; and other economic business, competitive and regulatory factors. Please refer to the cautionary statement regarding forward-looking information in Bard's September 30, 2012, 10-Q and the information under the caption Risk Factors in the company's 2011 10-K, including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

During the call, references will be made to certain non-GAAP measures, which management believes provides an additional and meaningful assessment of the core operating performance of the company and its individual product categories. Reconciliations of non-GAAP measures to the most comparable GAAP measures with respect to the company's historical financial results are provided in Bard's earnings press release and on the company's website at www.crbard.com. All information that is not historical is given only as of January 31, 2013, and the company undertakes no responsibility to update any information. Unless otherwise noted, all comparisons are to the prior-year period.

At this time, I will turn the call over to Mr. Timothy Ring. Please go ahead.

Timothy M. Ring

Thank you. Welcome to Bard's Fourth Quarter 2012 Earnings Conference Call. I'd like to thank all of you for taking the time to join us today.

As we told you back in October, going forward, we will also provide our annual financial guidance in conjunction with this call each year. I would expect the presentation portion of the call to last about 40 minutes.

The agenda today will go as follows: I'll begin with an overview of the results for the fourth quarter. John Weiland, our President and COO, will review fourth quarter product line revenue. John DeFord, our Senior VP, Science, Technology and Clinical Affairs, will give you an update on our product development pipeline. And Chris Holland, our Senior VP and CFO, will review the fourth quarter income statement and balance sheet and provide a multiyear look at our financial expectations and some insight into our investment strategy going forward. And then finally we'll close with Q&A.

Looking at the fourth quarter, net sales totaled $762.6 million, that's up 1% over Q4 last year on an as-reported basis and up 2% on a constant-currency basis. The currency impact for the quarter versus 2011 Q4 was unfavorable by about 60 basis points. The impact of acquisitions contributed approximately 1 percentage point of growth for the quarter.

Net sales for the full year 2012 were $2.958 billion, that's up 2% as reported and 3% on a constant-currency basis. Net income for the fourth quarter was $128.2 million, diluted earnings per share were $1.52. We did take a restructuring charge of $19 million as we continue to rationalize our resources towards markets with faster growth opportunities. Excluding this and other items that affected the comparability results between periods, which Chris will cover later, Q4 2012 net income and diluted earnings per share were $143.9 million and $1.70, down 3% and flat, respectively.

Full year 2012 net income was $530.1 million, and diluted earnings per share were $6.16. Excluding items again that affect comparability between periods, full year 2012 net income was $565.3 million, and diluted earnings per share were $6.57, down 1% and 3%, respectively, over 2011.

Looking at Q4 revenue growth geographically compared to the prior year, on a constant-currency basis, net sales in the U.S. declined 1%. And internationally, we grew 8%, with Europe up 3% and Japan up 5%. The revenues from our emerging markets grew 33% over the prior-year period and now represents 7% of our total revenue in Q4. Our teams in these markets continue to execute very well. We've established a strong foundation over the past few years and we continue to build our infrastructure and increase penetration in this rapidly expanding markets.

On the business development front, as we discussed in our third quarter call, during the fourth quarter we acquired Neomend in the surgical sealant space. We also closed a couple of small technology deals that will improve our portfolio in the inguinal hernia space.

Looking back on 2012, the reduced growth rates in the U.S. caused us to come in slightly below our original revenue guidance for the year. Despite that and absorbing the additional dilution from the Neomend acquisition, we were still able to meet our adjusted EPS guidance for the year, albeit on the low end of the range. Keeping our commitments to shareholders is very important to us, always has been.

While the pressures of slow growth challenge med tech in the near term, making the right decisions today to put you in the right position tomorrow will be critical. The potential Gore award would provide us significant resources for investment, and I can tell you that we are in investment mode. While our current growth profile is not sufficient to achieve the objectives we have for ourselves, we think we have the opportunity today to change the game to our benefit for many years to come.

This isn't the first time this team has ventured to change the trajectory of the business. Ten years ago, because of the success of our consolidation in manufacturing, we found ourselves with investment choices to make. We pulled certain levers based on the opportunities at that time and set the business on a very positive path. Today, the environment is different than it was then, but I would suggest that the levers available to us today may be even more substantial than they were back then.

The emerging market lever was not like it is today. The patient demographics were not nearly as favorable for us then as they are today. And back then, there was no potential influx of cash coming from a patent award. In fact, we were just starting our claim against Gore at that point.

What hasn't changed is the importance of innovation. Today, innovation's required to provide clinically effective outcomes with a heavier weighting toward economic value that addresses the need of a global health care system under enormous cost pressure. So while price may get you in the game, it doesn't win the game by itself. We continue to believe that companies that can develop clinically effective products with high quality at a cost that benefits the global system will be rewarded with significant volumes. I can tell you our organization is strong and has the capacity to do more. We've built a solid engine in emerging markets and are ready for more fuel. Our manufacturing capabilities and efficiencies have never been better. Our internal clinical function was just in its infancy 10 years ago as we relied almost entirely on outside experts. Today it's the core competency for us, well suited for these times, and you'll hear more details on this from John DeFord in a few minutes.

We've dramatically improved our quality processes over the years. Quality was already a good strength of ours 10 years ago, and we believe it's even more so today. Our global regulatory teams position us well to take advantage of the opportunities in front of us. And our ability to identify, execute and integrate acquisitions is better than it's ever been with seasoned teams across the entire organization and businesses. In fact, when we look at the leverage we have today, the size of the opportunities and our ability to execute, we're very excited about the future. We have decided that now is the time to significantly invest to change the growth trajectory of the business, and we believe we've got the financial flexibility to do it in a manner very attractive to shareholders. Chris will give you more details when he lays out our financial guidance. I can tell you that we measure success here over the long term and we're very excited about our plan and we're confident in our ability to execute.

With that, let me turn you over to John Weiland for a review of our fourth quarter product line revenue.

John H. Weiland

Good afternoon, everyone, and before I start, as usual, I'll be giving all percentage growth data in comparison to prior-year period on a constant-currency basis, unless otherwise noted.

So let's start with vascular. Total net sales in this category for the quarter were $212 million, a decrease of 2% in the fourth quarter of 2011. Our U.S. business was down 6% for the quarter, while internationally we grew 2%. Electrophysiology sales were down 2% this quarter as the EP disposables were down 4% and our EP Lab systems were up 1%.

Sales in our vascular graft category were up 4% in the fourth quarter, better than recent trends due to large OEM orders. Our endovascular business decreased 3% in the fourth quarter. And within endovascular, our biopsy line was up 1%, continuing the level trajectory we've seen throughout 2012. Our peripheral PTA products were up 1% this quarter, as we anniversaried the ClearStream acquisition earlier in the quarter.

Sales in our vena cava filter line were down 12% in the fourth quarter. The sales dollars have been essentially flat over the last 4 quarters with the step down in Q1 of 2012, so Q4 '11 was a relatively tough comp.

Our stent business was down 9% in Q4. The biggest driver of the decline in the quarter was from our covered stent product line. And based on the IMS data through Q3, our share has stayed consistent. So it appears that at this point that the market volumes were depressed in Q4. We're not aware of any competitive catalyst here, and we'll let you know if we have any more information, but as well the comps were difficult also.

LifeStent was down 2% in the quarter. LifeStent volumes have held up well, with several competitors coming on label in the SFA this year. But we did see some price erosion in the United States.

Let's move to urology. Total net sales were $195.8 million, which is up 3% versus Q4 of last year on both a constant-currency and as-reported basis. The United States business was down 2%, while internationally we were up 14%, driven by 92% growth in the emerging markets. The targeted temperature management products acquired in mid-November 2011 grew over 10% sequentially from the third quarter to the fourth quarter.

Our basic drainage business was up 3% in Q4, driven by another strong quarter in Japan and 70% growth in emerging markets. The United States business was down 1%.

I.C. Foleys were down 5% globally, with the United States down 9%. The market forces in the United States continue to work against us here.

Our continence business, which at this point represents less than 10% of total urology sales, was down 5% in the fourth quarter. Sales in urological specialties were down 1%, with brachytherapy down 18% for the quarter due to fewer prostate screenings as we discussed last quarter. And finally, our StatLock catheter stabilization line was down 5% this quarter.

Now for oncology. Total net sales in this category were $210 million, an increase of 5% over Q4 last year on both a constant-currency and as-reported basis. Net sales in the United States were up 2%, while outside the United States sales were up 13%. Our port line was up 2% versus Q4 last year, consistent with recent trends.

PICC revenue growth was 6% in the fourth quarter, with 43% growth in emerging markets. PICCs are our largest single product line in emerging markets, and we think they also represent a significant opportunity for us going forward. We're just getting started developing these markets, and we have a long way to go.

Related to our Sherlock 3CG Tip Confirmation technology, a couple of quarters ago, we told you that about 50% of the converted customers have already eliminated X-ray as part of their protocol. That number is now 70% and growing, representing approximately $29 million in potential savings in the health care system. The adoption of this technology continues at a rapid rate, and we don't see any slowing of our momentum.

Our Vascular Access ultrasound product line was up 8% this quarter. We are pleased with our growing presence in this market as the installed base of these systems is an important factor in our ability to help expand the placement of PICCs by nurses at the bedside. And to complete the results in oncology, our dialysis catheter business was up 5% in Q4.

So now we'll finish with the surgical specialties. Net sales in this category were $121.3 million in the fourth quarter, up 4% on both an as-reported and a constant-currency basis. United States sales increased 4%, while international sales were up 6%. 400 basis points of the global growth came from sales from the surgical sealant products acquired during the quarter.

Our soft tissue repair business grew 1% overall for the quarter. Our total synthetic hernia products were up 6% versus Q4 last year, with our synthetic ventral products growing 9% this quarter.

Our natural tissue products continue to experience market pressures, declining 10% in Q4. While our allograft product continues to see growth in the breast application, we're seeing a preference for porcine products in hernia applications.

Our fixation business was down 9% in Q4, after 5 straight quarters of double-digit declines. Closing out the surgical category, our Performance Irrigation business was down 7% in Q4.

This concludes our product line revenue discussion. I'll now turn you over to John DeFord.

John A. DeFord

Thanks, John, and good afternoon. I'll try to wrap up the 2012 portfolio today with a brief update on our clinical trials, the projects we've been tracking in the pipeline and rollout a few new projects for 2013.

In 2012, we started the year with 53 active clinical trials. To give you some historical perspective, in 2004 we had just 4, and 5 years ago we were at 15. In 2013, we expect to have close to 90 studies, demonstrating our increased investment, capacity and shift toward greater clinical and economic evidence surrounding our products. In 2012, we launched about 40 organic new products along with a handful of products we acquired over the course of the year.

Here's an update on a few projects in the pipeline starting with the ENCOMPASS atrial fibrillation ablation technology. We completed enrollment in the feasibility study in the back half of 2012 and we'll follow these patients for 1 year. We're compiling follow-up data to support our anticipated filing for the CE mark this summer. We also anticipate submission of the results to FDA after our 6-month follow-up visit later in the year in support of our pivotal U.S. IDE.

Moving to stent grafts, we've reached our enrollment target in the clinical study of the FLUENCY PLUS family for the AV access in-stent restenosis indication. We'll follow these patients for 6 months and plan to submit a clinical module of this PMA within Q4 of this year and launch upon approval, expected in the back half of 2014.

In breast biopsy, we anticipate launching in this quarter our new implanted breast tissue marker, the SenoMark Ultra. This new marker has a flexible applicator designed for deployment with all vacuum-assisted biopsy systems. It's designed to minimize migration and its material composition supports permanent, clear visualization under ultrasound, MR or X-ray imaging.

In filters, we also recently completed enrollment and the bulk of our follow-up in our next-generation Denali Vena Cava Filter clinical study. There are 2 arms to this study, 1 following patients with permanent implants and 1 following patients with retrieved devices. We anticipate completing the required follow-up and submitting the 510(k) with clinical data around the end of the quarter. Launch will depend upon FDA concurrence, which we think will happen toward the end of the year.

Turning to urology, we're completing the 510(k) testing and anticipate submitting for U.S. concurrence for the COMFORT GLIDE hydrophilic intermittent catheter later this quarter, with launch anticipated around midyear. The COMFORT GLIDE incorporates our new synthetic latex material, providing superior material properties for patient comfort without the proteins natural rubber contains that can cause allergic reactions.

Moving to oncology, in ports we're beginning the launch of our new PowerPort Clearview Slim family of low artifact MRI-safe implants. We're also on track to complete a dual version anticipated to launch around midyear. These ports build upon our 2012 launch of the Clearview platform that offers significantly reduced MR and CT imaging artifact, thereby reducing the effect of port placement on the interpretation of diagnostic scans and also helps to reduce the attenuation of radiation delivered therapeutically in the treatment of underlying disease.

In imaging, we anticipate the launch of the new Site-Rite 7 ultrasound platform in Q3 in both Europe and the U.S.

Moving to surgery. We're in the early rollout of our new resorbable Phasix Plug configuration for inguinal hernia repair. This design builds upon our recently launched Phasix flat sheet platform and is designed to provide the look, feel and function of our standard polypropylene-based products with equivalent strength during healing and then resorb leaving the patient with no foreign material in the body after about a year.

We also continue to build on our award-winning eco-mesh placement system. We recently completed a study that reinforced the economic benefits of accuracy, time savings and improved OR efficiency for this product, and we have additional product enhancements planned for the second half of the year.

I know we've gone through this pretty quickly, but before I turn you over to Chris, I'd like to extend to you an invitation to our Annual Analyst Meeting where we'll review our new product pipeline in further detail. The meeting will be at the New York Palace Hotel on June 3, beginning at 4:30 p.m. For those that can't attend in person, the meeting will be available by webcast.

Now let me turn you over to Chris.

Christopher S. Holland

Thanks, John. Let me start by covering the items that affect the comparability of our results between periods.

As Tim mentioned, we took a restructuring charge of $19 million pretax in the fourth quarter. We also had acquisition-related items of $3.1 million related primarily to the deals closed in Q4. These items are detailed in the notes to the financial statements and the reconciliation accompanying our Q4 earnings press release.

Now let's go through the statement of income for the quarter. Gross profit was $475 million in Q4 and $475.1 million on an adjusted basis or 62.3% of sales, down only 20 basis points from the prior year despite new amortization of 50 basis points. Year-over-year price comparisons stayed fairly consistent with the recent trend, coming in at 130 basis points of headwind on the revenue line and about 50 basis points in GP this quarter. For the full year, that brings adjusted gross profit as a percentage of sales to 62% even, down only 10 basis points from 2011 despite about 70 basis points from new amortization and 50 basis points of price headwinds. This exceeded the top end of our original annual guidance despite lower volumes and more difficult headwinds than we had expected. Our operations team had a stellar performance this year, driving 80 basis points of improvement to GP. The efficiency and quality of our manufacturing organization has really become a strong core competency for us, and we expect that to continue.

SG&A expenses were $213 million for the quarter or 27.9% of sales. On an adjusted basis, SG&A was $212.2 million or 27.8% of sales, 20 basis points below the prior-year period, which is a considerable achievement with 90 basis points added from recent acquisitions and 40 basis points added from incremental investments in emerging markets. So we saw approximately 150 basis points of benefit from our restructuring activities as well as our across-the-board expense control.

For the full year of 2012, that brings adjusted SG&A as a percentage of sales to 27.6%, an increase of 40 basis points over the prior year, slightly better than our original annual guidance. We continue to shift SG&A infrastructure from slower growing markets to faster growing markets, and we have a disciplined process of rationalizing our resources based on the growth opportunities in front of us.

R&D expenditures totaled $52.7 million for the fourth quarter or 6.9% of sales. On an adjusted basis, R&D expense was $50.8 million or 6.7% of sales, an increase of 90 basis points over the prior-year period, representing the increased investment from our acquired technology platforms of Lutonix, Medivance and Neomend.

Interest expense was $10.7 million for the fourth quarter as our debt increased in Q4 related to our bond offering completed in late October. Other income and expense was $21.3 million of expense for the fourth quarter. On an adjusted basis, it was $2 million of expense driven mainly by foreign exchange.

The effective tax rate for the quarter was 27.7%. On an adjusted basis, it was 27.8%, which took us to 27.7% on a full-year adjusted basis.

All-in then, EPS totaled $1.70 for Q4, excluding items affecting comparability, bringing us to a 3% EPS growth rate for the full year on a same basis, which is within our original annual guidance once again despite the pressure on the sales line and the absorption of the Neomend dilution. We repurchased roughly 941,000 shares of the company stock in Q4.

The balance sheet as of December 31, 2012, reflects cash, restricted cash and short-term investments of $921.3 million versus $836.6 million at September 30. For the full year, our AR days were down 1.7 days and inventory days were up 0.4 days, driven by currency. Capital expenditures totaled $17.1 million for the quarter and $72.6 million for the year.

On the liability side, with the addition of the bond offering, total debt was $1.410 billion as of December 31 versus $1.293 billion at September 30. Debt to total capital at the end of the fourth quarter was about 42%, and total shareholder investment was $1.926 billion at December 31, 2012.

So with 2012 now in the books, let's turn to financial guidance. We're in the process of posting slides in a PDF onto the front page of our Investor Relations section of our website that should help you follow along with my comments. For those of you who are connected to this call through our website, you can also find the slides in the Downloads tab, which is at the top of the webcast player.

As Tim said, our current growth profile is not sufficient to achieve the objectives we have for ourselves, and we don't have any expectation that our more developed markets will materially rebound on their own anytime soon. That said, we are executing a strategy to return to faster growth that we're ready to share with you today. We have significant opportunity in front of us and we know what to do and we know how to do it. We also find ourselves in an unprecedented position with the potential billion dollars expected to come our way through the resolution of the Gore matter.

Starting with the bottoms-up process that identified well over 100 strategic investment opportunities, we've spent the better part of the last year selecting and validating the projects that we believe will enable us to return to above-market top and bottom line growth. And we've already begun executing this multiyear investment plan. This detailed and thorough plan includes over 40 discrete projects that we believe the market will embrace and that we can execute.

Part of the selection process included us taking a careful look at the capacity of the organization and what we can productively do simultaneously. Our decentralized structure allows us to execute on multiple fronts at the same time. And the plan includes using existing external partners to help us accelerate the impact of these programs as early as possible.

As you can appreciate, for competitive reasons, we won't be discussing specific programs and initiatives but each program has been risk-adjusted for technical, regulatory and commercial considerations, and we are confident in our plan to deliver the returns and time lines that we've included in our guidance today.

For those of you who are looking at the presentation slides on our website, I'm now moving to Slide #4. Our focus and how we will measure success is sustained above-market long-term growth and profitability. Because this is a multiyear plan, we will give you a multiyear look at financial guidance.

Our total 2013 investment equates to roughly half of the estimated annual royalty from Gore. But because we don't expect to recognize royalty revenue until later this year, calendar year 2013 for us becomes very much a transition year as we are in investment mode. The first full year of benefit from the Gore royalties is then clearly evident in 2014. In 2015, we expect the results of this plan, in addition to the anticipated Lutonix drug-coated balloon launch in the U.S., to help us once again enjoy 200 to 300 basis points of revenue growth above the market along with double-digit adjusted EPS growth on a sustainable basis.

Now let's take a closer look at our plan on Slide 5. The investments fall into 3 major categories. First, accelerating our expansion into faster growing geographies where we've built a strong foundation and we've demonstrated the ability to execute. Secondly, dramatically increasing our investment in R&D, mostly focused on new market categories but also strengthening our current portfolio. And lastly, acquiring growth platforms designed to change the mix of the portfolio towards faster, sustainable, long-term growth.

Consistent with our historical use of cash flow and with our communicated intended use of the projected Gore proceeds, we plan to return approximately half of the initial after-tax accretion from the award to shareholders. At this time, it's not our intention to engage in accelerated share repurchase program, but we do intend to actively use approximately half of the after-tax cash bolus to buy back shares in the near term once the cash is received. We expect to deploy the balance of the cash over time as opportunities present for strategic acquisitions or for additional share buybacks. The priority is strategic use in order to drive sustained, faster revenue growth.

We want to be very clear on what is included in our assumptions on the timing and amounts of the Gore proceeds. This is laid out on Slides 6 and 7. As you know, the U.S. Supreme Court denied Gore's petition for cert on the infringement part of the case. Through December 31, 2012, that portion of the judgment amount is approximately $785 million, and the quarterly royalty rate has recently been between approximately $33 million and $36 million per quarter. While the patent is valid through August 2019, the value of future royalty streams may be more or less than recent experience, depending on Gore's future sales volume of infringing products.

We have filed briefs with the U.S. District Court in Arizona requesting the immediate release of those funds related to infringement. As far as the timing of the release of funds, we don't know how quickly the district judge will rule on the matter, and we would expect Gore to appeal any decision in our favor and seek a stay of any release of funds. We can't be certain how long these proceedings will take, but we believe it's reasonable at this juncture to include 6 months of royalties in our P&L for 2013 and to assume that our share repurchase activity would increase starting in Q3 of 2013. We recognize that the receipt of funds could be sooner or later, but we believe this is a reasonable assumption for our model.

Now it's important for you to understand the accounting for these royalty payments once the infringement award is released to us. Because we can't know what the quarterly royalty will be until Gore pays it to us following the completion of each calendar quarter, we would record the payments on a cash basis in the month they are received.

The court requires payment within 30 days after the end of each quarter. So to recognize 2 quarterly payments in 2013, we would need to have the release of funds before the second quarter payment is made in late July. Also, we need to make it clear that, at this point, we have not included in our model any of the $206 million related to willfulness. We like our case on this issue, and we plan to pursue this money aggressively. But for purposes of today's financial guidance, that money is not included. We have filed our written briefs with the court on this issue, and we await the district judge's decision on how and when the willfulness part of the case will move forward.

And finally, as far as the numbers go, we are assuming that 2014 would be the first full year of royalty revenue, with the amount expected to be between $130 million and $140 million. As we said, the amount of royalty in subsequent years is difficult to predict. Our current plan is to invest roughly half of the royalty benefit over the first several years in programs that we believe will drive incremental revenue growth over subsequent years that should more than offset any potential reduction in future royalty payments.

Now moving to Slide 8, let's look at the mix of investments and what kind of returns we expect. About 40% of the planned investment relates to sales and marketing initiatives largely focused on emerging markets. Over the last few years, we've invested significantly in these markets and our teams have executed above our expectations. We are confident now that we can accelerate that growth on the strong foundation that we have built. The projects are slated to add approximately 300 physicians in emerging markets in 2013. These investments are designed to accelerate penetration of international emerging markets with infrastructure and product lines that we believe can win and sustain significant growth. These investments have an average estimated ROI of well over 100%, with average expected payback in less than 2 years. We've demonstrated the ability to execute here, and we have a lot of room in front of us in these markets.

For example, John Weiland talked about our success with PICCs here, yet we're still just at the very beginning. We see the opportunity to pull forward investments to accelerate our market development efforts. In the aggregate, the returns from these projects will fund more investments in the future. Bottom line, we're moving quickly to aggressively shift the mix of our portfolio to faster growing geographies.

The R&D and clinical projects represent about 60% of the planned investment pool. The returns from these projects, as with the geographic investments we just discussed, have all been risk-adjusted for technical, regulatory and commercial considerations. While our teams are focused on driving higher returns than we are communicating externally, we feel comfortable telling you that these investments have an average estimated ROI of over 50% and an expected average payback between 2 and 3 years.

As Slide 9 depicts, the majority of these investments are related to new product entry into new market categories that we are not in today, including the studies to support those products. This would include our existing technology that can be applied to new areas we're not currently in. We're going to hold back further details at this point for obvious competitive reasons.

About 1/4 of the R&D investment will go to enhancing our core product portfolios that we have today. In recent years, we've invested heavily in improving our clinical capacity, as John DeFord just outlined for you, and bolstering our regulatory and quality processes for new product development. We've also bought some new platforms that have come with significant R&D clinical efforts. But these additional investments have diverted resources from our internal organic R&D efforts. At the same time, the hurdles have gotten higher at the FDA and getting new products into hospitals has become more difficult. So we've identified specific areas where we believe that an infusion of investment into our core platforms should improve our competitive profile and help us maintain and improve our leadership position into the future. For example, we're accelerating a number of programs in our pipeline such as a new angioplasty platform and a more rapid expansion of some of our new hernia mesh technologies.

After new product entries and increasing our investment in core R&D, we plan to focus the remainder of the R&D portion of the investment on enhancing our clinical and economic evidence for existing devices and expanding international registrations at a faster pace. For example, we intend to accelerate the studies in the targeted temperature management space to expand indications sooner and to provide additional effectiveness data.

So if you're following the slides, Page 10 lays out how our strategy and plans translate into our financial guidance. All of this includes our assumptions on Gore and excludes the impact of the other items that affects comparability.

For revenue, we see 2013 constant currency growth between 2% and 5%. That includes between $60 million and $70 million coming from Gore royalties recognized in the second half of the year. That number could be higher or lower, but the timing of the receipt of the cash does not affect our investment plan for 2013.

As far as constant currency revenue growth goes in our 4 disease state categories, in 2013, we expect vascular revenue growth to be between minus 2% and positive 1%, excluding any benefit from the Gore royalties. The first part of the year in particular we'll be up against difficult comps as we benefited from a competitor stent quality issue in the first half of 2012.

In urology, we expect revenue growth to be between minus 1% and positive 2% as the relative weight of the legacy products at flattish growth overshadows the benefit we're seeing from the anniversaried targeted temperature management products. We expect our oncology business to grow between 2% and 5% constant currency in 2013. This business has held up the best for us in this difficult environment, and PICCs specifically represent perhaps our largest single product opportunity in international markets in the near term.

And finally, we expect our surgical specialties business to grow between 4% and 7%, which includes the benefit of our surgical sealants products from the recent Neomend acquisition.

Moving to 2014, we expect to have a full calendar year of royalty revenue from Gore and we expect revenue growth in the mid-single digits overall. In 2015, we expect to launch our Lutonix drug-coated balloon in the U.S. and our investments start returning in a manner that we believe will allow us to grow revenue between 200 and 300 basis points above the underlying market growth. That far out, it's a bit difficult to project a specific number but a key measure of success will be 200 to 300 basis points of sustainable growth above the market.

We expect our gross margin percent in 2013 to improve between 0 and 30 basis points over our 2012 level including between 70 and 90 basis points of improvement due to the estimated royalty and 50 basis points of favorability from our underlying cost improvements. Price is estimated to be between 40 and 50 basis points of headwind, and 20 basis points of headwind is coming from amortization of deals closed in the last 12 months. We estimate FX to be approximately 50 basis points of headwind and we expect mix to be about neutral.

Going forward, we expect continued organic improvements in our underlying GP. While changes in the royalty and factors like price, FX and amortization will impact the total number, we expect our underlying cost engine and mix to continue to improve.

We expect SG&A as a percentage of sales to step up between 140 and 160 basis points in 2013. 130 basis points is due to the full year impact of the new medical device excise tax, which we project to be approximately $40 million for us. The remainder represents the investments we're making in faster-growing markets partly offset by leverage in slower-growing geographies.

Going forward, excluding any impact from future acquisitions, we would expect SG&A to moderate downward as a percentage of sales, consistent with our historical pattern. We expect R&D for 2013 and 2014 to be above 8% as a percentage of sales, and we expect the returns from these incremental projects to help sustain an increased investment going forward.

From an operating margin perspective, 2013 will see a step down due to the medical device excise tax and our planned investment spending. But we project that by 2015, our operating margin will be at or above the 2012 level and on a trajectory of improvement. We expect interest expense in 2013 to be approximately $45 million, the increase due to the bond offering in October.

We expect the effective tax rate to improve by 100 to 120 basis points in 2013, including the R&D tax credit, and we think that tax rates should continue to decline in 2014 and 2015 as our mix of profit outside the U.S. increases. That all adds up to adjusted earnings per share in 2013 between $6.25 and $6.30, including our assumption of Gore royalties but excluding any other items that affect comparability. Again, if the royalty comes in sooner, we'll do better. If it comes in later, we'll do worse. The spending plan remains unchanged, so you can do the math on the drop-through of the revenue pretty easily. That timing also affects the quarter in which we start to buy back incremental shares with the Gore proceeds, so share count would also be impacted in either direction.

Due to the timing of our investments and the difficult comps faced by certain businesses, including fewer selling days in the U.S. and Europe, we're forecasting Q1 2013 with adjusted EPS between $1.40 and $1.44 per share on flattish sales growth, and a step down in our GP due to timing issues.

For 2014, we expected adjusted EPS growth to be between 22% and 25%, which assumes a full year of royalty revenue from Gore. In 2015, we expect the returns from our investment plan, together with the anticipated U.S. launch of the Lutonix drug-coated balloon, to drive sustainable double-digit adjusted EPS growth.

Our investment plan also comes with a slight uptick in capital expenditures in 2013, which we expect to total between $85 million and $95 million. And we expect operating cash flow to be in the $600 million range in 2013, exclusive of any proceeds from Gore bolus or royalty.

So thanks for bearing with me through that long commentary. And with that, I'll turn the call back over to Tim.

Timothy M. Ring

Thanks, Chris. So having said that, while 2013 is a transition year for us, we believe that the investment plan we're executing today will move us back to delivering above-market top and bottom line growth on a sustainable basis. We measure success over the long term here, and we're very excited about the future.

That does conclude the formal part of the presentation. Let me now turn you back to the moderator to facilitate Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from Michael Matson with Mizuho Securities.

Michael Matson - Mizuho Securities USA Inc., Research Division

I guess this is a lot of information to absorb here. I guess my first question would just be with regard to the emerging markets. What areas are you most focused in, in terms of investing in, which countries, which products, et cetera? And where do you think you can take that as a percentage of your overall sales by, say, the 2015 time frame?

Timothy M. Ring

Well, we -- the emerging markets for us fundamentally would exclude everything except U.S., Europe, Japan, Canada and Australia. That's pretty much what we throw in there. Our focus has been China, we've talked a lot about that. We've made a lot of investment in Brazil and a few other countries in Latin America. The Eastern European markets are starting to -- we're investing more there. The other Asian markets, we're investing heavily there, so we've been doing well there. We're kind of doubling down there. When you look at the execution aspect of it, we've done a very good job. It's really a fairly fundamental business model in the sense that you get the products registered, you get -- you hire employees, very good employees, it's critical in that part of the world, retention is key, and then training both the employees and then the clinical community on the technologies. It's really that fundamental, and we're very focused on that. It's 7% of total revenue growth as of the end of fourth quarter. We mentioned the increase in heads, which is more than 50% from where we are, so kind of that summarizes that at the top line.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then with regard to the R&D expansion and the new product entry, how far astray from the current markets that you're in are you willing to go? And would it be possible that we'd see you at a fourth -- or sorry, a fifth business segment? Or would it really just be more incremental to the existing segments that you're already in?

John A. DeFord

Michael, John DeFord here. Look, we don't rule anything out. Obviously, getting into an entirely new segment with a, say, new leg to the stool would probably require more than just internal R&D to be effective with our strategic intent of product leadership. That said, we think we've got some really exciting technologies that we can leverage and also some very near adjacencies, and some that are -- where we have some degree of leverage or synergy that we could go after. So we think that these are very executable kind of areas that aren't cannibalizing our existing products and give us a new footprint and a broader footprint within our existing businesses.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then my final question is just around the clinical trials. I think you said that you're going to go from 53 clinical trials this year to 90 in 2013. So I guess I'm just wondering kind of what the breakdown there is between trials that are being done more for marketing purposes and then trials that are being done for regulatory reasons to get product on a particular market somewhere?

John A. DeFord

Well, so I would characterize these -- and what I said was we started 2012 with 53. Over the course of the year, we added. So it's not like we're going from 53 and suddenly flipping the switch and having 90. We've been building that up over the course of the year. And I'd say that we are -- we've got about 40% of our studies are for either new indications or regulatory approvals and then we have certainly a significant number of our studies, in that sort of 50%, 60% range, that are providing additional marketing data and economic data that we think is important. And so I think that would be a reasonable way to kind of break this out.

Operator

Our next question is from the line of Joanne Wuensch with BMO Capital Markets.

Joanne K. Wuensch - BMO Capital Markets U.S.

I'm sorry, I'm still absorbing all these information, but let me just sort of get big picture in here. When you laid all of these out, and clearly you had more than enough time to think about how to spend your money, how did you think about each one of the divisions, the vascular versus urology versus surgical and oncology?

Timothy M. Ring

Sure. I'll take that. We start with growth. We want to grow the business at a faster rate than we are today, so we look really where the best opportunities are. And when you look at, for example, the SG&A shift that we've alluded to a couple of times during the presentation, we're transitioning to faster-growing market segments geographically, and we're going to do the same product-wise. So that was really the primary factor that we used along with other things like sustainability of the growth. We don't want something that spikes for a year and is not sustainable over time. So we factored that in as well, but growth and faster growth was really the primary thing that we looked at.

John A. DeFord

Right. And Joanne, just to add another note to that. As Tim said, we didn't try to apportion to each division a certain number. We looked at all the opportunities, and as Chris said, there were over 100 of them that we looked at and selected what we thought were the best ones that were executable and within our capabilities that we could bring to bear as quickly as possible.

Christopher S. Holland

And with a focus on returns, right? So obviously the ROI is an important factor as well.

Joanne K. Wuensch - BMO Capital Markets U.S.

And then my follow-up is, unless I missed it somewhere in here, in terms of redeployment of capital, I didn't hear you say things like changing your dividend policy. I did hear you say you weren't going to do on ASR, but I'm not sure what exactly your plans are for share repurchases?

Christopher S. Holland

Yes, so with respect to the Gore bolus, what we have said is that we would return in short order, not through an ASR but in short order through the open market, half of the after-tax proceeds of the bolus once we receive it, which we've currently said we are assuming is in Q3 of 2013. At this point, we would plan on retaining the other half of the after-tax bolus proceeds to invest in strategic opportunities, acquisitions and/or additional buybacks depending on our acquisition opportunities. The ordinary course level of repurchase activity, you would anticipate us to continue to plan on doing, but always subject to the first priority of our free cash flow being investments that grow the business including acquisitions.

Joanne K. Wuensch - BMO Capital Markets U.S.

And dividends?

Christopher S. Holland

No change at this point.

Operator

And we have a question from Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I guess I just wanted to ask about timing. I mean, obviously you've got more visibility now that you've had a Supreme Court ruling. And was just curious in terms of your estimate, how much variability could there be around the timing of the initial bolus, how much visibility do you really have into that? And then also were you just waiting for that Supreme Court ruling issuance to really jump start some of this stuff?

Christopher S. Holland

Yes, I think, Matt, obviously we've been working on an investment plan for many months as you can imagine. And we've arrived at one which we think is the right one for the company. Obviously, the denial of cert was an important milestone in our mind in terms of the certainty of proceeds. So that certainly was a factor as we moved into '13 and began executing this plan. But as we said, I think -- we take advice from lots of lawyers who know a lot more about this than we do. And sitting here today as we've said, we believe a Q3 estimation of the release of the funds is a reasonable estimate. It could move earlier, it could move later. But factoring everything we know in at this point in time, we think that's a reasonable estimate.

Matthew Taylor - Barclays Capital, Research Division

Okay. And I just wanted to ask one follow-up. I guess, on the buyback. I'm a little unclear because you're talking about the initial bolus, using half of that for the buyback but not doing an ASR. So are you just going to be kind of out there in the market buying things as you see fit with regular market conditions? What's the plan assuming that you do receive the bolus in the third quarter?

Christopher S. Holland

Yes, we would plan, again, I think given the volume levels, we think we can effectively execute repurchases within the market in fairly short order in Q3 with half the after-tax proceeds.

Operator

And we have a question from Dave Turkaly with JMP Securities.

David L. Turkaly - JMP Securities LLC, Research Division

Just on the acquisitions that you've already brought in, can you give us, I mean, any specifics, I know you gave by kind of category what the growth would look like. Anything in additional that you could say either in dollar magnitude for either Neomend or Medivance?

John H. Weiland

Well, we said that Medivance grew 10% over the third quarter of 2012, and we were pleased with seeing that progressive growth. On Neomend, it's our first quarter in terms of integration of the business. We're delighted where we're at. We just finished our kickoff sales meetings for the year where the Neomend team really -- the integration of that group culturally with Bard has gone as well as anything that we've ever seen, and I'd say the integration from an operational standpoint has gone as well as we have ever seen. We like the potential for new indications on the Neomend product. And as we said, that is some of our investment modes that we're doing with the investment program that we talked about getting different and newer indications for the Neomend product lines and other areas outside of their open indication, which we have today. In Lutonix, I think we're delighted where we are. We completed enrollment in trial. John DeFord took us through where we're at on Lutonix. We are very optimistic about the Lutonix opportunity, and I think that showed in the multiyear projections that we talked about for 2015.

Operator

And we have a question from Jonathan Palmer with CLSA.

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

With regards to emerging markets, the perception of Bard's portfolio has been that it's more commodity like and that has really precluded some of your entrance into emerging markets previously. Obviously, the growth you're putting up recently puts that notion to rest. But I was hoping you could give us some color on which portion of the portfolio you plan to aggressively push across this new plan and how you're really positioning those products versus the local or multinational competitors?

Timothy M. Ring

Sure. Just let me take a step back and tell you how we, several years ago, looked at this. We clearly, we're not going to say to the general manager of an XYZ country, "Here is the 10,000 SKU Bard playbook, go sell everything." So there was a lot of analysis done in terms of where we felt the market growth opportunities were, where the clinical unmet needs were given the varying populations, et cetera. Those were not just internal analysis done. We retained some outside people to triangulate the data points as well. So I don't want to get into the competitive aspect of it but we've targeted, let's say, 7 or 8 key major product groups, and you could put it together based on demographics, lifestyle, kind of the general information you get and take a look at where we're emphasizing those products. I will tell you, to your earlier comment, and I was a little confused with the commodity comment, but we kind of look at these markets into 2 segments. One is a premium segment, one is a value segment, maybe that's where you were going with the commodity comment, but the products that we have right now fit very nicely into the premium product segments of those markets. That's frankly where the money is right now. And then there's an additional strategy to get into the value segments and then operate those segments down the road. That's a several-year multiple plan -- a multiple year strategy that frankly goes far beyond this multiple year plan that we've laid out for you. So I hope that answers the question for you. But it's a very well-designed, thought-through plan. And as you can see by the results, to your comment, so far it's worked pretty well for us.

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

That was very helpful. And then one just follow-up here on Lutonix. Now that you have another quarter under your belt in Europe, can you just give us an update on the launch and also where you stand with the coronary application, whether you decide to keep that in-house or partner?

John H. Weiland

We're still evaluating the coronary application, not -- have not made a strategic decision on that, but we're certainly not sitting on our hands as it relates to that side of the business, that's all I'll say. Number two, in terms of what we've seen early on in the launch, we like the way we've approached the market, introduced the products into the marketplace. As we know, we've always said that the key to that is LEVANT 2, having the clinical data to backup exactly what customers' impressions are of the product line. But I will tell you that physicians' impressions of our product line vis-à-vis the competition, and what we're seeing in an uptick in terms of revenue meets what our expectations were.

Operator

And we have a question from Rick Wise with Stifel, Nicolaus.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Couple of questions. One, when we -- I guess -- of course we'd love to get some idea of what you're thinking about in the new product entry half of the multiyear operating investment plan but -- and I appreciate you aren't going to give us precise details, but can you characterize, is there some direction you're going in terms of -- these are all hospital-oriented plans mostly or step-down units? Or can you come at it another way to help us understand what you're prioritizing? Or can you help me frame the question better and answer it?

Timothy M. Ring

Well, let me take a whack at it and I'll pass it on to a couple of the other guys. I mean, I'll go back to the fundamental basic foundation answer would be what I told Joanna earlier to her question. We start with what we think the growth is going to be. But if you want to grow faster, you got to grow -- you got to invest in the faster-growing segments. The other aspect of it is that Chris alluded to the fact that these things have been handicapped, risk-adjusted was his term, significantly. So we've taken that into consideration more heavily with the R&D than with the geographic thing because there's more uncertainty with the R&D frankly than the geographic aspect of it. The third thing you look at is the net effect of the new product sale not -- taking away the cannibalization aspect of it. Which is important given that we're #1 or #2 in 80% of our sales, there's going to be by design, a certain amount of cannibalization. So we put kind of heavier weight in those that would be less cannibalized, which would mean you'd be getting the same call points but more into some of the adjacent spaces and areas that would move the needle more than something where you'd cannibalize 90% of what you're in today. So that will give -- that's my whack at it. Let me give it to John DeFord and he can comment a little more on the R&D.

John A. DeFord

Yes, Tim, I think you did a great job of laying that out. I think if you think about it this way, Rick, we're not going to take a big risk here and say pick a new technology and a new market and a new call point that we don't know anything about and jump into it. So we're going to try to leverage the things that we know. So you can imagine we might have new technologies into existing call points, new -- leverage our technologies into a new call point or leverage our technologies into a new market space. So those are the kind of things that Tim laid out but just to give you a sense of what we're looking at here.

Timothy M. Ring

One other thing maybe to help that question a little bit. When you talk about hospitals or different kind of units, step-down units, et cetera. We are very cognizant of, especially in the U.S., decision-making shifting from clinical to admin and then the financial economic aspect of it. Having said that, we don't believe our products are such nor will they ever get to be at a level where the clinician doesn't have any input. Yes, you got to go to value analysis committees and so on and so forth, but I mentioned in my commentary, price may get you in but that's not going to win the game for you. You still have to perform clinically, be the best for the patient et cetera, et cetera. So it's that combination that we're very cognizant in shifting to that economic buyer. But that clinical data and the performance has to be there. At the end of the day, that's what's going to win for you, not just price.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Right. Just as a follow-up, I mean it's impressive to remember -- to think about the past decade and appreciate the transformation that you led at Bard. One of the key hallmarks was the improving operating margins. You're talking about sort of mid-decade, '15, getting back to 2012 level, improving, yes. I mean, how much -- when you think about all these plans in the emerging markets and you dial it all in, is there a meaningful opportunity, not over the next 3 years but over the next 3 to 5, 7 years, to see operating margins move meaningfully higher if your sort of the high-end of your plans are realized if that's the best way to say it.

John H. Weiland

Yes, I think what we've said is that we would expect a short stem step down in the operating margins while we are in investment mode with that -- the 2015 time frame getting back to our 2012 levels and then moving beyond from there.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

I mean 30% does not -- just when you think again, 5, 10 years, you really think that these plans are going to drive you substantially higher over time?

Timothy M. Ring

Well, I'll tell you this, Rick, if you look at us vis-à-vis our peer group and our operating margin level, we're pretty -- and we're not the highest, we're pretty damn close to being the highest. So we think we've got a great operating margin story, and we'll get back to that. I think the driver for us and a lot of where we focus is our gross margin level. And our guys and Chris went through the results they've had, a lot of the percent -- a very high percentage of our cost to goods is in materials, and we're doing a very good job there with a lot of runway left to leverage that as we move forward. So yes, there's still a lot of story here to be told as we roll this out over the next several years.

Christopher S. Holland

And Rick, just to remind you, there's $40 million of incremental expense because of the EM debt this year as well.

Operator

And we have a question from Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So a couple of things, I really appreciate this call and all the detail. Obviously, the slightly awkward part of it is that you're starting to spend before the money starts to come in. And so I guess my first question is, if Gore is delayed for the rest of this year, what does the 2013 number look like? If you're going to be spending all year long, is that more like a $6 number or $6.10 number. So as a starting point, I was wondering if you could just address that?

Christopher S. Holland

Sure, Bob. When you factor in a quarter's worth of royalty and actually the impact of the buyback with half the bolus, it's about $0.30 a quarter. So if you gain a quarter, it's $0.30, if you lose a quarter, it's $0.30.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. We can work with that. And Tim, just from a top-down perspective, again, I appreciate all this detail, but you're moving forward here before you have money in hand. Can you just reiterate what gave you the confidence to move forward with the spend and move forward with this plan. And I know you talked to it a little bit earlier, but just how confident are you that this is all going to work out in the time frame that you lay out and that you're going to be successful?

Timothy M. Ring

Yes, sure. Two parts there really, and they're frankly not new. One is we're not happy with the revenue growth rate that we're at today. So this is all targeted at getting the revenue line growing faster. Secondly, when you look at making the investments, the returns that we get from both the geographic and the R&D investments are really good, they're very good, they're returns that any of us -- you'd make in your personal portfolio in a heartbeat. So those 2 factors and then the capability of the organization, we kind of, throughout the presentation, talked about the infrastructure build with the clinical capability, the execution that we've demonstrated on the geographic expansions, there's a lot of confidence with me and with the organization and up through our board to execute here against this. So we put a high probability on being successful with the investment out in front a little bit, if you will.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

No, I guess I was just asking the confidence in getting the Gore money in.

Timothy M. Ring

Well, we've been with that for 1 year. We waited for the -- what we felt to be in terms of the time line, the key to your point, was the Supreme Court decision because that could have dragged it on for a long time. So having had that, we got a little more confidence now with that.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then, Chris, can you -- one way of asking how much buy back you're assuming here in this plan is can you just give us another line item here, can you give a share count for '13, '14, 15?

Christopher S. Holland

That's not on my pages here, Bob...

Timothy M. Ring

You could give us the share price, if you want him [ph] to do that.

Christopher S. Holland

No, I think, to be fair, we think and have historically and I think today, think that it's not the right thing to commit to hard numbers to you guys because it's not the right thing for the company to potentially hamstring ourselves from that perspective. So the last thing we want to do is make a promise on buybacks and not be able to make an acquisition we think is the right acquisition too. So I think maintaining flexibility, I think, is right. I think, having said that, we have a long history of being pretty darn consistent about returning a significant portion of our free cash flow through buybacks.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

But 2014 doesn't assume that. It assumes just a normal level of buyback, correct?

Christopher S. Holland

Correct.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then the Q1 guidance, I think did you say $1.40 in earnings for the first quarter?

Christopher S. Holland

Yes, $1.40 to $1.44. I think there's a couple of factors just for folks' benefit. As I had said, there are fewer selling days that we're 1 day short in the U.S. and 2 days in Europe. And at these growth rates, obviously, that's a significant impact to the growth rate and to the GP. I also noted, and we've seen this, there is some variability in our GP because of the timing of our cost improvement plans and as they roll into the P&L. And so, there's a step down in GP in Q1. And then you've got EM debt [ph] and then you've got Neomend and you've got the investment spending. So it's burdened with all of those factors, as well as the fewer selling days, but it's consistent in terms of the investment in emerging markets and the investment in the various projects that we talked about today. That is beginning and burdening Q1. But again, in the context of this plan and the multiyear strategy, we obviously think it's the right thing to do.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

All right. And then last question is what was the thing that has to happen in order to get 2 payments in 2013 by what date? You mentioned this previously.

Christopher S. Holland

Right. So the royalty needs to be paid 30 days past the end of the quarter. So July 30 is when the June quarterly payment would be received. So if we have resolution prior to July 30, give or take a few days, we would be able to record the July payment, as well as the October payment in revenue for the year.

Operator

And a question is from the line of David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

I was hoping to just get some -- one clarification here in how we should really think about end market growth? Obviously, there's some cyclical dynamics negatively impacting trends right now. But if I look at the 2013 guidance of 2% to 5% growth and take out the royalty expectation, I get something like 1% gross to the company, and I guess, a little bit of acquisition in there. Is that -- how would you square that up against end market growth rates?

Christopher S. Holland

Yes, I think it's, David, actually pretty consistent to what we've seen in the recent past here. And so I think when you strip out what we're doing here, vis-à-vis the royalty and the investments we're making, we're saying that 2013 looks a lot like the second half of 2012 for us. We've also talked about, there's a couple of places where we may be losing a little bit of share, there's places where we're gaining it. And so, we believe we're growing at this point in time in our developed markets with the markets for our end product segments. So we're in that sort of 0% to 2% range overall, obviously in the U.S., that's weaker. And that's what we're fighting up against and that's why we're doing what we're doing today in terms of finding other avenues of growth from a product standpoint and accelerating the investments in markets where we're growing 30-plus percent.

David H. Roman - Goldman Sachs Group Inc., Research Division

So I guess, if I think conceptually about what you're saying for 2015, that 2 to 3 points above market growth, the moving parts around 2015 are your emerging markets will probably be a greater percentage of total sales which would help. You'd have Lutonix in there, that would be sort of new end market that you'd be in. But when I listen to your commentary, we shouldn't be thinking about 2 to 3 points off a base of 1%, it sounds like an end market growth would improve with your mix, is that the right way to think about it?

Christopher S. Holland

Yes, I think that is. And again, some of these adjacencies that we are moving into are essentially new product categories or new adjacent markets for us. And so those are going to have growth characteristics we're not in today. But every dollar of sales is going to be an incremental dollar of revenue for us.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. And then maybe lastly for Tim. I mean, you talked a little -- you've talked about it for some time, is the reorientation of product development with the focus toward economic effectiveness or cost effectiveness at hospitals to make their purchasing decisions. But when I sort of listen to the pipeline, maybe I'm missing something, the product category sound pretty similar to the types of things you and your peers have developed in the past. Can you maybe give us some flavors to of what that new type of product looks like and how the development time lines might compare to what they've been in the past? And how we should think about that going forward?

Timothy M. Ring

Let me turn it over to John DeFord. He can give you a little more granular explanation than I can.

John A. DeFord

We don't want to give a lot of detail today on some of these products. They're all competitive spaces and we don't want to signal where we're headed. I would say that from a returns perspective, the projects in our portfolio today, as well as the projects that we're adding would have similar returns. So it's not like we were holding back and waiting to do something better and also, not like these are second-tier kind of projects for us. There are really things that we think we can execute on and accelerate. I really don't think today is the right time to start getting into the details of those projects. And we'll -- there be a lot of arm wrestling going on here on what we want to say come June at our Analyst Day, but I think we will be in a better position to at least give you some more details there, as we just don't want to signal just yet where we're headed.

John H. Weiland

I think what we did say, we did give some pretty tangible examples though that you can grab onto. We talked about our largest product line, PICCs, that some of the investment is to drive the market development for PICCs around the world. We talked about our position in hernia and some of the projects that are here are to expand our hernia pipeline in new indications there. We talked about our new angioplasty platform as being core to us. All of these areas are areas where we have key market strengths and share leads today that we want to exploit for the future, while adding to that some of the new markets we've gotten into with acquisitions where we can bolt on additional indications for those products. This is just a pure acceleration of that whole strategic plan.

Operator

And we have a question from David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Just 2 quick questions, maybe one for Tim and Chris and then one for Chris. Just I wanted to make one question on the intermediate term and then one question on the longer-term outlook. Just first off, for organic growth, just kind of try and interpolate the guidance, it looks like flat to maybe 1% organic growth growing to maybe 2% to 3% organic into '14. I was hoping you can sort of maybe confirm those numbers. And maybe just help us understand, those early investments you're making in '13 to get that 2-point growth shift into '14. Where should we think about that organic growth coming from, just in the intermediate terms of the plan? And then I have one follow-up.

Christopher S. Holland

Yes, I think the organic growth again is consistent with what we had in Q4. It's really adjusted for the days what we would have seen in Q1 and what's really in the model for 2013, which is in about that 1% range. The nearer term acceleration is going to come primarily, just given the timing of the investments and the ability to ramp, is in the acceleration of the spend and the growing of the infrastructure in sales in the emerging markets portion of the portfolio. As well as some of the new adjacencies with development time lines, as we said, in sort of that 2 to 3 year period for a number of the projects will start to impact '14 as well. And then obviously, as we get into '15, Lutonix has a significant impact, as well as a number of the projects in the portfolio at that point are contributing above an organic growth rate that today, we're saying is half that. The Gore impact in '14, obviously, there's a full year of royalty assumed in '14 and 1/2 royalty assumed in '13. So part of the incremental growth in '14 is a result of the full year of royalty.

David R. Lewis - Morgan Stanley, Research Division

Sure, okay. Very clear. And then, you did a great job kind of walking us through the shareholder returns of the next couple of years. The one element that did not get a lot of attention in your prepared remarks was acquisitions. Obviously, you're going to move into adjacencies. But Chris, could you share with us kind of your approach, the methodology or management's approach, to dilution versus accretive deals. Or if deals are going to be dilutive, what type of profiles should we think about in terms of that dilution or what return on invested capital we should look at for some of these targeted adjacencies?

Christopher S. Holland

Again, I hate to lay out a rule when it comes to acquisitions, which I know you can appreciate. The bottom line is, right, is we want to find investments and deploy capital in a way that's going to create value over time. And so, you can put acquisitions in a number of different buckets. There are clearly opportunities that we will look at that will be much more bolt-on or acquisitions of companies or product portfolios that we can integrate in that would be clearly accretive out of the gate. They may not necessarily improve your top line organic growth rate though. And so, I think balancing the investments we're making internally with external investments that are going to have ROIs and growth rates that are going to be accretive, is something that we have to do day-to-day and quarter-to-quarter. So we're very cognizant of the commitments we're making. We're committed to balancing internal and external investments in a way, again, that it creates value over the medium and long term, and I'd ask that you just judge us when we do things and hopefully, we are only going to do them if we think it makes sense for the company and for shareholders. And hopefully we'll be able to convince shareholders that it is the right investment at the right point in time.

David R. Lewis - Morgan Stanley, Research Division

So Chris, just to be clear, so the guidance, as it stands, through '15 does not include some inherent cushion for potential dilutive transactions?

Christopher S. Holland

Not explicitly, I'd say.

Operator

And we have a question from Michael Weinstein with JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

I have a handful of questions here. So the first one is getting back to the '15 top line commentary about 200 to 300 basis points above market. Could you give us your view of what your markets will be growing in '15 or how we should think about that?

Timothy M. Ring

Well, we can't give you that because we don't know what they're going to be. I mean, if you had asked us 4 years ago, we would have projected what they were today, it would have been a higher number than it was today.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

But you'll be in different markets, Tim, in '15 than you're in today.

Timothy M. Ring

Clearly, I would say, Mike, there's a combination of things that I would say would shift that mix as the percentage of emerging markets becomes a bigger percent of total, that will help that. Clearly, the acquisitions, you got Lutonix launching in 2015, that will help that. I think, tough to put a number on it, but it will be faster than it is today, would be our expectation. And difficult to give you a real number but we do plan on growing above whatever that market rate is going to be.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay. Let me ask you another question. The $0.30 a quarter in impact from Gore basically implies $1.20 of accretion from Gore. Previously, your math and our math was for, I think a higher number than that. If you just take that $130 million to $140 million pretax from the ongoing royalty, depending on tax and share count, you'll get to $1.10, $1 -- as much as $1.15 and -- in EPS contribution just from the royalty without the cash proceeds and without buyback. So the $0.30 a quarter comment does seem low. Why isn't it a higher number?

Christopher S. Holland

Mike, I think $140 million of royalty fully taxed at U.S. rates is about $1. So the royalty itself is about $0.25 a quarter. The bolus, which is a onetime shot, is -- again, I was speaking to the timing of it vis-à-vis moving it a quarter back or a quarter forward. And then the willfulness, there's another $200 million of willfulness that we're not factoring in. So that's a piece that's not in the number. But $0.50 from buybacks, which included the willfulness number, that's onetime, obviously. And then $1 from $140 million of royalty fully taxed at U.S. rates gets you to $1.50 in total of accretion pre any investment spending.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

You must have a higher share count and a higher tax rate than I knew because I would get a higher number. But we can go through that later. That -- it seems like it should be higher than that just based on running the math to the model. Let me switch then. You're talking about growing R&D, let's call it 25% in 2013, adding $50 million or so in spending and it's taken you 4 years to grow R&D by $50 million but you're saying you're going to do it in 1 year. So how do you do that? But obviously, we've seen the challenges the company has had in spending that quickly in the past. And then I just want to be clear, that $50 million of -- roughly $50 million of incremental spend that you're talking about this year in R&D, is that an internal assumption or is there some assumption that some of that will come from external R&D?

Timothy M. Ring

Let me take the first part addressing the historic aspect of what you're talking about in terms of the pace. Now a few years ago, we did say we were going to invest more in R&D. What we didn't anticipate was the slowdown in the revenue growth rate. So it wasn't as if we weren't prepared to be able to do it, we chose not to do it given the pressures on the P&L, et cetera, et cetera. And frankly, with some of the decisions we made to fast forward and get on the front foot in some of these emerging markets more quickly. So we've made significant investments on that aspect. As you know, the R&D investments take a little bit longer. So that's the historic aspect of it, John DeFord, let me turn the rest over to you.

John A. DeFord

Sure. And just briefly, Chris kind of alluded to this in his comments. But we have a lot of development partnerships, so we have a lot of capability internally. We also have established development partnerships so that we can turn on this investment pretty quickly. And let me put it into perspective, too. When you think about how much we invest be in R&D today, and we talk about a, call it a roughly $200 million number in 2012, about 40% of that actually goes to new products and 60% of it is funding things like clinical and regulatory and quality and some of the business development activities. So when you think about what we're doing here, we're effectively increasing our R&D by about 50%. So the number of projects that we'd be adding and the amount of investment, that is within our capability to absorb, again, with our internal capacity and then using established relationships. So we've kind of tried to hint at this over the last several months, but we've been thinking about this, planning this and developing our relationships with our external partners for quite a while. And so we were ready to get this started as soon as we could convince the rest of the senior team it was the right time to invest. So I'm not at all concerned about our ability to execute on these projects.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

And just, John, maybe just for those who've seen the R&D side of Bard really struggle the last 5 years with time line delays. Give people some sense of your confidence and the ability to execute at this point on time lines and get the returns that Tim and Chris were talking about?

John A. DeFord

Well, we don't talk about it a lot, but our execution against our time lines have been pretty good, on a comparative basis, in this marketplace. Now that said, there are certainly some high profile projects that have suffered some delays or things like our antimicrobial ports and antimicrobial pick that went through the development process and weren't successful. But when you look at the number of projects we've launched on an annual basis and our adherence to our schedules, it's really been pretty good. That said, we can always improve. So I am confident about our ability to execute. Again, we have risk adjusted our portfolio here based on the technology risk, based on the clinical and regulatory risk, and based on timing. So we think that we've got a reasonable plan to execute.

Operator

And we have a question from the line of Matthew Dodds with Citigroup.

Matthew J. Dodds - Citigroup Inc, Research Division

Just a couple. On foreign exchange, you've got it, you said, I think Chris, down 50 basis points for gross margin. I don't think you said for revenue because it seems to me that you don't have a yen impact but the euros gone up, so I'm trying to figure out why it would be down in '13 or be a negative.

Christopher S. Holland

Matt, on the sales sides, it's actually going to be probably pretty neutral because of our hedge contracts, there's a bit of a disconnect between the impact on GP and the revenue impact.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay, perfect. And then just one line item question for '13. I know you gave big picture numbers for the divisions, but for stent, stent grafts in particular, it was just down 5, my assumption is looking at that guidance, you think it will be worse in 2013 with the comps and some competition in pricing, I guess?

John H. Weiland

I think the first 2 quarters are going to be difficult comps for us, Matt, because of one of our competitors being off the market and we benefited that pretty substantially. So the comps are really tough Q1 and Q2, should level out after that.

Matthew J. Dodds - Citigroup Inc, Research Division

All right. But overall, negative, down for the year?

John H. Weiland

We haven't forecasted anything like that in terms of being down for the year. I'm just saying we have tough comps in the first 2 quarters for us.

Operator

And we have a question from Matthew O'Brien with William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

I was just hoping you could talk a little bit about the impact of your plans here if Gore decides to go ahead and move manufacturing offshore or do something to reduce the amount of the royalty going forward. I mean, what would that do to 2014 on the top line and then to '15 as well? I think we can do the calculation on the bottom line.

John H. Weiland

Well, we're not going to -- we don't know what Gore's plans will be. And as we develop this plan -- and Chris, chime in. As we develop this plan and we look at the early investments, we expect by the 2015 time frame we're getting returns on these early investments, which will give us the ability to further invest then in other projects and programs to keep this growth profile going. So from our perspective, we're not saying these royalties are going to be there through 2019. We're using them to really drive the growth and then we will look at that downstream as things developed on that end.

Christopher S. Holland

Yes, and, Matt, obviously, we've got a lot of balance sheet flexibility. And obviously, as we look to execute acquisitions, we'll also have flexibility to dial up and dial down incremental share repurchases as well, as we see the potential impact of decline in royalties.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. And then on the R&D side, I mean, I think Mike talked about this a little bit about these heightened -- the increase here in 2013. But is it just more a function of tired of sitting back and kind of watching the growth suffer as you don't invest. Because I think, Tim, you had mentioned in the past that most of the R&D investment was really related to what you see from a macro perspective. And I don't think you're saying anything here macro-wise that's changing domestically or in Europe. This is just more of you putting your foot down to try to reinvigorate the growth rate versus anything you're seeing up from a macro perspective, is that fair?

Timothy M. Ring

Yes. I think that's fair. I mean, we see the opportunities, we see what's needed in the marketplace to get to higher growth rate. Frankly, we'd be doing this even without the Gore money. We need to invest to get the growth rate back and that's what's going to drive, in our view, shareholder value. So that's where the focus is at the moment.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. But just to that end, I was curious, why now? I mean, this is something you've been watching for a while. And given those returns that you're talking about from a sales and marketing and R&D perspective, I mean, they're pretty dramatic, why have you waited so long?

Timothy M. Ring

Yes. Well, what we've essentially done, I mean, we put multiple-year growth plans together for the Board that we go through with them. Clearly, as you see the, especially in the more mature markets, the growth rates being what they are right now, with no sign of them coming back, to be able to basically move the needle on the growth rate, you got to accelerate your investment plans. And that's essentially what you're hearing us talk about. We are moving the plans, multiple-year plans, forward to make the investments now to get the revenue growth rate moving faster because we don't see the underlying market growth rates in the more mature markets moving around real quickly here.

Christopher S. Holland

And, Matt, I would just add, I mean, we take our commitment seriously, right. And so it's always a balance between delivering against what you said you're going to do while making the appropriate investments for the future. And with the dynamism in the markets that we've seen over the last couple of years, it's been a tough balance. And I think we've tried to strike it, but at this point in time, we're ready to do this and think it's the right thing to do. But I think over the last couple of years, we've made commitments and we've tried to meet them in the face of some pretty stiff headwinds blowing at us from the marketplace.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. That's helpful. Just one more, if you don't mind me sliding it in real quick, on Lutonix. Medtronic just completed enrollment in their study, they're targeting kind of an early 2015 launch. And then you've got Covidien now buying CVI. Can you just give us a sense for your comfort level in still hitting that $100 million target year 1 with Medtronic potentially on the market? And then your thoughts going forward [ph] there. Is the market big enough for three [ph] big players to generate something along those lines in terms of revenue in year 1 and 2? Or do you think it will be -- there's the potential for some downside risk to that $100 million number that you've thrown out there?

John H. Weiland

There's nothing that we've seen that will, at this point in time, would cause us to turn from our $100 million target. We like what we've seen through Lutonix. If we're doing head-to-head comparisons, we like how we stack up. I'm not sure when player #3 would get into the market but they -- I think, they've said a number of years after that. We're going full power ahead towards $100 million target.

Operator

And we have a question from Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Just for clarification, your R&D targets of 8%, is that -- that's over sales, like I guess, just sales, not revenues, right? So it's not 8% including the royalty?

Christopher S. Holland

It actually is, Kristen. So it's 8% of reported revenue which will include the royalty.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. So it's not product sales, it's just total revenue.

Christopher S. Holland

Total revenue, correct.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay, great. And then just thinking about that number. What makes, I guess, 8% kind of right. A couple of years ago, you guys had talked about increasing it, I thought, to like 8% to 10% of sales. You guys never got there. I realize the market slowed and you guys wanted to meet your commitment on the bottom line. But what's kind of different now, I guess, to the extent that you see continued incremental pressures from a competitive standpoint? Are you guys committed to, I guess, the investments, or could we also see maybe some of the pace lightened up to the extent we see a further deterioration in the top line?

Timothy M. Ring

Yes, I think a couple of different things. And I'll turn it over to the rest of the group here to chime in. Clearly, we made some choices over the last couple of years that actually resulted in the revenue -- or I mean, the R&D being what it was. We made a choice to put a lot more investment in the emerging markets which we did at a considerable level. And the other part of it is that when we look at what we have now, we've got this plan that we put together over the last -- more than 1 year, frankly. We've got the projects already outlined, defined, all laid out on a map. I mean, if you walk in here to work tomorrow and you said, "Show me the R&D map that gets you there." We can lay it out project by project, business by business, and that's what we know today. Some of the acquisitions that we've made, we look at those as platforms, we built upon that. That's even on top of this going forward. John had mentioned some of the other indications for Neomend that we're very interested in, are investment opportunities for us. And frankly, we think the days of -- for us anyway, and I'm not going to advocate what other companies do, but when you're churning around at low revenue growth rates and trying to do double-digit earnings growth, that's not a great long-term strategy. And we need to invest to get that turned around and that's what we're doing now. So you guys want to add anything else?

John H. Weiland

I'd like to -- I would say that in one way that's especially important to look at it is, that as we embarked on these emerging markets, that was uncharted water for us. And the fact is our execution was superb in those. Now that, as we're doubling down and improving that footprint even larger, we've already built the infrastructure, the bones of the infrastructure in all these markets. It makes it a lot easier for us to expand and really continue to execute on it. So it gives us great confidence that we'll be able to do that.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And have you guys quantified over the past couple of years what exactly has been the investment in emerging markets as opposed to R&D that you've made?

Timothy M. Ring

Well we have that number but we haven't disclosed it and nor will we. I mean, if you look at it from the standpoint of -- a good way to look at it, our SG&A as a percentage of revenue's been about -- more or less constant. There's been a lot of movement underneath that where we've shifted an awful lot of investment over to emerging markets. The faster growing markets from the slower growing front markets.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And just again, I know this question was asked, I just want make sure I understand it. But with respect to future acquisitions, you have not explicitly incorporated them, I guess, from a sales perspective in helping to accelerate the top line nor have you included it from a, I guess, impact from an earnings perspective. So that would be something where if you were to do another Neomend or Lutonix deal, where there could be potential dilution or conversely could be accretion, obviously, the numbers work. So what you've given out from a 2013, '14 and '15 is just organic expectations, is that correct?

Christopher S. Holland

Yes. that's correct.

Operator

[Operator Instructions] And we go to Anthony Petrone with the Jefferies Group.

Anthony Petrone - Jefferies & Company, Inc., Research Division

I actually have questions on the ROI assumptions on the Slide 8. I just want to make sure I'm getting this right. First, are those on an annual basis, it states Tier 1 investment. And if so, which of the R&D projects should we look toward for most of the return? You have Lutonix, Medivance, new technologies. And the reason I ask, if you go through the math there, it does suggest a heavy drop down. If you take 50% of the upfront royalty, that's about 3 93, adjusted for what it looks like a 60% investment in R&D and clinical initiatives, you get about a $230 million investment. This may be sort of adjusted for when the money comes in. But either way you do that, it does suggest a very heavy drop-down to the bottom line.

Christopher S. Holland

Anthony, let me just stop you there. This relates to the royalty revenues only. We've talked about investing about half the annual royalty. The annual royalty is 130 to 140, so these investments would represent half that amount. The bolus is not included in terms of the P&L investments that we'll be making. We'll be buying back stock with half the bolus.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Okay. So then the -- so then going back then to the initial upfront, half would go to buybacks half then would go to presumably some sort of R&D and internal initiatives and...

Christopher S. Holland

The cash, if you will, will essentially remain as an asset of the company for -- to fund acquisitions and/or incremental buybacks beyond the initial 50%.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Okay. So then the payback periods, again, that you've outlined are just purely on those annual royalty drop-throughs?

Christopher S. Holland

Yes. That's correct.

Operator

And we have a question from Josh Jennings with Cowen & Company.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Just focused on 2014, I think a question was asked earlier, I just wanted to follow-up on. What is the risk to the full year royalty in terms of what Gore can do to try and minimize the royalty payment? Is there risk to the 2014 assumption and is there any knowledge of any strategic moves that Gore has already put into play as was mentioned before, moving manufacturing, circumnavigating their engineering, et cetera?

Christopher S. Holland

Yes, Josh, we don't have any knowledge. Obviously there are things they can do. Obviously, there is risk to the royalties overtime. As John said. We are again looking to move quickly and invest over the next couple of years and obviously, we'll be ready to deal with any impacts on the royalty that we might see, but it's hard to speculate and we're not aware of anything to speculate about, frankly, at this point.

John H. Weiland

I think one other thing to keep in mind here, I think this is well known, but probably given the question, worth pointing out. Up to now, the decision was made several years ago in the jury trial and subsequent decision. Gore has had to put this money forward on a quarterly basis. It's not like they've been holding back and saying, "Oh, guess [ph] what now, we got to go write a big check." This money has been in escrow, if you will, and posted over time. So it's already, if you will, they've already written those checks. So in terms of whatever they do, they're going to do, but it's not like they're sitting there saying, "Oh my god, now we got to go write this big check."

Joshua T. Jennings - Cowen and Company, LLC, Research Division

So the risk to your assumption for full year royalty in '14 is very low, is this the bottom line?

Christopher S. Holland

We think it's a reasonable assumption at this point in time.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Okay, great. And then just on strategic business development. Are there any -- can you comment on whether or not in your plans, or your plans could include a transformational acquisition and building out a fifth business unit? Or are you looking to pursue the M&A strategy that you have historically and with Lutonix and Medivance-type acquisitions going forward?

Timothy M. Ring

Sure. We were pursuing growth, and we're pursuing growth, certainly, when you look at in the confines of the markets that we're in and as those markets change, you've got to look for other newer growth opportunities within the playing field that's laid out by those changes. And that does open it up for us, frankly, I think there's a lot of opportunity for us but we're very open-minded as to what we would pursue from an acquisition point of view.

Operator

Okay. We're going to close the line. And ladies and gentlemen, this is going to conclude our Q&A session. I would like to turn the call back over to over to the Bard's management for closing or additional comments.

Timothy M. Ring

Okay, well thanks, everybody, for joining us today. And I would also like to take this opportunity as I usually do to thank Bard employees around the world for their dedication, commitment and hard work. We look forward to talking to all of you after the first quarter. Thanks.

Operator

Thank you. And ladies and gentlemen, this concludes your conference. We thank you for using AT&T Executive TeleConference. You may disconnect.

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