CR Bard's CEO Presents at Barclays Global Healthcare Conference (Transcript)

Mar.13.13 | About: C. R. (BCR)

C. R. Bard, Inc. (NYSE:BCR)

March 13, 2013 11:15 am ET

Executives

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

Todd W. Garner - Vice President of Investor Relations

Unknown Analyst

Thanks for joining us for this session with CR Bard. Really pleased to be joined by CEO, Tim Ring and Todd Garner, the Head of Investor Relations. So Bard is a company that we like and it has been investing to drive growth in the future. Laid out a big strategic plan last quarter in anticipation of a potential windfall from a 37-year-old patent litigation with Gore.

Question-and-Answer Session

Unknown Analyst

And so maybe we could start there, if you want to talk a little bit about the plan and how you feel that the investments could reinvigorate growth and what you expect in terms of timing.

Timothy M. Ring

Sure, sure. We actually started working on this plan over 1.5 years ago. 37 years notice, you get a little bit of time to start preparing. So we basically targeted a couple of things. One, obviously, the whole spectrum and specifically us, we're not happy at all with the revenue growth. And I don't think anybody anticipated the length of the slowdown in the U.S. market. And basically the message we sent internally is, circumstances aren't an excuse. Fine, it's a tough environment, we got all kinds of opportunities, get back into investment mode and let's look at things that are going to move the needle from an investment point of view. And we started with kind of an all-commerce starting point of any investment you want to make, put it on the table. This is outside, by the way, of the normal P&L that each of the businesses would normally have and we'd go through the normal process, if you would. So we targeted fastest-growing opportunities. You want to mix the shorter-term, longer-term things, obviously R&D. Just by the nature, it takes 18 months, more or less at a minimum, could be longer. And then we've had great success more recently with our investments in the emerging markets. And frankly, those are a little faster payback. So I think we've got a nice mix of around 60-40 R&D to geographic expansions, primarily almost exclusively targeting those emerging markets. So went through a couple of different sorts of those submissions, if you will, not only internally but then we went through a couple of different reviews with our board. Discounted for risk, if you will, both the R&D and the geographic expansions pretty significantly, discounting R&D more than the geographic expansions. And then the forecast that we ended up rolling out to you guys and with our board, obviously, factored all those risks into that and was the outcome of that process. So we started the investment now. We think that's an important thing to do regardless of when the money comes. It's just an important thing to invest for growth, and that's where we're at right now.

Unknown Analyst

And so can you talk about the timing a little bit? You started investing at the beginning of the year, Supreme Court denied the request to rehear the case, and that seems to be a little bit of a catalyst on your side. And I think you've estimated the third quarter, July, as your expected timing, and I was wondering if the shift in timing would change things at all in your plans and how you look at that and how you're able to come up with that estimate.

Timothy M. Ring

The shift of timing of receiving the money?

Unknown Analyst

Yes.

Timothy M. Ring

I think the only impact that would have is not on any internal investment at all. We're not going to get out in front of the money, if you will, with a lot of the kind of above average stock repurchases. So that might wait for the bolus. We're in our normal course of business share repurchase mode, anyway. But that would be the only thing we'd wait on. The rest of investments we're making as we speak. Anything you want to add to that?

Todd W. Garner

Just as far as how we got to July. I think you're right the Supreme Court decision was certainly helpful. We do see this as a question of when and not if on the part of the infringement. So let's just go through the numbers a little bit. So through December of 2012, the historical accumulation of the judgment related to infringement was $785 million. There's another $206 million related to the question of willfulness, whether Gore was willful infringor or not. That, we think, is going to be on a little bit of a longer time frame. But we have filed motions with the district court for immediate release of the $785 million. We've met with our lawyers and looked at all the different scenarios that could happen. And we thought that by July, it was certainly reasonable that, that money would be released to us. And just to be clear, the $785 million is also growing at a quarterly rate and there's a royalty that's due through August of 2019. In recent quarters, it's been between $33 million and $36 million a quarter. So at the end of July, that would be 2 more quarters added to that number. So call that $840 million or $850 million or something like that. So -- but we still think that, that's a reasonable time frame for the release of those funds.

Unknown Analyst

I think we have a talked about this before is you've talked with your legal advisers, and there's a potential that some of the arguments go to oral argument and there's a potential that they don't. And if they go to oral argument that, could be longer; and if they don't, that could be quicker, and that's sort of how you were able to come up with that framework.

Timothy M. Ring

As a whole, I mean, there's literally hundreds of different scenarios. We'd -- our timing does allow for oral arguments on the question of the release of funds, and we'd still be in good shape.

Unknown Analyst

Do you want to give us some perspective on how you're thinking about potential for the royalty through 2019? I mean, certainly, the loss -- the royalties are on products that are made and sold in the U.S., and so there may be some potential for Gore to move manufacturing offshore or do a design around. Have you thought about those things in your strategic plans in terms of your investment plans? And how are you forecasting or thinking about the revenue stream from royalty?

Timothy M. Ring

Our assumptions, Gore does have options. We have no visibility into what they're doing. But just kind of planning for the worst case, our models assume that the highest year of royalty is 2014. The first full year of royalty is our assumption that it would probably decline after that. But we have no visibility into what, if anything, they're doing.

Unknown Analyst

And can you just remind us what you communicated you're going to do with the additional bolus. You talked about share buybacks and the investments that you laid out. But just for the benefit of people here, can you talk about what you're going to do with the initial bolus of cash?

Todd W. Garner

Sure. So we said that with the bolus of cash, we would use half of it -- and it is taxed at -- full U.S. rates, including state income rate. So those numbers I gave out earlier were pretax. So half of the after-tax amount we said we would use in short order to buy back shares in the open market. The other half, we would kind of leave as dry powder either for acquisitions or depending on the opportunities available. It could potentially be used maybe down the road for more share buybacks. But our first priority is always strategic, to increase the long-term growth rate, revenue growth rate of the company. And then the royalties, the ongoing royalties that would stop being deposited with the court and would come to us after release of funds, that's the money that would fund these SG&A and R&D investments that Tim mentioned, and we'll probably talk about some more.

Unknown Analyst

Qualitatively, if you don't want to discuss specifics, can you talk a little about how you're focusing those R&D investments. I know there's some mix of some new products, some additions to your current products and also some evidence that you're going to put behind clinical outcomes and cost effectiveness. So how do you identify those different areas?

Timothy M. Ring

Sure. What we started with pretty simply, revenue growth prospects. If you want to grow at a faster rate, obviously, you have to shift your mix to faster-growing opportunities. So that was kind of the top line cut, if you will. And then we looked at things -- there was a fairly extensive kind of format, John DeFord put together, assessing technical difficulties, that kind of thing. That was then risk adjusted. Time to market was a factor. How it supplemented either a new position for us or the current positions we have, not only within the businesses but within the product lines within those businesses. So -- and I think the -- if you want to think about it, the vertical thought process that went in terms of building up the rationale for each investment was pretty solid. I think relative to the mix across the businesses, I think, if you look at the various markets that we're in, clearly, the vascular business and the oncology business and the surgical business, just in the markets that we're in probably have more growth opportunities within those sectors than say the urology systems. So you can kind of guess how that got mixed -- then that's what got mixed through those businesses. But basically, that's how we've looked at kind of took each one on the merits and then in the -- within the aspect of the business that it's there to support. And the other thing is one of the things, I think, that's happened to us over the last several years, more than it had in the past -- we're a market leader in 80% of our revenue. That's being #1 and #2. When you're market leader, you have to cannibalize yourself by definition. When the markets -- underlying growth of the markets were kind of high to mid-single digits, that's fine, you still get some decent growth out of there. When those underlying market slow down and then you're cannibalizing yourself for the big percentage of the new products you come out with, your growth rate, obviously, could slow down pretty dramatically. So one of the other things we did, which was different than we maybe historically have done, is we wanted things that move the needle. We didn't want all 80%, 90% cannibalization in these projects. Could -- doesn't mean they have to be in a different market, could be in an adjacent space that the business wasn't really strong in or even in before. So there was that extra cut, if you will, in the thought process that historically we had not done a lot of, didn't need to do a lot of it when the markets were growing faster. You want to add anything?

Todd W. Garner

No.

Unknown Analyst

And maybe just it's interesting to be instructive. Can you talk about how this compares to 10 years ago when you started to invest more in Bard at that stage and were able to start to get more productivity out of the R&D pipeline? What similarities and differences should we think about?

Timothy M. Ring

Sure. It's interesting, ironically, there's a lot of similarities. And one of the things that, John Weiland, our COO and I have been -- I've been around 21 years this year and John around 18. When you hang around a place long enough, things kind of circle back around. And as we told the senior management group now when you look at the tough U.S. environment -- and the opportunities we have today are far better than they've ever been, including those that we had 10 years ago. 10 years ago, emerging markets was really a hypothetical. Their health care systems hadn't really matured to a point that we or for that matter any other company, were ready to sink a lot of dough of into those investments. So those opportunities are out there that didn't exist before. The breadth of product technologies and kind of base platforms, if you will, that we have, to build investments off of is probably 3x what it was 10 years ago. So a lot more technology investments there as well. So I think how we got into a faster growth rate 10 years ago was again pretty simple. If you want to grow faster, you got to invest more in faster-growing segments. So the other thing we have available to us today that and much more -- to a much deeper extent than we did 10 years ago was the financial flexibility to do deals. I've been in this job 10 years. We've done 75 deals or something like that. Most of them have been smaller technology tuck-ins, which is kind of our sweet spot. But we've got the wherewithal now to do -- to be more aggressive, do more deals, and we've done several in the last couple of years that I think exemplify that in terms of branching out from a technology basis. But -- so we've got a lot of investment opportunities a lot more than we did 10 years ago. And again, you have the emerging market investment, which we'll add -- this year, we'll add another 300 people in those markets, and that's on top of probably 300 to 400 people we've added over the last few in those markets. So heavy investments there, and that's fairly straightforward execution in those markets. It's pretty simple. You get the products registered, you hire people. That's very important, and retaining those people is important. And then you have you to train the clinical community and your own people, obviously, in those technologies and products. So it's really more of an execution play than it is like an R&D project where you've got to try something, see if it works from a technology perspective.

Unknown Analyst

And I think you're about 7% or so of sales in emerging markets today. You're going to invest more in the sales force. How could you see that growing as a piece of the pie over the next couple of years?

Timothy M. Ring

Well, we're often asked if we have a goal or target -- we don't. We just wanted to grow fast and that growth rate has been around 30-ish percent, and we would expect that to continue. In fact, we'll -- I am focusing more of my time now in kind of what I'd call the next tier of emerging markets. At some point, China is no longer an emerging market. It's just a very good strong health care market. And you need to get down to that next investment platform and do the analysis what you need to do there and we're spending a fair amount of time on that as well. And then additionally, a lot of the cash, in fact, almost all the cash that we currently have, putting the Gore money aside, is outside the U.S. Obviously, not earning a lot of interest at the moment given current rates. So we're aggressively looking for acquisitions outside the U.S., targeting some of these emerging markets, which we think would also bolt our growth initiatives in those markets.

Unknown Analyst

Can you talk about some of the deals that you've done several in the past couple of years, ClearStream, Medivance, Neomend and I guess the bigger on was Lutonix. Maybe give us some framework in terms of what you typically look for in a deal? And now that you're going to have a little bit of a war chest, does that change anything in terms of your approach?

Timothy M. Ring

Yes. No, it doesn't change the filters at all. And the filters are fairly straightforward. Going back to growth rate, it's got to be certainly growing faster than we're growing as a corporation revenue line, preferably double-digit revenue growth, and for that to be sustainable over a period of time. I mentioned, we're #1 and #2 in 80% of our revenue. That's another filter we look at, can that particular product be #1 and #2 in its space and/or will it supplement significantly where we're currently #1 and #2. Next would be looking at from a gross margin point of view. Is it at or above the corporate average gross margins or can we find it a way to get it there over some period of time? And then we look at that whole context, how sustainable is that. Is it the kind of market or technology where competition is going to be able to climb up over the wall pretty easily and chase behind? Or are there things -- are there several types of barriers to entry, whether it be from a patent point of view, from a regulatory approval perspective? Purely in the case with Lutonix, we believe to be very good scientific clinical outcomes and evidence there -- in that particular technology. So we kind of look at it in total in terms of the sustainability of that leadership position over time.

Unknown Analyst

And do you want talk a little bit about the base business in terms of what you see as some of the key opportunities and threats this year? And maybe just a comment or 2 on current market dynamics and anything you're seeing on the pricing side.

Timothy M. Ring

Well, I think relative, if you look at what we've done very well as a company over the last several years, maybe the entire time I've been around with the company, we've been very clinician focused, predominantly doctors, nurses are important as well in certain sectors. And I'm going to limit these comments, particularly to the U.S. at the moment. So in the U.S. environment as things have evolved over time, the clinician, although still a very important decision-maker, the weight of that influence has diminished and things like medical economic or the economic outcomes becomes very important. So as a company, we have to shift our resources into that area, too. So for example, this year we'll do 90 clinical trials, something like that. Roughly maybe 40% of those aren't necessarily for the clinical evidence. It's for the medical economic evidence. A great example, and it's not all about the new technology. It can be about the base business kind of the old technology as well, because something that was launched 5 years ago didn't necessarily need that kind of evidence to accompany that when you were going to a clinician and the clinician say, "I want to use that." And there weren't a lot of questions or heavy scrutiny from the [ph] side of things. We have a simple little product in our oncology business that's used to clean hubs of ports and catheters. It's got almost like an antiseptic in it. Very basic, I'd it call it almost a commodity product. Recently this e-mail that I saw within the few weeks, won a contract in a hospital, not big dollars for us at all. And it's not even a product we would ever even talk about in a forum like this. But in winning that contract, the -- and there are -- there's competitors in the marketplace there. The hospital in announcing the contract went to their -- this is a group of hospitals, by the way, to their hospitals, talked about the benefits of this product over competition. And the primary thing was it takes less than 5 minutes for this to work, if you will, in terms of cleaning the substance line versus 15, 20 minutes for the competition. Simple little thing, pretty obvious and intuitive in terms of why that's better. And we had to generate data to demonstrate that impact, where 5 years ago we wouldn't do that kind of thing. So basically, everything we do now -- certainly, we're catching up with some of the older product lines. All the newer R&D things that in parallel for the technical track, there's this economic track that you have to ring all the bells on as well. And there's a business case review as well as a technical review. If the business environment has changed,because R&D takes 18 months or so to get to market, we'll kill products based on what look like a good situation in the business or economic environment changed a bit. Now when I say economic, I want be clear, we're not heavily dependent on a lot of reimbursement decisions. Most of our product lines -- our products sell at an ASP of less than $500. So I think we have 1 or maybe 2 products with a DRG code. The rest of the products are within procedure costs, that a hospital might get reimbursed at. So when I say economic, it's not targeting something that we'd have to specifically go down to CMS and say, "Hey, this does this." Now it's a different kind of economic sale that we're trying to make in the administrative things. So just an example of the kinds of things on the older product lines that we're working on. Relative to the environment, for the last couple of years, we've basically gone into each year with an assumption of no improvement in the market, clearly in the U.S., and I think that's fair to say, again, heading -- as we head into this year that was certainly our assumption. The pricing environment, it's been challenging. It's always been challenging. It's been more challenging of late. We'll see how that plays out. It may moderate a bit only because of the timing of contracts that we signed over the last few years, but they're still going to be pricing pressure. And the direction we've given to the businesses just presume that's there forever. That's the importance of the economic argument that you need to be able to make.

Unknown Analyst

We have time for one more, and I just want to -- you mentioned Lutonix, I want to go over your expectations there, talk about the time frame and $100 million target for the first 12 months in the U.S. Can you talk about what you think is really differentiated about the technology and maybe the current market and Europe?

Timothy M. Ring

Sure. Lutonix is a drug-eluting balloon technology for peripheral vascular use. It's fairly complex from a technology point of view. You need to get, a, the right type of balloon. So the balloon itself is a technology that's got to perform well in a stand-alone basis. Then there's got to be a coating applied to the balloon and then there's got to be a drug applied to that coating. And the interaction of all those 3 things becomes extremely important in terms of how it functions clinically. Such things as the amount of drug that needs to be used, affects its safety profile. The ability to control the release of that drug in a way where the clinical outcome is predictable is an important component of that technology. And then -- and all those things we think that the Lutonix platform has a clinical advantage over all the other technologies, and we looked at all of them over the last several years that they're out there. Relative to the European launch, where it is launched today, there's several -- and this is not a new technology in Europe. What's been lacking in Europe is the data. So we think the LEVANT 2 data, will be -- which is a trial that's going to be released in September we think or fall sometime, will be compelling data or a very important data point to have with longer-term results. And we think that's a great story, both clinically and economic story, to treat peripheral vascular disease. You want to add anything else to that?

Todd W. Garner

No.

Unknown Analyst

Well, thanks a lot for your time. I think, we'll wrap up here and have a breakout.

Timothy M. Ring

Thanks, everyone.

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