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CR Bard (NYSE:BCR)

Q4 2013 Earnings Call

January 30, 2014 5:00 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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

David L. Turkaly - JMP Securities LLC, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Raj Denhoy - Jefferies LLC, Research Division

David R. Lewis - Morgan Stanley, Research Division

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

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Matthew Taylor - Barclays Capital, Research Division

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

Ravi Misra - Leerink Swann LLC, 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 2013 Earnings Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. And it 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; 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 related to Bard's patent infringement suit against Gore. The accuracy of these statements are necessarily subject to risk and uncertainty. These statements are not historical in nature and use words such as anticipate, estimate, expect, project, intend, forecast, plan, believe 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, the uncertainty of loss-reserve estimates, 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, 2013, 10-Q and the information under the caption Risk Factors in the company's 2012 10-K, including disclosure of the fact that, 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 provide 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 30, 2014, 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, sir.

Timothy M. Ring

Thank you, Kathy. I'd like to welcome everyone to Bard's Fourth Quarter 2013 Earnings Conference Call. And also thank all of you for taking the time to join us today. I would expect the presentation portion of the call to last around 40 minutes.

The agenda today will go as follows: I'll begin with an overview of the results for the fourth quarter of 2013; John Weiland, our President and COO, will review fourth quarter product line revenue; John DeFord, our Senior VP Science, Technology and Clinical Affairs, will update you on the product development pipeline; and then Chris Holland, our Senior VP and CFO, will review the fourth quarter income statement and balance sheet and provide our financial guidance for 2014, as well as updating you on the status of our strategic investment plan that we introduced to you a year ago. And then finally, we'll close with Q&A.

For the fourth quarter 2013, net sales totaled $791.3 million. That's up 4% over Q4 last year on an as reported and on a constant currency basis. The currency impact this quarter versus Q4 of 2012 was favorable by about 30 basis points. The impact of acquisitions offset by the divestiture of our EP business in the quarter contributed about 50 basis points of growth for the quarter on a net basis.

Net sales for the full year 2013 were $3.05 billion, that's up 3% as reported and also on a constant currency basis, which is at the top end of the original guidance for the year. Net income for Q4 was $667.5 million and diluted earnings per share were $8.28. This includes the onetime gain from the Gore litigation that we recognized in the quarter. Excluding this and other items that affected the comparability of results between periods, which Chris will cover later, fourth quarter 2013 net income and diluted EPS were $114.7 million and $1.42, down 20% and 16%, respectively.

Full year 2013 net income was $689.8 million and diluted EPS were $8.39. Again, excluding items that affect comparability between periods, full year 2013 net income was $474.9 million and diluted EPS were $5.78. That's down 16% and 12%, respectively, from 2012 and does reflect the impact of our strategic investment plan. This result on the bottom line is $0.08 better than the top end of our original guidance when adjusting for the timing of the Gore royalties despite absorbing roughly $0.10 of dilution from the business development activities during the year.

Looking at Q4 revenue growth geographically, compared with the prior year on a constant currency basis, net sales in the U.S. grew 4% and internationally, we grew 3%, with Europe up 2%, Japan down 1% and our other international geographies up 5%. I want to remind you that the Electrophysiology business had the highest mix of our outside U.S. sales in our portfolio. Excluding the EP divestiture impact, total international sales were up 7% with Europe up 8%; Japan up 2%, and the remaining geographies up 8%.

Our emerging markets sales continue to increase and represented about 8.5% of our total revenue in the fourth quarter. The mix of emerging markets sales from our EP business was much higher than the mix acquired in our recent transaction. So the trajectory of our overall mix from these geographies may slow slightly as we work those sales out of the base. We're actively working on accelerating these newer technologies into the emerging markets.

As expected, the business development activity we announced in Q3 came to closure in Q4. The Medafor transaction closed in early October. The EP divestiture closed in early November and the Rochester acquisition closed in mid-November. I would tell you we're very pleased with the integration activity on these transactions so far, and we continue to actively look for additional strategic assets to shift the mix of portfolio to higher long-term revenue growth areas.

Looking back on 2013, we're pleased with the progress we've made. But let's be clear, nobody here is happy with low single-digit organic growth, which is why we implemented a plan over a year ago to improve the long-term organic growth profile of the business. While we don't expect the returns from the investments to begin to show in our numbers until later on this year, some of the key accomplishments in 2013 make us further believe we're better positioned for the future than we were a year ago.

While all we've really done so far in the investment plan is spend money the way we said we would, we believe that these investments will produce increased revenue opportunities for a number of years to come. We also received the Gore proceeds during the year and we were very pleased with the successful outcome of the LEVANT 2 trial, especially considering the significant scientific rigor that was implemented in this trial. We look forward to releasing more results in our drug-coated balloon program in 2014, and we're working tirelessly on getting through the next steps of FDA approval and preparing for a subsequent U.S. launch.

We remain very much in the investment mode with the global return to premium revenue growth versus our sector with the lower risk profile that provides for double-digit EPS growth, both of these on a sustainable basis. In addition to the objectives we laid out at the beginning of last year, we believe that the business development activities completed in 2013 provide additional acceleration to our long-term organic revenue growth profile.

There's been a lot of speculation recently about where the U.S. market growth is today, we think it's too early to identify any meaningful rebound and there are as many moving pieces today as there have ever been, frankly. It still appears to us that the market's growing somewhere in the low single digit. Our plan is based on getting us to higher growth without tailwind from any market improvement. If the markets get better, we expect that we'll do even better. But I'm happy to tell you that as we look at the levers available to us, even if the markets don't improve beyond the low single-digit range, as long as they don't deteriorate further, we believe that beginning in 2014 and forward, our revenue growth should be in the mid- to high-single digits.

Chris will give you more details when he lays out our financial guidance. And as we said, we measure success here over the long term. We're very excited about our plan and we're very confident in our team's ability to execute. With that, now 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 the 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 $204.7 million, a decrease of 3% on a reported basis and 4% on a constant currency basis when compared to Q4 2012. Our United States business was down 4% for the quarter and internationally, it was down 5%. The decline in the vascular category was driven by the divestiture of our Electrophysiology business this quarter. Excluding the impact of divestiture, total Vascular sales increased 2% this quarter over prior year. Due to the divestiture, Electrophysiology sales were down 35% this quarter compared to the prior year. As previously disclosed, we have entered into a multiyear transition supply agreement with Boston Scientific, so we will continue to record a modest level of sales in this category until Boston has integrated manufacturing into their facilities.

Sales in our vascular graft category were down 4% in Q4, consistent with recent quarters. Our Endovascular business increased 2% in the fourth quarter. Within Endovascular, our biopsy line was up 7%, driven by strong international growth, especially in the emerging markets. Our peripheral PTA products were up 7% this quarter with drug-coated balloons in Europe being the key driver of the growth. We're also seeing good early momentum with the TRUE double-plasty balloon acquired in Q2.

Sales in our vena cava filter line were up 12% in Q4, driven by our new Denali filter. And our Stent business was down 7% in the fourth quarter. As we said last quarter, we see continued price headwinds in this category.

Let's move to Urology. Total net sales were $202.4 million, which is up 3% versus Q4 of last year on both a constant currency and as reported basis. The United States business was up 4%, while internationally, we grew 3%. The Rochester Medical acquisition in mid-November added about 200 basis points to the global growth for the category this quarter. The intermittent and male external catheters will be recorded in basic drainage and the leg bags will be recorded in our continence sales, consistent with where we report those types of products today. I'll remind you that our European fiscal year ends in November and the majority of Rochester sales were in Europe. So we only recorded a couple of weeks of sales in Q4 from this important geography.

The targeted temperature management products grew into very healthy double digits again this quarter, and we remain optimistic about the long-term growth prospects of this technology platform. Our basic drainage business was up 3% in Q4, with half of that growth coming from the acquired Rochester medical products.

I.C. Foley's were up 4% globally with the United States down 1%. These organic results are better than we've seen in I.C. Foleys for a while. Because of the Rochester acquisition, our continence business grew 4% over the prior year quarter. Excluding the impact of the acquired products, our legacy continence products were down 9% for the quarter, the same percentage decline as Q3. Sales in urological specialties were down 4% with brachytherapy up 1% for the quarter. And finally, sales from our StatLock catheter stabilization line increased 3% this quarter.

Now for Oncology. Total net sales in this category were $220.4 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 3%. While outside of the United States, sales were up 9%. Our port line was up 1% versus Q4 of last year. PICC revenue growth was 11% in Q4 with strong performance in the United States and internationally. We continue to advance the quality of care across the globe with our differentiated offering and technology.

Our Vascular Access ultrasound product line was down 6% this quarter with a tough comp a year ago. And to complete the results in Oncology, our dialysis catheter business was up 2% in Q4.

And now we'll finish with Surgical Specialties. Net sales in this category were $140.6 million in the fourth quarter, up 16% on both an as reported and constant currency basis. The United States sales increased 17% while international sales were up 13%. About 10 percentage points of the global growth in this category came from business development, which included the Arista Hemostat product line acquired at the beginning of the quarter and the final few weeks of sales before the late October anniversary of the Progel surgical sealant acquisition a year ago. We're very excited about the long-term opportunity from this new biosurgical product portfolio. And already, in the first full quarter of sales from both acquired product lines, the combined revenue of our biosurgery products exceeds our biologic hernia sales and is almost 3x as much as our sales from Fixation products.

Our soft tissue repair business grew 6% overall for the quarter, which marks the fifth straight quarter of improving revenue growth, all organic. Our total synthetic hernia products were up double digits versus Q4 last year. This was a strong quarter for us in synthetics. We've seen recently that when we have a strong quarter in either synthetics or biologics, the other product line seems to have a like quarter, and that was the case in Q4.

Our natural tissue products were down 5% this quarter. As we've said before, we've been seeing the market move away from the allograft products for hernia use. And that was the key reason for this decline in products for us.

Our Fixation business was down 5% in Q4. The declines here have moderated from what we were seeing a year ago, but we're not projecting return to growth in this category until 2015. Closing out the surgical category, our Performance Irrigation business was down 5% in Q4.

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

John A. DeFord

Thanks, John, and let me try out a new voice for you guys today. In 2013, we launched over 30 organic products and about 10 product families associated with acquisitions. As you might imagine, there's a lot of R&D activity going on around here these days, and I'll provide some recent highlights for you today.

I'll start with our drug-coated balloon program. As you likely know, we submitted the final module of the PMA for the SFA and popliteal indications in late November. The PMA is under review and timing is really in the FDA's hands. We would expect to receive some feedback from the agency later in Q1 that could help us better understand next steps.

Public disclosure of the 1 year LEVANT 2 results will likely be driven by publication timing. We know that the investigators are nearing completion and submission of the manuscript. Until that submission and feedback from a targeted journal, we won't have more definitive timing on disclosure to share. We will provide additional detail surrounding the study at upcoming meetings including ACC and Charing Cross. And it's possible we could present full 1 year results at one of these latter meetings, again, depending on publication timing.

Our substantial drug-coated balloon development and clinical program continues to expand. In Q3 of 2013, we completed enrollment in our LEVANT 2 continued access registry. This study enrolled 657 patients following the same inclusion/exclusion criteria as the LEVANT 2 study and the early safety results are included in our PMA submission. Beyond these 2 studies, we also have an open label SFA and popliteal registry outside the U.S. that's enrolled over 360 patients and our LEVANT 2 Japan study's rapidly enrolling, and we anticipate completing enrollment around midyear.

In our Below the Knee study of DCB technology, we have approximately 2/3 of the sites up and enrolling, and we're making reasonable progress. This study is in a much sicker patient population, as we're treating critical limb ischemia, not claudicants. We anticipate enrollment to continue into 2015.

Next in our DCB developments is the planned launch of coronary products around midyear 2014 in Europe, and an IDE filing in that timeframe to commence a study of the technology in peripheral in-stent restenosis.

Moving to some of our other Vascular developments. We reported back in Q1 that we reached our enrollment target in the clinical study of the FLUENCY Plus family for AV access in-stent restenosis indication. We completed our analysis, and I'm pleased to report we met both our primary safety and efficacy endpoints and filed the final module of our PMA in December. Launch is predicated on PMA approval, currently estimated late in 2014.

On our last call, we told you about our new balloon expandable stent graft program, development and preclinical testing is expected to be complete this quarter and our IDE filing is anticipated in Q2. We plan to launch in Europe for iliac use around midyear 2014 and commence enrollment in the pivotal study in that same timeframe.

Within our urology business, our primary focus is on integrating Rochester Medical's considerable pipeline of products into our portfolio, to capitalize on the opportunities in those markets. The teams are executing well together, and I look forward to discussing the details of some of those products on a future call.

In the coming weeks, we anticipate the launch of a new Foley tray, which supports our commitment to optimizing the usability of our products. And later in the quarter, pending regulatory clearance, we plant to deliver our DIGNISHIELD with medical delivery capabilities.

In our targeted temperature management portfolio, we expect to release a new software configuration this quarter and we're progressing well in our development efforts to further tailor the technology for use in neonates and pediatric patients. We anticipate initiating studies of these new PADs in Japan in the back half of 2014. Finally, we have a number of new endourology product initiatives underway, including a new guidewire that we anticipate launching midyear.

Moving to Oncology. We're preparing the rollout of our new Site-Rite Vision II ultrasound platform later this quarter. Site-Rite Vision II is our new high-end ultrasound system with full color Doppler and broad imaging and may be configured with Sherlock 3CG capabilities. We're also preparing for the launch of our freehand stereotactic system for vascular access that we now call Pinpoint GT in the first half of this year. This technology could improve the success of first-attempt needlestick access across multiple clinical applications and we look forward to getting this into the hands of clinicians.

In PICCs, we're working toward regulatory filings for both an antimicrobial PICC family and a broad thromboresistant PICC offering, both are slated to launch upon FDA clearance, hopefully by the end of the year. While these represent important platforms, we see the opportunity to move beyond just a coatings discussion with the new PICC platform, that for competitive reasons, I'll wait to discuss until a further date.

I discussed on the Q3 call that we were nearing the launch of additional sizes of our POWERGLIDE midline catheter family. We anticipate launching the 18- and 22-gauge devices this quarter and into Q2, which expand potential utilization of this important and successful platform. Our simplified insertion technique and all-in-one design has already made this product family a popular alternative to PIVs for patients who need venous access for up to 29 days, but don't need the central access of a PICC.

And finally, moving to Surgery, our biologics franchise is working with the FDA to secure concurrence on 2 key technologies. First, we anticipate launching additional sizes of our XENMATRIX porcine graft family in the next few weeks. This will enable us to better serve the demands of our customers.

Second, we've mentioned previously our activity on a new antibiotic-coated XENMATRIX product family. We submitted our 510(k) as planned in Q4, and we're working with FDA to answer some outstanding questions.

Moving on to our recently formed biosurgery product family, which includes Progel, Arista AH and Avitene. We're pleased to communicate solid progress against our goals. With respect to our Progel sealant family, we continue to enroll patients in our video-assisted and robotic-assisted thoracic surgery study and we're just a handful of patients away from meeting our enrollment target.

Next, we commence enrollment in November in our vascular sealant pivotal IDE. This study will expand our indications beyond thoracic to include vascular applications of Progel. We anticipate enrollment will continue through 2014 with PMA submission in 2015 and launch following approval. We're also focused on the execution of the global launch of Progel, which includes expanding our presence in Europe and getting approval in other emerging markets. We're also on track with our integration of Medafor. We're working diligently to expand our Arista Hemostat technology with additional clinical indications and next-generation technology. In parallel with our global efforts on Progel, we've also commenced global launch activities with Arista.

In mesh fixation, we're working on 3 new products. The first is a spring-loaded resorbable pack device named OPTIFIX, now targeted to launch early in 2015. This is a highly competitive space, so I'll hold further details on the other projects until we get closer to launch.

With the breadth of our portfolio, I've only been able to hit a few of the highlights today. But before I turn you back 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 held at the New York Palace Hotel on June 2, beginning at 4:30 p.m. For those that can't attend, the meeting will, of course, be webcast. Now here's 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 booked an $894 million pretax gain related to the receipt of funds from the Gore litigation this quarter, and made a onetime contribution to our charitable foundation of approximately $23 million pretax. We had acquisition-related items of $14 million pretax related primarily to the acquisitions closed in Q4. We also recorded a pretax gain of $213 million from the sale of the EP division, as well as a charge of approximately $8 million pretax for divestiture costs. And we took litigation charges totaling approximately $110 million this quarter, primarily to increase our product liability reserves related to multiple product categories. 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 $480.7 million in Q4 and $481.2 million on an adjusted basis, or 60.8% of sales, down 150 basis points from the prior year, including new amortization of 60 basis points and FX driving about 50 basis points of headwind in Q4.

Pricing pressure moderated somewhat in the quarter coming in at 70 basis points of headwind on sales line and about 30 basis points in GP in Q4. Although pricing pressure this quarter was better than it's been, we don't believe at this point there has been any fundamental improvement in the pricing environment.

As we told you on the last call, we had targeted integration-related spending and investments in the quarter and those exceeded our cost savings by about 10 basis points in Q4. For the full year 2013, that brings adjusted gross profit as a percentage of sales to 61% even, down 100 basis points from 2012, which includes about 30 basis points of headwind from FX, 30 basis points from new amortization and 40 basis points of price pressure. In this investment year, we've taken the opportunity to apply the cost savings generated by our operations toward strategic investments in supply chain and procurement and certain other initiatives. We're spending today for better leverage throughout the P&L long term.

SG&A expenses were $253.7 million for the quarter or 32.1% of sales. On an adjusted basis, SG&A was $251.9 million or 31.8% of sales. 400 basis points above the prior year period with 120 basis points coming from the recent acquisitions and 160 basis points from our investment plan in emerging markets, in addition to the impact from the new medical device excise tax this year.

For the full year 2013, adjusted SG&A as a percentage of sales was 30%, an increase of 240 basis points over the prior year. 290 basis points of the increased spending related to the medical device excise tax, acquisitions, our investment plan and increased spending in emerging markets. Aside from these areas, we saw 50 basis points of improved leverage on the rest of the business for the year.

R&D expenditures totaled $70.9 million for the fourth quarter or 9% of sales. On an adjusted basis, R&D expense was $70.4 million or 8.9% of sales, an increase of 220 basis points over the prior year period, reflecting the increased investment related to our strategic growth plan and the recent acquisitions.

Interest expense was $11.3 million for the fourth quarter, consistent with recent quarters. Other income and expense was $957.9 million of income for the fourth quarter, driven by the gains related to Gore and the sale of EP. On an adjusted basis, it was $1.9 million of income. The effective tax rate for the quarter was 39.5% due to the gains in the U.S. On an adjusted basis, it was 23.3%, taking us to 25.2% on a full year adjusted basis, better than we had been trending during the year. We're seeing the impact from certain investments we've made to improve our supply chain over the last couple of years and we expect to see the benefits carryover into 2014. That all adds up to EPS of $1.42 for Q4, excluding items affecting comparability, bringing us in at $5.78 for the full year on the same basis. As Tim said, this exceeded the top end of our original guidance when adjusting for the timing of the Gore matter despite absorbing about $0.10 of dilution from our business development activity during the year.

We repurchased roughly 1.4 million shares of the company stock in Q4, including a portion of the Gore proceeds directed toward share buybacks in the quarter. We anticipate completing the Gore-related buyback commitment in the coming months through open-market activity as market conditions permit. And we've announced today an additional $500 million authorization for our share buyback program. Between buybacks and dividends, we returned over $800 million to shareholders in 2013, in what was also an active year on the acquisition front for us. The average price we paid for buybacks during the year was $112.53 per share. We believe we've been good stewards of investors' money and we plan to maintain this disciplined and balanced approach to capital allocation, with strategic investments remaining our priority.

The balance sheet as of December 31 reflects cash, restricted cash and short-term investments of $1.1 billion versus $801 million at September 30. For the full year, AR days were 2 -- were down 2.3 days and inventory days were up 2.3 days, driven primarily by the acquisitions late in the year.

Capital expenditures totaled $21.8 million for the quarter and $69.1 million for the year. This was about $20 million lower than our original guidance for the year. Some of these projects will now flow into 2014. On the liability side, total debt was $1.4 billion as of December 31, versus $1.5 billion at September 30. Debt to total capital at the end of the fourth quarter was about 40% and total shareholder investment was 2.1 billion at December 31, 2013.

So with a very active 2013 now in the books, let's turn to financial guidance. A year ago, we outlined the transition and investment plan with the objective of returning the company to above-market revenue growth in a profitable and sustained manner longer term. We are pleased that the first year of that plan came in pretty much as we expected, if not a little bit better. We were clear that those projections a year ago excluded any business development activity. And as you know, we had a very busy year in 2013 on that front.

From a revenue standpoint, the acquisitions and the EP divestiture, while only affecting a little over $100 million in revenue in total, improved the longer-term organic growth profile of the business by roughly 50 basis points. And we see significant long-term revenue opportunity with these new platforms.

On the earnings side, the divestiture of EP and the acquisitions come with a little short-term dilution to EPS, but are expected to become accretive to our profitability as we move into 2015 and beyond.

Another change from the original 2014 model is the stock price we assumed a year ago for share buybacks and the diluted share count. Obviously, our original projections for 2014 EPS would have been lower using today's stock price and with the later timing of the receipt of funds from Gore. We also have a couple of initiatives including the mandatory unique device identifier program mandated by the FDA that will require more P&L investment in 2014 than originally anticipated.

Another development from a year ago is the continued trend within the sector to reporting on a cash EPS basis. We've been monitoring this trend, mindful that many investors compare peer companies across a set of metrics that may not be equivalent. And we don't want Bard to be an outlier as investors evaluate their alternatives. With that as our motivation, we've made the determination to begin guiding and reporting on a cash EPS basis beginning in 2014. This will help us -- this will have us adding back tax effected intangible amortization to our adjusted EPS. We will still be reporting gross margins, operating margins and the entire P&L, including amortization, but we will use cash EPS for our guidance and be clear about the impact of amortization.

I want to ensure you that our team remains focused and incented on revenue growth, profitability and returns. You should not expect changes to our disciplined approach to investments. Our focus on return on invested capital and our internal financial models remain the same.

With that background and overview, let's go through the 2014 financial guidance by line item, excluding the impact of items that affect comparability. For revenue, we see 2014 constant currency growth between 6% and 8%. That assumes between $130 million and $140 million coming from Gore royalties during the year. We're assuming between 0 and 30 basis points of estimated growth from the net impact of the EP divestiture and the acquisitions completed in 2013. I want to be clear that this revenue guidance assumes no fundamental improvement in the market growth rates from where they've been the last couple of years. If the markets improve, as some suggest, then we would expect to do better. Again, as Tim said, we think it's much too early to plan for any improvement in the underlying markets.

As far as constant currency revenue growth in our 4 disease state categories, in 2014, we expect Vascular revenue growth to be between 5% and 8%. The impact of Gore royalties, offset by the loss of EP products, has a net impact of 60 basis points of benefit for the category -- excuse me, 600 basis points of benefit for the vascular category.

In Urology, we expect revenue growth to be between 5% and 8%, including about 600 basis points of growth contributed by the Rochester medical products. We expect our Oncology business to grow between 2% and 5% constant currency in 2014. This business has held up the best for us in this more challenging environment and PICCs specifically represent perhaps our largest single product opportunity in international markets.

And finally, we expect our surgical specialties business to grow between 7% and 10%, which includes approximately 700 basis points of benefit from the recent Medafor acquisition.

Certain distributed products we acquired from Rochester Medical will be recorded in our other category as we consider them non-focus. So we estimate the other category will grow between 5% and 10% in 2014.

We expect our gross margin percent in 2014 to improve between 30 and 60 basis points over 2013. This includes between 160 and 170 basis points of benefit due to the estimated royalty from Gore and 50 basis points of favorability from our estimated cost savings, demonstrating the organic improvement consistent with our long-term projections. We estimate FX to be about neutral at current rates. The headwinds include amortization of 60 basis points and price is estimated to be between 40 and 50 basis points of pressure on the GP line in 2014. We expect mix to be a headwind between 60 and 70 basis points in 2014. This captures the negative impact of the EP divestiture, including the OEM transition agreement, which has us selling EP products to Boston Scientific at low margins; integration expenses; and the impact of the lower GP Rochester Medical products. We believe all of these mix factors will be temporary in nature. Over the next few years, we would expect the Rochester margins to improve by approximately 1,000 basis points. And by then, we would expect to have the Boston transition agreement largely behind us.

With our higher level of sales, we expect SG&A as a percentage of sales to decline between 90 and 110 basis points in 2014, though we will continue to significantly invest this year in faster-growing markets and in the growth platforms we have acquired. We expect further leverage in SG&A as we look out to 2015.

We expect R&D for 2014 to be above 8% as a percentage of sales again. 2014 will be the second year of significant investment for us. While the level of spend as a percentage of sales may moderate going forward, we will continue to invest in those projects that we believe provide attractive returns and sustainable above-market revenue growth into the future.

We expect interest expense in 2014 to be between $47 million and $48 million. We expect the effective tax rate to improve about 100 basis points in 2014 compared to the full year 2013 range. This does assume the renewal of the R&D tax credit for 2014. And we believe the tax rate should continue to decline somewhat in 2015 as the share of our profit outside of the U.S. increases. That all adds up to adjusted cash earnings per share in 2014 between $8.20 and $8.30 per share, excluding any items that affect comparability. The adjustment for amortization is about $0.90 per share after tax in 2014.

For comparative purposes, the adjusted cash EPS number for 2013 was $6.51. So our EPS growth this year is projected to be between 26% and 27%. The sequential ramp between quarters this year will be meaningful as we expect the 2013 acquisitions and the investments we are making to deliver improving profitability as the year develops. We're forecasting Q1 2014 with adjusted cash EPS between $1.83 and $1.87 per share compared to the prior year at $1.61. We expect Q1 sales growth to be between 6% and 7%, including the first quarterly royalty payment being received from Gore.

As for capital expenditures in 2014, as I've said, we've had some carryovers from 2013 and we are beginning to make significant investments in our systems infrastructure and manufacturing capability across the organization in conjunction with our recent acquisitions. So 2014 will begin a temporary step-up in capital expenditures, which we expect to total between $100 million and $120 million. We expect operating cash flow to be in the $700 million range in 2014.

As we look at the projections we made a year ago for 2015, the next year of this transition plan that we laid out last January, we remain confident in our ability to hit those targets. The margin headwinds I've discussed from the EP divestiture and the Rochester acquisition, which obviously weren't contemplated a year ago, may make it so that our operating margin doesn't return all the way back to 2012 levels next year but we expect to be on a trajectory of meaningful improvement. And depending on the magnitude of the commercial success of Lutonix and other products slated for launch in 2015, it is possible we could still return to those sector-leading levels in that timeframe.

I'd like to conclude my comments by reminding you that the objective of our strategy is to position Bard from a portfolio standpoint to deliver above-market revenue growth for years to come. The key measure of success for this transition plan will be the improvement in the organic engine. This plan was never about maximizing EPS for 2014 or even 2015, but to strengthen the business for the long term in a disciplined and thoughtful way. From a profitability perspective, our objective is to provide double-digit EPS growth on a sustainable basis. To the extent the environment or our returns are better or worse than anticipated, we plan to adjust accordingly to invest appropriately in the business, to increase our chances of providing long-term revenue growth and returns above the sector.

And with that, I'll turn you back over to Tim.

Timothy M. Ring

Thank you, Chris. So as we enter the second year of the transition plan we spoke about a year ago, we are encouraged by the events of the past year and we believe that continued execution of our plan will move us back to delivering above-market top and bottom line growth on a sustainable basis. Again, we measure success here over the long term and we're very excited about the future.

That concludes the formal part of the presentation. I'll now turn the call back to our moderator to facilitate the Q&A. Kathy?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So 2 questions, 1 for Chris and 1 for John and Tim. So first, Chris, just I want to make sure I've got a good understanding of the guidance. So first of all, for 2014, organic revenue growth, if you exclude Gore and exclude divestitures and acquisitions, just doing that math, are you suggesting organic growth about 1% to 3% for 2014?

Christopher S. Holland

Yes, that's right, Bob. A little bit above that, but yes, the 1% to 3%, the sort of -- we're guiding acquisitions and the impact of EP is 0 to 30 basis points, so 1.5% to 3.5% on the high-end would be the organic number.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then on the 2015 comments, I just want to make sure I've got that right in terms of what you're communicating relative to EPS growth in 2015 versus what you said previously and also top line growth.

Christopher S. Holland

Again, I think as Tim commented in his commentary, given as the way we see the world now, obviously in '14, we're now guiding to 6% to 8% revenue growth. And we're now comfortable as we look at the future, given the current market state, that we would expect to be growing in the mid- to high-single digits, which is really just firming up a little bit the notion of 200 to 300 basis points above the markets. And obviously, on the bottom line, the objective has been and continues to be double-digit EPS growth.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay, great. That's very helpful. And then for John and Tim, a question on drug-coated balloons because there's been a lot of discussion among investors about LEVANT 2 data and what we might see at 1 year and what that will mean, clinically. Obviously, you guys know the data, the 1 year data. And John, especially you know the clinical community as well as anybody. So I just want to kind of ask the question from a big picture perspective, how comfortable are you guys that this product will be a commercial success as you guys have defined it? And do you think that -- how convinced are you that doctors will react really favorably to the data when they see it?

Timothy M. Ring

Let me talk at a higher kind of 50,000-foot level about my view in this business. And to remind you, Bob, as even before I was CEO, I was a group President for the Vascular business for number of years before that. So this is an area that I've just personally spent a lot of time in. And I would say, my take on this is this is an area that continues to frustrate physicians with the tools that they have available to treat what is still a very much an undiagnosed and under treated disease by all attributes. So I think that we all understand the issue with implants and stents and crossing of legs within the different stresses on leg stents, if you will, for vascular stents versus coronary stents. Having another tool in the armamentarium that will help delay and further treatment in this, I think they're going to think very positively about. So I think all the directions are moving in the right area here and having this tool will be good -- very good for patients and I think that physicians will welcome having it in their armamentarium. With that, I'll turn it to...

John A. DeFord

Yes, so Bob, just to jump in. Believe it or not, it is John DeFord here. With all of that said, we're not taking anything for granted here. We've got a lot of work to do with the FDA. We're not taking anything for granted in the clinical community either so we're working hard to pull this information together and present it. That said, as Tim stated, we're pleased with where we are with the results. We fell in the range we expected to be within and so we're positive about moving forward. There's, again, a ton of work for the team between now and launch. And as I said, we've filed our PMA. We expect to get feedback from FDA, typically at that 90-day, roughly, time period. So that's kind of end of February is our expected time period, again, pretty much within their control. And we would expect this to go to panel, so that's always a bit of a wildcard as far as timing goes and it's also bit of a wildcard based on when you get through that, when approval comes. So we're pretty focused on meeting all the timelines that we've talked about and pretty excited about the technology and the platform, so we're moving forward.

Operator

Our next question is from Mike Weinstein with JPMorgan.

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

Let me start with 2014 and I'm really kind of hoping to end at 2015. I think when I kind of digest the guidance commentary, particularly given the second half performance in '13, the top line guidance was certainly the lower half of the range would seem conservative, I think, to most people on the call for '14. So can you talk a little bit about the '14 conservatism relative to the '15 enthusiasm and kind of the going from the 1.5% to 3.5% range, again assuming that's the right range for '14, I think, most people feel that -- hopefully that's conservative, to the mid to high single-digit commentary for '15.

Christopher S. Holland

Yes, sure, Mike. Obviously, conservatism versus aggressive, I mean, if you just think over the last 4 or 5 quarters, we've seen sort of flat organic growth, right. So I think we continue to believe as we move into '14 and to Tim's comment that there's more moving parts in the U.S. health care system than there's ever been, that it's much too early to get more bullish about the U.S. So 1% to 3%, as we sit here today, continues to be what we think is an appropriate range. When you think about 2015, obviously, Lutonix is a very important launch for us. Obviously, we're not taking approval for granted yet but we're working hard on that. And that is a material contributor to growth. And we're spending a lot of money, as you know, both in expanding our emerging markets infrastructure and on dozens of R&D projects, some of which we've talked about, some of which we haven't. And the acquisitions that we've added to the mix and x the EP sales, which were declining, put us in a position to have those new businesses actually be more impactful as we move into '15 and as we globalize those franchises, which, by and large, excluding Rochester, were U.S.-centric businesses. So there's a whole bunch of moving pieces and that was the idea that we put together pieces, and add things to the portfolio, that 2 years from now you're talking about a different growth profile for the company. So it's not one thing but it's a whole bunch of different things that we all think are going to contribute to the higher sustained growth.

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

So Chris, and Tim chime in here as well, when you think about the play out of 2014, we got a feel for how you're guiding to the first quarter, are you assuming at least on the top line that the organic picture accelerates over the course of the year? That as you get to the back half of the year, you start to get to some of the benefit of the emerging market investment that you started to get some of the benefit of the globalization as you called it, of some of the acquisitions from last year. And so we exit -- before we get the Lutonix benefit, that we exit '14 at something closer to that mid-single digits or how do you think the year plays out? I'm thinking early part of the year versus latter part of the year? And I'll drop.

Christopher S. Holland

Yes, I think, obviously the 6 to 7 in Q1 and the 6 to 8 for the full year does imply that we would anticipate improving growth as we move to the back half. And it is indeed a combination of the things you mentioned. Obviously, the acquisitions are growing. We've got to integrate them, we've got to execute on our growth plans, but they do become more impactful as we move through even 2014. And we've put a lot more bodies in the emerging markets. They will become more productive over time, we'll get more products into their hands over time, and so that should also be a net positive for us as we move to the back half. So those are probably the 2 primary drivers. And again, market dependent in terms of incremental headwind or tailwind in the market, we're not assuming. But there's, again, enough factors in play that should have growth improved as we move through the back half of the year.

Timothy M. Ring

Mike, this is Tim. I can't add a whole lot more to that other than the timing of these acquisitions was very end of the year, really. And the fact that these were, for the most part, established businesses without a big x U.S. presence, with the exception of Rochester. We have historically done very well as we start to take those businesses direct in the various markets. I would see a momentum build throughout 2014 on the revenue side.

Operator

We'll go next to Larry Keusch with Raymond James.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Tim, could you -- Rochester obviously a big component of what you guys are talking about. Could you talk a little bit about the strategy of getting into the home market in a bigger way and perhaps strategically why you want to be there?

Timothy M. Ring

Sure. Yes, I think -- and I wouldn't narrow it to home. I think specifically, as you look at the U.S., Europe maybe to a lesser degree, U.K. has already been there. But within the U.S., it's very clear that hospitals are trying to move treatment outside the hospital walls, whether that be alternate site, ambulatory care, home care. From all sources we tap into, it's certainly moving in that direction. So as we looked at our Rochester, and it isn't the first time that we've looked at this. We're continuing to look at our own internal portfolio and how to take advantage of this. I'll just lay out one example, which wasn't necessarily designed for this, but which can accommodate [ph] the strategy very well. If you go back to our -- and I'll use PICCs as an example, our PICC technology. A few years ago, just a few years ago, PICCs throughout the industry were a product that had to be flushed daily with pepper. We came out with a product improvement that allowed it to be flushed weekly with saline. Again, not intended for a non-hospital use but clearly playing very positively into that kind of setting with that type of care protocol. Similarly, we came out with technology that allows you to confirm the placement of PICCs without an x-ray, originally intended to save time within the hospital but again also plays very well to a non-hospital setting. So there is a number of things we've been doing directionally heading towards that non-hospital setting. And now it's continuing to identify those, tweak some of the ones we already have and then look at other components that play into that kind of environment, knowing that the environment's heading in that direction. So I hope that kind of gives you a snapshot how we're looking at it strategically.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Yes, that's perfect. And then the other quick question on the PICC side of the market, since you mentioned it, was 2 quarters of double-digit growth, I think if I've got my numbers right. Again, where do you think the market's growing and what's sort of driving that resurgence in your growth rates in the PICC side of the business?

John H. Weiland

Well, the PICC growth of 11% in the quarter was our strongest for the year. We grew the year to 8% overall so a very solid year. There's definitely 1 issue and that's our technology. Clinicians are finding that the use of our technology, the elimination of x-rays, and having these confirmed placements done and giving therapy to patients quicker is, in fact, the right way to go from a technology and patient care standpoint. And if you ask me what the market was growing, I'd say in the low single digits.

Operator

Our next question is from Dave Turkaly with JMP Securities.

David L. Turkaly - JMP Securities LLC, Research Division

Just to follow-up on the guidance, I know on the Oncology side. You said 3 to 5 and mentioned that the o U.S. opportunity was the largest for the company. To follow up on that last question, is there a market share thing happening here or why do we see that deceleration next year?

John H. Weiland

Well, I think the key is, I guess I would call it a continue to build. I mean our perspective is many of these markets for PICCs outside the United States aren't developed yet. And the market development work that has to happen in terms of clinician training is indeed significant. So overall, from our vantage point, building sales force is building training centers and training clinicians is really the key to the long-term strategy and adjunctive technologies, which we have in the portfolio which will be coming out through our R&D portfolio.

Christopher S. Holland

And Dave, just to be clear, 2013 was 5% for the Oncology disease state, overall, so the high-end of the range we're guiding to a similar growth in 2014.

David L. Turkaly - JMP Securities LLC, Research Division

And a quick follow-up, you mentioned antimicrobial and antithrombogenic, did you say by the end of the year? And could those -- when you look at the competitive landscape, could those be sizable or a big advantage for you next year?

John A. DeFord

Yes, we did say that we're planning by the end of the year, so we get our 510(k)s in. Right now, we're not talking about guidance for '15 on product level detail, but we'd expect them, as we said, to be important to our portfolio, although I think we do have another technology we want to talk about later in the year that I think is even more exciting.

Timothy M. Ring

The only thing I'd add is I think, as it relates generally, to coatings and specifically within PICCs, the underlying performance of the base PICC is extremely important and we've seen that demonstrated time and time again over the years with competitive entries that have come in with one coating or another but the base PICC did perform very well. So I think that's also, as you try to understand those markets, understanding that point's an important one.

Operator

Our next question comes from Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

One for John Weiland and one for John DeFord. For John Weiland, on the stent business, you said down 7%, you've got some competitive launch that's come in there. Just wondering if you can kind of tease out underlying volume, price, market share dynamics as you look at that product franchise in particular for the next couple of years?

John H. Weiland

We're not expecting to be back in a growth mode with stents, quite frankly. The majority of the loss that we've had this year has been price loss. Our unit -- we look at our unit share and look back over the last couple of years, we've been pretty stable with our unit-share positions. We would expect that to stay consistent. There are a few more players in it but we've not seen a significant impact on our business as a result. In fact, I think in Q3, we were down 13% in stents. Majority of that is based on the comps and when the competitor returned to the market after being off the market for a period of time. So I think you'll see that as a slow decline business because of the number of players in it, and there'll be a number of people continuing to get in.

Brooks E. West - Piper Jaffray Companies, Research Division

And then for John DeFord -- thanks for the last comment. For John DeFord, following up, you talked about the dialysis access, in-stent restenosis, I think it was the FLUENCY trial. Can you talk a little bit more about just the size of that opportunity and kind of some of the dynamics around that market?

John A. DeFord

Well, I can talk about the dynamics and maybe John Weiland or Chris could jump in on some of the market size. Being the R&D guy, I'm not as into those details. But there is a high incidence of failure in both fistulas and grafts for the human dialysis patient. And we have the Flair product that's available for grafts right now. There's also a big issue with in-stent restenosis for central veins with these patients, because you get such a change in the dynamics of the blood flow on the venous side. So we think that this is going to be an important technology for treating those patients that have been treated with a stent to try to deal with central vein stenosis primarily. And so we think that it's going to be a pretty interesting technology. We were very pleased with the results of our clinical study. I'm not going to disclose them today because we do think that would be a very interesting publication coming up, but we did hit both our primary efficacy and safety endpoints there as well. And, John?

John H. Weiland

The total market's approximately $200 million as we stand today, globally.

Operator

We will go next to Matthew Dodds with Citigroup.

Matthew J. Dodds - Citigroup Inc, Research Division

Chris, you said SG&A for '14 down 90 to 110 basis points year-over-year, is that right?

Christopher S. Holland

Yes, that's correct, Matt.

Matthew J. Dodds - Citigroup Inc, Research Division

So if you look at the fourth quarter, you hit about -- it looks like about 31% x the med tech tax. I know some of that is the acquisitions, the forward spend [ph], but the acquisitions aren't going to kind of disappear right away. How do you get the cost down that much in '14? And is that heavily back-end-loaded?

Christopher S. Holland

Actually, I was trying -- I tried to be clear in the comment, Matt. I mean, obviously, sales are increasing pretty significantly, in part because of the full year of the Gore royalty. So there's leverage, the spending is not declining.

Timothy M. Ring

There's no additional sales against the Gore royalty.

Christopher S. Holland

So it's really the way the math works.

Matthew J. Dodds - Citigroup Inc, Research Division

And then amortization, is it spread throughout the P&L or is it all mostly in the gross margin? Or are you going to break it out by piece as well as you go forward?

Christopher S. Holland

It's all in the gross margin, Matt.

Operator

Our next question is from Raj Denhoy with Jefferies.

Raj Denhoy - Jefferies LLC, Research Division

2 questions if I could. First on emerging markets, I'm not sure, did you give the percentage of revenues in the quarter that came from emerging markets?

Timothy M. Ring

8.5.

Raj Denhoy - Jefferies LLC, Research Division

8.5, okay. So I guess, a slight uptick from last quarter. Are you still -- given the sort of perceived turmoil in some of the markets, are you as confident about growth coming from emerging markets as you've been?

Timothy M. Ring

I think the turmoil you see is more at a macroeconomic level in the country. I think if you were to dial in within -- I think a lot of that's consumer driven and maybe manufacturing export driven depending upon which emerging market you're looking at. The rest of it, health care is still very much, for the countries and those governments, an investment mode. And as the kind of emerging middle class continues to be income earners within those economies, they are spending money on health care.

John H. Weiland

I think we're kind of controlling our own destiny in that in 2013 and continuing into early 2014, we would have added approximately 200 positions into the selling environment in those emerging markets, which are really a catalyst for future growth.

Raj Denhoy - Jefferies LLC, Research Division

Okay. Maybe if I could just add one on Lutonix. Obviously, there are still a lot of questions about the trial design and the educational efforts you guys are doing in order to sort of make people aware of the more robust nature of the trial you guys have put together. I guess I'm curious how you feel that's resonating? Even still amongst the investment community there's a lot of questions about how this is going to play out. As you talk to clinicians, as you get ready to go to regulators, do you feel that message is getting out or do you think you need to do more in the interim to get people aware of how different this trial really is?

John A. DeFord

Well, I think it's a combination of both. The feedback we've been getting, and I can tell you I was just at the ISET meeting last week and then LINC is going on right now but the team -- we had a number of physicians stop by to say that as they're digging into it and understanding the details of the study, we got a lot of congratulations for running a very complex study that really tried to remove bias in multiple different ways. So I think there's still some education that's going to be required there, but the feedback's been extremely positive.

Raj Denhoy - Jefferies LLC, Research Division

So if you do go to the regulators or if the data does come out, as we all know it will, and that those lines, those TLR lines simply don't separate as much as we see in other trials, how much of a hurdle would that represent? I mean, is that something that you can educate people around or is it going to be something that is a hurdle longer term?

John A. DeFord

I think longer-term it's not an issue because we've shown a strong biological effect that you saw at 6 months. Without giving away too much detail here, we're obviously looking long term as far as our results go, and we think it's not going to be an issue.

Raj Denhoy - Jefferies LLC, Research Division

Sorry, just lastly, but then how is that influencing the reimbursement you can get? If those lines don't separate, does it becomes more difficult to get as much of a premium as perhaps you'd like?

John A. DeFord

Well, I think, we obviously anticipate that the -- improvement in biological effect will translate into improvement in clinical effect, and that'll give you increased reimbursement. So we think it all fits together.

Operator

Our next question comes from David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Tim, I just wanted to come back to some of your commentary on the rest of world growth. In the fourth quarter, was the number we heard 8%, rest of world? And if that was the right number, that number seems slower than the number you've had in prior quarters. Can you give us a sense of what's driving that in rest of world and where the EM growth rates sort of looked in 2013 versus '12?

Timothy M. Ring

Yes, I'll comment -- I'll kind of give you the narrative comment, and then Chris can chime in with the specific numbers if you want to drill down more into those questions there. I think what you see with emerging markets, for us, as we continue to go direct in some of these markets. You get a little bit of lumpy growth based on taking dealers up, finding out exactly how much inventory is in there, in the field, I should say, getting the tracings around those. And what we don't want to do is flood the market. We want some of that inventory to kind of burn off, if you will, in the marketplace. So there's some -- I've referenced this before in prior calls, but there's going to be some fits and starts relative to some of the markets over time. Underneath all of that, directionally, we're very pleased with the way we're performing in those markets and how the results are stacking up.

Christopher S. Holland

The only couple of things I might add, David, is that rest of world number of 8% in Q4 includes countries like Australia and Canada, right? So there are a number of other countries that are in the mix there. Emerging markets at 8.5% of sales in Q4, we said, continues to deliver very strong double-digit growth. And so there will be some lumpiness, to Tim's comment, but with the investments we're making, we expect that to continue for, certainly, for the foreseeable future.

Raj Denhoy - Jefferies LLC, Research Division

Okay, very helpful. And, Chris, just for modeling purposes in the first half of the year. With the Gore proceeds as it relates to the buyback, how should we think about the pacing or your intent to use those proceeds to get the buyback completed as soon as possible?

Christopher S. Holland

I don't want to signal too much. Obviously, depending on our acquisition activity, we would expect to use free cash flow over the course of the year as well. And as I said, in the first number of months here, we would anticipate completing the rest of that Gore-funded commitment. But again, with ordinary course buybacks and that increment, you'll see us be somebody who is active over the course of the year as we typically would be.

Operator

Our next question is from Rick Wise with Stifel.

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

You talked about the PAD [ph] being sort of a toolbox, needing a tool box approach. Can you just update us about your thoughts beyond your current products, Lutonix, et cetera? Do you need more than just stent balloons to be a dominant player or whatever, atherectomy, CTO crossing? Any updated thoughts on that front?

Timothy M. Ring

Yes, I'll talk generally as opposed to about specific technologies. I still think that there -- relative to technology in this space, I still think it's fairly early. If you want to go back and look at kind of where -- how the coronary market played out over time, I personally think that the peripheral vascular market is more challenging, technically. And some of the anatomy below the knee, behind the knee, et cetera, can be extremely challenging. And I think there's a lot to be learned, and I think Lutonix will help people a lot in learning about the disease, about when to intervene with the disease. I think there's probably going to be some very interesting dialogue over time, in part promoted by some of the data that comes out of the Lutonix and the general use of technology in the space about when to intervene and those kinds of things. And as a result of those discussions, I think there'll be additional technologies in this space that will keep our eyes open, to -- we're obviously a big player in the space, and be important to our customer and clinical base. And obviously, always looking out for what can help patients is important to us.

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

Chris, gross margin, you mentioned, I think, if I heard you correctly, we exceeded our cost reduction goals by 10%. Just remind us what's left of the cost reduction fund. And maybe as part of that, you could talk about the driver of that 1,000 basis point improvement, longer-term improvement in Rochester gross margins.

Christopher S. Holland

Sure. Actually in 2014, Rick, when I laid out the gross margin guidance, we're including 50 basis points of cost improvement in gross margin in 2014, which is frankly reflective of what we think we can do on an annual basis for the foreseeable future. There's -- there continues to be a significant opportunity, we believe, on a product cost side. We've done, I think, a terrific job on the labor side and the overhead side, but we're in the early stages of generating ongoing cost improvement on the procurement side. And so that's been a terrific contributor for us. And again, obviously the challenge in recent years has been prices have been offsetting that. So we'll continue to do what we can organically to move the margin higher, and we're confident in our ability to do that. And Rochester, from a similar standpoint, will benefit over time as we consolidate the manufacturing and obviously benefit from the efficiencies that our teams can bring to what is a very successful but smaller company. And that's going to be across the board from a procurement, really process and labor side. So we'll do it carefully and systematically over the next number of years here. But again, we're very confident that the operations team will be able to deliver that kind of improvement.

Operator

We'll go next to Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Just on the amortization. I just wanted to ask, has that changed since, I guess, the September update? Because I had thought it was going to be a little bit more than $0.90 a year. Is that just the final purchase price allocations and whatnot? Or am I just thinking of it wrong?

Christopher S. Holland

Thanks for the question, Kristen. The actual number as we finished the purchase accounting is a bit lower. It's about $106 million of pretax amort for '14. And we're tax-affecting it at the jurisdictional tax rates not the corporate effective tax rates. So when you do that, you end up with $0.90 on that $106 million of gross.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay, that's helpful. And then the commentary on R&D spending, I think you'd mentioned that for 2014 you were expecting it to be around 8% of revenues. And guidance, I guess last year, when you guys talked about it a year ago, was that you'd be kind of over 8%. And it sounds like today you're saying to expect that number to kind of return down. Have you changed your -- just thinking on internal R&D given the number of acquisitions that you've completed. And then should we expect additional acquisitions, I guess, in the year ahead as well?

Christopher S. Holland

I think the guidance for '14 is actually to stay over 8%, so that's very consistent with what we said last year. We obviously ended this year over 8%. We're going to continue spend at a level that has us still over 8%, even obviously on a much higher revenue number in 2014. What I said is as you get into 2015, we would anticipate that the -- while the nominal dollars may still grow, obviously, we anticipate the revenue line becoming larger. And so we would expect a moderation in the level of spending as a percentage of sales as we get into '15 and beyond.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And then, I guess, any -- just going back to the special charges in the quarter. The increase in reserves, is that related to the pelvic floor mesh primarily or is there something else?

Christopher S. Holland

Yes, it's across a number of product categories with the pelvic mesh being one of them.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then last question just in terms of Gore and just how should we think about the royalty going forward. How are you guys, I guess, thinking about it in terms of whether or not the $130 million to $140 million level is something you would expect over the next couple of years? Any insights there in terms of what they're doing to probably reduce the amount that they're writing to you every quarter?

Christopher S. Holland

I think we're comfortable with $130 million and $140 million for 2014, so that's obviously now part of our guidance. And I think everything we're trying to do over time is create a more robust organic engine in the company that's going to drive top and bottom line growth. And we're certainly not going to be sitting around here dependent on that royalty over time. But we're not going to speculate, right, what they might do or what they could do and how that might affect '15.

Operator

We have a question from David Roman with Goldman Sachs.

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

I was hoping you can talk a little bit more about some of the deals and the integration opportunities. I think, Chris, in your prepared remarks, you talked about 1,000 basis point improvement in the Rochester medical margins. So maybe just conceptually you could talk to us about how you see these deals fitting in, besides the simple fact of layering them in from a growth perspective. But what are the opportunities to put these in your sales forces bag whereby 1 plus 1 equals 3 from a top line perspective? How long does something like that take? And maybe any more detail you can provide on that level of margin expansion?

Timothy M. Ring

I'll start and maybe John Weiland wants to jump in as well. I think that -- first of all, we did 3 of them very close together from a timing point of view. One of the nice parts about being decentralized like we are, those are 3 different businesses. So the Urology business is integrating the Rochester deal, the Surgical business, the Medafor and then the TRUE Balloon's going to Vascular, which makes the integration that much easier. It's 3 different businesses dealing with that. They all have well-established sales forces. We clearly always sell PTA technology, so our sales force understands that. The indication for this and the application's a little different, but the training curve is not very high. As it relates to the surgical sealant or hemostasis business, again, a business that we -- the hemostasis we've been in for a while. So we understand that market, that call point, the same sales force. And then the Urology one is just almost a direct overlay with a couple of exceptions regarding where the product is actually sold. I mentioned earlier that internationally, given the size of these businesses, with the exception of Rochester, they virtually had little to nothing over there outside the U.S. relative to direct presence. We have the infrastructure there, so it's very easy for us to pull that in. So it's about as seamless an integration on that sales and marketing front that you could expect given the similarity of the product line.

John H. Weiland

And I think that if you look at -- it's not glamorous. It's one of the strengths of the organization, is to be able to integrate these into our sales forces worldwide. And again, interesting example is that with the Neomend and Medafor acquisitions, we took what was a small sales force in BioSurgery with Neomend, and now have a very sizable sales force in the United States, brand-new sales force in the United States selling 3 major product lines in biosurgery. We would expect big things from that. Tim talked about the Rochester side of it. But I guess a good example would be if you looked at the growth that we had in the fourth quarter in Europe, which we haven't talked much about, where we grew at 8%. Excluding EP, when you look at the growth drivers, many of those were the platforms that we've built over the last 2 years: Biopsy, PTA, StatLock catheter stabilization; therapeutic temperature management; biosurgery were the drivers, that's how you get it back to the growth levels that we're trying to drive it through. And I think the integration of past and new acquisitions is going extremely well.

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

And then maybe just a follow-up or a segue from that. As we look at the SG&A guidance, when I just sort of lump in, call it $135 million, the midpoint of your guidance on the royalty, it does look like on an organic basis, you are still spending quite a bit. And even some of the Gore proceeds do look to be getting reinvested. Should we be thinking about return timelines any differently from some of the investments you're making? It sounds like 2015 was the year that we're going to see sort of an inflection point. But is there anything you're seeing in the investment program that suggests either the return could be longer than you'd initially contemplated or a ramp is steeper but further out? I mean, is that a fair way to kind of look at the SG&A spending or not?

Timothy M. Ring

Well, I think when you look at the total investments, include R&D in there as well. 50% of that incremental investment was R&D, 40% was SG&A of the Gore money, if you want to think about it that way. R&D takes a longer period of time. Returns are both very good. The SG&A stuff, it's pretty much on schedule with what we had planned, and there's been no change of expectation from what we had planned originally with any of those investments in those emerging markets.

John H. Weiland

I'd say the only variability that we have in our R&D investing, as we stand here today, is that we're executing very well on all the projects, and on our timelines, the only area that is outside of our control is exactly when you get approval through the FDA. That's the only wild card that I see in some of the projects that we have remaining.

Christopher S. Holland

Yes, but we would expect, as I said, David, as we get into '15, to see more leverage. As I said, we've leveraged sort of the non-investment parts of the business in 2013. We said last year, 2014 would continue to be a big investment year. And obviously, we're continuing to build the infrastructures in these emerging markets, and we've added these new platforms through these acquisitions. All of which we would expect to lever more effectively as we get into 2015 and beyond.

Operator

And next we have Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I just have a follow-up on Lutonix. I want to ask about a couple of things. One was, the last 2 quarters, you had mentioned that it's been a growth driver in the Vascular business. I was just wondering if anything has changed there in Europe. And then also do you have any commentary that you'd like to share in terms of how you think the failure of the balloon [indiscernible] trial from Medtronic impacts your outlook for that indication or for your business at all?

John H. Weiland

I would just start, and I'll turn it to John DeFord, is that no, we've seen a continued escalation in our ability to execute in Europe. And John, I'll let you talk about the Medtronic trial.

John A. DeFord

Sure. You guys are probably aware that yesterday, Medtronic did present, or Dr. Zeller presented Medtronic results at the LINC meeting. Although I wasn't there, I did get a briefing on it. And I think we were surprised that there was no biologic effect that was shown in that study. Again, it's a very different kind of technology. It was a very different study. At this stage, we really don't think you can draw conclusions on a class effect or draw conclusions on our technology in particular. So we've got a study ongoing, as I said, and we've got just a handful of patients enrolled at this point. But we're watching it closely. And at this point, we're excited about it and bullish on it, and we'll see where it takes us.

Operator

Your next question is from Matthew O'Brien with William Blair.

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

I was hoping we could start on emerging markets. If my math is correct, it looks like the performance in that business accelerated during the fourth quarter. Was that a function of new products or new geographies? And then within that question, as I look at the emerging markets performance and, again, the growth there, it looks like that should contribute about 100, 120 basis points to the organic growth in 2014. So that would imply that you've got some negative thoughts around the U.S. or Europe, even though both those geographies had improved recently. Can you just let me know if that's an appropriate way to characterize it.

John H. Weiland

Well, I don't think that we said we saw an escalation in the growth rates in our emerging markets. We were happy with what we produced in Q4, and our expectations are significant based on the number of physicians that we've added in emerging markets in the year 2013 and its impact on '14 and '15.

Christopher S. Holland

I don't think they're going to be as impactful in terms of a contributor to organic growth in 2014. Obviously, the sales base is bigger and, obviously, the acquisitions that we've made are -- there's almost no emerging market component to them. While EP did have actually a fairly significant emerging market component to it. So I think from a contribution standpoint to growth, 2014 won't look that much different, I think, from 2013 from an organic standpoint.

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

Okay. And then on share count for 2014, can you just give us some specifics on what we should expect in Q1 and then for the full year?

Christopher S. Holland

No.

Operator

[Operator Instructions] We'll go next to Rich Newitter with Leerink Partners.

Ravi Misra - Leerink Swann LLC, Research Division

This is actually Ravi Misra in for Rich. You mentioned something about a FDA mandatory device identifier program. Can you just talk about what kind of investment that's going to require on the P&L, where that's going to show up?

Christopher S. Holland

It's a multiyear program. We have to identify every device. It requires relabeling every device we manufacture. So it's actually a multiyear, tens of millions of dollar investment for us in systems infrastructure and also relabeling across all of our manufacturing plants around the world. And the P&L burn because they're actually -- there's P&L spending associated with the relabeling that's not capitalizable. That will flow through the gross margin line over the coming years. So it's a headwind for us on the gross margin line, and it's a tens of millions of dollars investment for us over the next 3 years.

Timothy M. Ring

And just to be clear, this is not a requirement unique to Bard. It's an industry-wide requirement.

Christopher S. Holland

Yes. But one thing I'd add is because of our number of SKUs, which is in the 15,000 range. For a company our size, given our breadth, it's a much more significant burden, if I can call it a burden, on Bard relative to our size than virtually any other company in the space.

Ravi Misra - Leerink Swann LLC, Research Division

And then maybe if I can ask, how much of an impact would that -- but then that's obviously factored in to your 30 to 60 bps improvement in 2014. I mean, tens of millions would be a run rate on an annual basis?

Christopher S. Holland

No. It's going to be less than that because a significant portion of the investment, at least half of it, will be able to be capitalized and amortized over a longer period of time. But in '14 and '15, it will be less than $10 million, but in the single millions of dollars in terms of P&L. And then once the project is done, the depreciation will begin to burden the P&L but in a less significant way.

Ravi Misra - Leerink Swann LLC, Research Division

And then maybe one last run before I drop off. The continence business looks like it returned to positive growth in the quarter. What's your outlook for this in 2014?

John H. Weiland

Well, the continence business really returned to growth as a result of the Rochester products being added into the continence franchise. So I wouldn't expect that you'd see a significant difference in our continence business. The full year, we were down 7% in continence, and I would expect that'll be a very low or negative growth business for us moving forward.

Christopher S. Holland

Yes. Within that category, the Rochester products will continue to grow very nicely. It's just relative to the base, they're not big enough to swing it.

Operator

Our next question is from Josh Jennings with Cowen & Company.

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

First one, just for Chris, I was -- sorry to ask you to do this, but just can you clarify your definition of organic growth for your guidance in 2014, 2015? What's included in '14, what's included in '15?

Christopher S. Holland

It's the net impact of the loss of the EP sales as compared to 2013, plus the impact of the revenue associated with the acquisitions. Obviously, they came on during different points during the year. They're expected obviously to grow. We have plans to have them grow at very attractive rates. The OEM agreement with Boston Scientific is somewhat out of our control in terms of the level of sales. But that'll contribute in '14. And when we net those against each other, we're including, again, 0 to 30 basis points from the net effect of those transactions.

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

Okay, great. And then just in terms of your portfolio -- disease portfolio, assuming that Lutonix gets approved and that product is in your bag in the U.S., could you just talk about your current portfolio and what holes you have to fill potentially if you want to be kind of a full-service provider for interventionalists?

John H. Weiland

I think we have a very full bag as we speak today. And then we're always looking for opportunities that would add growth platforms to it. Not necessarily fill in the bag per se, because we don't think that's the right strategic approach to the business is just to fill the bag. But where we see growth platforms developing and an opportunity, be it business development, to enter a segment that has sustainable growth and the opportunity to be #1 or #2 in terms of that product line growth area, we'd be very serious about it.

Operator

Then we'll go next to Mike Matson with Needham & Company.

Unknown Analyst

It's actually Brad filling in for Mike. I just have 2 quick questions. First back to emerging markets. Could you give more color on the number of actual salespeople that you added compared to your expectations?

John H. Weiland

Sure, I certainly can. We had the expectations that we would add 201 during the fiscal year 2013, we added 203.

Unknown Analyst

Great. And then just another quick one and then that's it for me. Can you tell us how much of the Gore cash you used for share repurchase thus far?

Christopher S. Holland

We used a portion of 1/2 the after-tax proceeds, so I'm not going to be more specific than that, but a portion.

Operator

We have a follow-up from Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I just wanted to check in again the drug-coated balloon expectations. I think a year ago, you guys had talked a little bit about your goals for 2015 of $100 million in sales. I just wanted to get your thoughts around if you think that number is still a good number we should think about. And also is that a kind of net number, if you will, because I just also want to see how you guys are thinking about any potential cannibalization from the kind of base stent business as well?

John H. Weiland

That's certainly our strategic outlook, and we have not changed our opinion at all, Kristen. And no, that is not net. That is the sales of Lutonix as we've identified it.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. Would you expect to see any sort of pressure on the stent business? And then just more broadly, I guess, as we're looking into 2014, what are your expectations for peripheral stents, just given some of the pricing headwinds that you have been referencing, as well as some potential increased competition in that area?

John H. Weiland

Well, it certainly could have an impact on the stent business in 2015. But as you know, the stent business is relatively broad. So it would impact the whole industry, so to speak, if this technology is indeed as effective as we hope it is. And we've said, I think a little earlier today, that our stent business will continue to be in a slow decline mode based on new entrants to markets and based on our position as we exist today.

Timothy M. Ring

I think, Kristen, this is Tim, the other thing to keep in the back of your mind as you track this going forward, the largest component within our Stent business is in longer like stents. And the Lutonix balloon, at least initially when it comes out, will be in lengths available, shorter than that, significantly shorter than the stents available. So...

John A. DeFord

15, 10 millimeter.

Timothy M. Ring

Yes. I think you need to -- so our view of it is Yes, this may end up eating into the stent business. It may not necessarily be our stent business.

Operator

And there are no further questions. So this does conclude our Q&A session. I'd like to turn the call back over to Bard's management for closing or additional comments.

Timothy M. Ring

Thanks, Kathy. With that, I'd like to thank all of you for joining us this afternoon. And I'd like to take this opportunity, as I always do, to thank Bard employees around the world for their hard work, dedication and commitment, and we look forward to talking to all of you after the first quarter. Good evening.

Operator

Thank you. And, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and choosing AT&T Executive TeleConference. You may now disconnect.

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