Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

CR Bard (NYSE:BCR)

Q4 2010 Earnings Call

January 31, 2011 5:00 pm ET

Executives

John Weiland - President, Chief Operating Officer and Director

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

Todd Schermerhorn - Chief Financial Officer and Senior Vice President

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

Eric Shick - Vice President of Investor Relations

Analysts

Matthew Dodds - Citigroup Inc

David Roman - Goldman Sachs Group Inc.

Robert Hopkins

Michael Weinstein - JP Morgan Chase & Co

Douglas Tsao - Barclays Capital

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

Kristen Stewart - Deutsche Bank AG

Thomas Gunderson - Piper Jaffray Companies

Frederick Wise - Leerink Swann LLC

David Lewis - Morgan Stanley

Robert Goldman - CL King & Associates, Inc

Paul Choi - Caris & Company

Lawrence Keusch - Morgan Keegan & Company, Inc.

Joanne Wuensch - BMO Capital Markets U.S.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CR Bard Inc. Fourth Quarter 2010 Earnings Results Conference Call. [Operator Instructions] Today's presentation will be hosted by Timothy M. Ring, Chairman and Chief Executive Officer; along with John H. Weiland, President and Chief Operating Officer; and Todd C. Schermerhorn, Senior Vice President and Chief Financial Officer. Also in attendance today are John A. DeFord, Senior Vice President, Science, Technology And Clinical Affairs; and Eric J. Shick, Vice President, Investor Relations.

Today, Bard's management will discuss some forward-looking statements, the accuracy of which are necessarily subject to risks and uncertainties. Please refer to the cautionary statement regarding forward-looking information in Bard's September 30, 2010 10-Q and the information under the caption Risk Factors in the company's 2009 10-K, including disclosure of the factors that could cause actual results to differ materially from those expressed or implied. During the call, references will be made to certain non-GAAP measures, which management believes provide an additional and meaningful assessment of the core operating performance of the company and its individual product franchises. Reconciliations of non-GAAP measures to the most comparable GAAP measures are provided in Bard's earnings press release and on the company's website at www.crbard.com. All information that is not historical is given only as of January 31, 2011, 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 Timothy Ring. Please go ahead.

Timothy Ring

Thank you. Good afternoon, everybody. I'd like to welcome you all to Bard's fourth quarter 2010 earnings call. We expect the presentation portion of this call will last about 25 minutes. The agenda today will go as follows: I'll begin with an overview of the results for the fourth quarter; John Weiland, our President and COO, will review fourth quarter product line revenue; Todd Schemerhorn, our Senior VP and CFO, will review the fourth quarter income statement, balance sheet, as well as our expectations for the first quarter. And since we've just covered our product development pipeline in depth at our December 13 analyst meeting, we'll wait until our first quarter earnings call to give you a detailed update on those projects. And then finally, we'll close with a Q&A.

Fourth quarter 2010 net sales totaled $717.1 million. That's up 6% over Q4 of last year on an as reported basis and 7% on a constant currency basis. The currency impact for the quarter versus the Q4 was unfavorable by 100 basis points. Our net sales for the full year 2010 were $2,720,200,000, up 7% on both an as reported and a constant currency basis. Net income for the fourth quarter was $136.2 million and diluted EPS were $1.47. Excluding items that affected the comparability results between periods, which Todd will cover later, fourth quarter 2010 net income and diluted EPS were $143.4 million and $1.54, up 5% and 11% respectively. EPS for the quarter versus our guidance benefited from the true up of our tax rate for the last minute retroactive renewal of the R&D tax credit, and Todd will cover this again later. Full year 2010 net income was $509.2 million. Diluted EPS were $5.32. Excluding items that again affect comparability between periods, full year 2010 net income was $535.7 million and diluted EPS were $5.60, up 5% and 10% respectively over 2009 results.

Looking at our revenue growth geographically compared to the fourth quarter of 2009, again on a constant currency basis, net sales in the U.S. increased 6%. Europe was up 5%. Japan, we were down 3% versus the prior year period, following a particularly strong Q3 as sales into our joint venture there tend to be somewhat variable from period to period. Our other international businesses had a very strong quarter, growing 22%, including 43% in our emerging markets, which now represent about 4% of our global revenue. We define our emerging markets as Central and South America and Asia, excluding Japan. We are rapidly expanding our presence in China, which is helping fuel our growth in emerging markets. In fact, over the last two years, we've expanded our headcount there by four-fold. We're also making selective investments in several other countries in our emerging markets.

The business development has been discussed at our analyst meeting last month. During Q4, we closed the Romadex [ph] (14:48) transaction, acquiring the Sapiens TCS tip confirmation system. Beyond that, we acquired technology that we plan to use in the development of a next generation cranial repairing implant.

Looking back on 2010, we did 10 deals, ranging from technology acquisitions to the SenoRx transaction. And looking ahead, we have a number of potential product and technology deals in our business development pipeline. As Todd discussed when he laid out the recash [ph] (15:18) transaction at our analyst meeting, what's important here is our strategic objectives remain unchanged and most importantly, our commitment to strategic acquisitions remains a top priority. Let me now turn you over to John Weiland for a review of our product line revenue

John Weiland

Good afternoon, everyone. Before I start as usual, I will be giving all percentage growth data in comparison to the prior-year period on a constant currency basis unless otherwise noted. Let me start with our Vascular business. Growth in this category stepped up this quarter to 16%. Total net sales were $205.3 million, up 13% over last year on an as reported basis. Our U.S. business, which represented 56% of global vascular revenue, was up 19% for the quarter. Internationally, we grew 11%, which includes a 50% increase in our emerging markets sales. Electric physiology sales, which represented 18% of our Vascular category, were up 4% this quarter. Growth in our EP disposables was 5%, led by another good performance in our Steerable Diagnostic Catheter sales, which were up 8%. We also saw a 6% growth in our Conventional Diagnostic Catheter line this quarter.

In the fourth quarter, our EP Lab System sales were flat against the prior-year period, but represented 35% of our full-year 2010 sales as the fourth quarter has historically been the largest sales period of this line. Sales in our vascular breadth category were down 4% in the fourth quarter, which is within the typical range for this category. Our Endovascular business increased 23% in the fourth quarter. Within endovascular, our biopsy line was up 56%, with the SenoRx products increasing about 30% sequentially over the third quarter, reflecting the transition to a consolidated United States selling force, selling the full biopsy bag and the mobilization of our direct sales efforts in Europe. The integration of SenoRx into our existing Biopsy business has gone very well to date.

Our Biopsy business, excluding SenoRx, was up double digits again in the fourth quarter, driven by our core needle products; the FINESSE Vacuum Assisted biopsy device and our tissue marker line. Our peripheral PTA products were up 37% this quarter, with continued growth across the line, most notably from our recent expansion into specialty, small vessel and CTO catheters spaces. We've had great success building a strong PTA portfolio and haven't seen a quarterly growth below 15% in over three years. Looking forward, we continue to see good growth opportunities in this business, with six new product launches scheduled from the first half of 2011 through the first half of 2012.

Sales in our Vena Cava filter line were down 15% in the fourth quarter versus the prior-year period. As we've discussed previously in August, the FDA issued a recommendation that implanting physicians and clinicians responsible for the ongoing care of patients with retrievable IVC filters consider the risk and benefits of removing the filter as soon as protection from a pulmonary embolism is no longer needed. We suspect this publication has led to a somewhat more selective use of filters. We hope to see a shift in our momentum here once we launch our new MERIDIAN filter. Recent communications with the FDA has us continuing to anticipate launch of the jugular version in the first half of this year. Further, we've had some good news from the agency since the analyst meeting and now expect to launch the femoral version around the same time rather than in the second half of the year as we've previously communicated.

Our Stent business was up 7% in the fourth quarter, including some good growth in our emerging markets. Within our bare-metal stent line, light stent was up double digits again this quarter, our eighth straight quarter of double-digit growth since we annualized the acquisition of the device.

Let's now turn to Urology. Total net sales were $185.1 million, which is flat versus the fourth quarter of last year on both a constant currency and an as reported basis. The U.S. business was flat while internationally, we were up 1%. The timing of U.S. distributor shipments did not materially impact our results this quarter.

Our Basic Drainage business was flat in the fourth quarter, with IC Foleys down 5%. Overall, the situation here remains the same. We haven't seen any change in the factors impacting the market, including reduced hospital patient volumes and marginal pressure on Foley catheter utilization. We've also seen no evidence of any market share shift during the quarter.

Our Continence business was down 7% in the fourth quarter. Within Continence, our DigniCare fecal management line was up 8% in the fourth quarter. As we discussed in our last call, the comps started getting tougher this quarter. Looking forward, we plan to launch our next-generation DIGNISHIELD device later in the first half of the year.

In Slings, we grew 2% against a strong fourth quarter last year. Sales in urological specialties, which represented 14% of our urological category, were down 4% versus the prior-year quarter, driven by a 10% decrease in brachytherapy. Our StatLock catheter stabilization line had another strong quarter, with standalone sales of the product increasing 12%, including 24% growth outside of the United States.

We'll now turn to our Oncology segment. Total net sales in this category were $189.2 million, an increase of 6% over the fourth quarter last year on both a constant currency and an as reported basis. Net sales in the United States, which represented 75% of our global oncology business, were up 5%. Outside the United States, sales were up 9%. The fastest-growing geographic category in our outside of the United States business continues to be our emerging markets. Our Port line was up 6% versus the fourth quarter last year. Although we entered 2010 facing increased pricing pressure from competitive devices, we grew our Port business 6% for the full year. Looking ahead, we like the growth potential in this market because we estimate that in the United States alone, out of 750,000 cancer patients that receive IV chemotherapy annually, only about 430,000 receive it through a port. It's our experience that many clinicians and patients are just not aware of all the vascular access device options, so we believe there is room to expand the penetration of ports for this indication through our training and education programs.

PICC revenue growth was 7% in the fourth quarter. We had another very good performance here in our small but growing emerging markets. As we discussed at our December meeting, in the first quarter, we will be launching our Sapien's PICC tip confirmation system. For those that didn't hear our discussion of this new product at the meeting, the Sapien TCS is the standalone device that utilizes the patients' ECG to determine the correct positioning of PICC within the superior vena cava, which illuminates the time and costs involved in sending patients for an x-ray to confirm the location of a catheter's tip before it can be used. The Sapien's TCS is the only device with this indication in the United States. We're already enhancing the Sapien system by adding our proprietary through the drape connection technology that preserves the sterile field during the entire PICC placement procedure. This is an important distinction from an infection prevention standpoint, especially in the bedside placement setting.

Moving to our vascular access ultrasound product line, we saw growth of 11% this quarter as we continue to see strong demand following the second quarter launch of our versatile new Site-Rite Vision system. We are pleased with our growing presence in this market, and the installed base of these systems is an important factor in our ability to help expand the placement of PICCs by nurses at the bedside. Our Dialysis Catheter business is up 5% in the fourth quarter.

Let's complete our revenue discussion with the Surgical Specialty segment. Global revenue growth in this category was 6% in the fourth quarter. Net sales were $114.6 million, up 5% on an as reported basis. The United States sales increased 5%, while international sales were up 9%. Our Soft Tissue Repair business grew 9% overall for the quarter. Within Soft Tissue Repair, our natural tissue products grew 26% with another strong quarter, albeit not at the same level we experienced in recent quarter as the comps get tougher. As we previously announced, we initiated the voluntary recall of the XenMatrix in the early January that led to a minor disruption in shipments. We resolved the issue quickly and resumed shipping XenMatrix again in mid-January. So going forward, we expect the disruption to be limited to the first quarter. Otherwise, in our natural tissue line, our AlloMax products continue to grow nicely, particularly for breast reconstruction applications where we're up over 100% this quarter. After a little over a year, we're very pleased with our progress getting into the breast reconstruction space. With an expected 20% CAGR over the next several years, this $190 million market is a great opportunity for us to leverage our Soft Tissue Repair platform. We plan to increase our focus here as we go forward.

Moving to our synthetic hernia products, sales were flat versus the fourth quarter last year. That said, we did see continued growth in our inguinal and absorbable barrier ventral products. As we discussed in December, we expect to get our overall synthetic ventral hernia line back into growth mode with a number of scheduled product launches over the course of 2011. They include several new versions of our proprietary laparoscopic ventral repair products that combine new, lighter mesh with our Seprafilm resorbable barrier and our new Echo PS mesh positioning system.

Our Hernia Fixation business was up 37% again in the fourth quarter, with the performance and increasing popularity of our SorbaFix product. We continue to see strong growth here despite having lapped the anniversary of the device's launch in the second quarter of 2010.

Closing out the Surgical category, our Performance Irrigation business was down 5% in the fourth quarter and finally, our Hemostasis business was up 2% this quarter. This concludes our product line revenue discussion. I'll now turn you over to Todd Schermerhorn.

Todd Schermerhorn

Thanks, John. Let me start by covering the items that affect the comparability of our results between periods. First, as I outlined in our analyst meeting when I discussed our Q4 guidance, we took a charge for restructuring in the quarter of $16.7 million. This is to address the efficiency issues associated with changing demand in our various businesses. The charge is made up almost entirely of severance and related benefits. Savings estimates here are unchanged. We expect to save $10 million in 2011 as a result of this program and $19 million on an annual basis upon full implementation in 2012. Second, we had acquisition-related items of $2.6 million, mainly purchased R&D and milestone accretion. And third, we had a $6.2 million decrease in our income tax provision related to the closure of certain foreign tax examinations and the expiration of statutes and limitations in foreign jurisdictions. These items are detailed in the notes of 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 $453.4 million or 63.2% of sales for Q4. On an adjusted basis, it was just slightly better at 63.3% of sales, up 100 basis points over the prior-year quarter. New amortization of intangibles relating to transactions closed in the last 12 months cost us about 70 basis points year-over-year this quarter. Our gross margin results can at times be a little volatile, kind of subject to the ups and downs of a complex production planning effort, especially given our product track. But frankly, this period, the timing was such that nearly everything went right. We expect our gross margin percentage to normalize back into the 62s in the first half of 2011 and then progressively improve as we move into the back half of 2011.

SG&A expenses were $204.7 million for the quarter or 28.5% sales. On an adjusted basis, this reflects an increase of 160 basis points over the prior-year period and 140 basis points sequentially. Couple of items are noteworthy this quarter. First, this is the quarter that we issue equity grants. Generally the expense of equity comp is spread over multiple years, but for employees who are retirement eligible, the expense is recognized immediately upon issuance. Sequential increase in equity comp accounts for a full 1% of sales this quarter. In addition, our major 2010 initiatives, notably the surgery sales force expansion and our emerging markets investments peaked in Q4. And then, of course, we continue to have comparison issues in the SG&A from our business development activities in 2010.

R&D expenditures totaled $52.2 million for the fourth quarter. On an adjusted basis, they were $50.1 million, at 7% of sales once again this quarter, representing an 11% increase over the prior-year quarter. It's worth noting that in the last two years, two of the toughest years ever in terms of the demand environment for med tech, we continued to invest in R&D at a compound annual growth rate of 10.5%. We can't control the demand environment so for us, it's all about how we compete and we think this uninterrupted investment in our future will hold us in good stead in the coming years.

Interest expense was $3.8 million for the fourth quarter, up about $700,000 sequentially as a result of 11 days in new debt for the recapitalization. As well as you saw, we ended up financing the recapitalization of two tranches. We borrowed $250 million over five years and $500 million over 10 years at very attractive rates. We simultaneously swapped the five-year fixed rate debt to floating at an immediate positive carry of 200 basis points. It makes particular sense for us to swap to floating and pick up the carry because our large x U.S. investment portfolio is all essentially at floating rates. So floating rate debt actually acts as a hedge. All in, including cost and discounts, we'll book the interest on this new debt at an initial blended rate of about 3.4%.

Other income and expense was $15.9 million of expense for the fourth quarter. On an adjusted basis, it was $800,000 of income consistent with our historical patterns.

The effective tax rate for the quarter was 23.0%. On an adjusted basis, it was 26.9%, down from the 30% rate we were booking for the prior three quarters. The majority of this downward adjustment is as a result of the renewal of the R&D tax credit. We did not communicate this adjustment as an item affecting comparability because it was in the rate in 2009 and it will also be in the rate in 2011. So on a year-to-date basis, we're dealing with apples-to-apples comparability both forward and backwards.

But just to help with the clarity of EPS a little bit further, we reported $1.54, including excluding items affecting comparability, $0.06 ahead of the top of our guidance range. $0.04 of the overperformance relates to the R&D tax credit. We did receive about $0.025 benefit in the fourth quarter from the impact of the recapitalization, but we knew this was a strong possibility when we issued our Q4 guidance. So our full-year EPS, excluding items adds to $5.60, which is a 10% increase over 2009 and which will serve as our base for the 14% 2011 EPS growth that we guided to in December.

We repurchased roughly 8.3 million shares of the company's stock in Q4. The initial ASR purchase accounted for 8.1 million gross shares. Because the calculation of outstanding shares is based on a weighted average, the fourth quarter reflects only about a 2 million share benefit. The full benefit will show in Q1 and then thereafter.

Balance sheet as of December 31 reflects cash and short-term investments of $641.4 million versus $662.2 million at September 30. For the quarter, accounts receivable days were flat and inventory days were down 3.2 days. For the year, AR days were down one day and inventory days were down 1.9 days. Capital expenditures totaled $17.9 million for the quarter and $51.2 million for the year. On the liability side, with the addition of new bonds, total debt was $977.4 million as of December 31 versus $365.8 million at September 30. Debt to total cap at the end of the fourth quarter was about 37% and total shareholder investment was $1.632 billion at December 31.

Moving on to financial guidance. No surprises here. We expect constant currency sales growth in the range of 6% to 8% for the first quarter. On an EPS standpoint, we see first quarter in the range of $1.43 to $1.47, excluding items affecting comparability, if any. Lastly, as far as the full year 2011 guidance is concerned, we have a very slight adjustment relating to the geography of our P&L. Since our December analyst meeting, the public accounting firms have opined on the treatment of the new Puerto Rico excise tax. Rather than just netting the tax and the U.S. tax credit, we're going to need to show part of the tax as a reduction to gross profit, and the credit as a reduction to the tax rate. The adjustment is about $6 million to both lines so about 120 basis points to margin guidance, offset by about 50 basis point reduction to tax rate guidance. Obviously, earnings were unaffected by the change, but since investors pay such close attention to gross margin, we want to make sure we communicated this treatment. So that's it for me. I'll now turn you back to Tim.

Timothy Ring

Thanks, Todd. That concludes the formal part of the presentation. I'll now hand the call back over to the moderator to facilitate the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question then is from David Lewis of Morgan Stanley.

David Lewis - Morgan Stanley

Tim or John, just thinking about the emerging market business in the quarter, obviously there was a significant inflection. Can you just talk about was there some type of inventory drawdown in China? Help us understand sort of the sustainability of that trend. Or what particular products across your mix would be early entrants into that marketplace? And I've got a quick follow up.

John Weiland

No. This is John Weiland, David. no, there is no inventory fluctuation issues. What we're seeing is the result of the investments, we believe, we started making about four years ago in some of these emerging markets, particularly in China right now. And the growth has been balanced. We have a very focused number of products in that geography that we're concentrating on and training our sales forces on. Heavy growth experienced in Oncology, heavy growth experienced in Surgical, and we think that will broaden out as the years will go on as well.

David Lewis - Morgan Stanley

And then, John, just thinking about the outlook for PICCs. Obviously the Analyst Day, product cadence and growth outlook there was at a premium. So thinking about the changes that have happened competitively since the Analyst Day, help us understand sort of how that outlook changes when you think about TCS potentially versus technologies relying on ECG and Doppler. So succinctly has your view for PICCs and outlook for 2011 growth for Bard changed based on dynamics you have seen in the marketplace the last several weeks?

Timothy Ring

The answer is no. This is the only product on the market that has an FDA indication for elimination of x-ray to confirm the tip location in the superior vena cava. And I think you combine that with the expansiveness of our plans for training individual hospitals on it, and I would say that we're more bullish today than we've ever been on the technology and its ability to penetrate markets out around the world. John?

John Weiland

So just weighing in, I don't have a whole lot to add to that. I mean, we've got a lot of technology in our Sapiens device. We haven't really seen the VasoNova product on the market yet. We're certainly familiar with the technology and know that they've got a regulatory path they've got to go through on this. So we're not exactly sure what that means from a timing perspective or what kind of claims they might ultimately end up with. So right now, we feel pretty comfortable with the technology we've got, the platform that we're offering, our sterile barrier and through the drape connection proprietary to Bard and in our overall combination of ultrasound with Sherlock tip location and the ECG and the claim.

Operator

Our next question comes from Rick Weiss, Leerink Swann.

Frederick Wise - Leerink Swann LLC

Maybe I'll start with the tax rate. You had mentioned that, I think at the Analyst Meeting, that we should expect a 50 to 100 basis point reduction in 2011. Just to make sure I'm clear, the Puerto Rican tax adjustment that you were talking about, Todd, is that an additional 50? So if you did 29.4% tax in '10, we'd now are thinking about 100 to 150 basis points reduction for this year?

Todd Schermerhorn

That's correct. Now, obviously, Rick, the last 50, there's no income benefit because it's taken out of GP.

Frederick Wise - Leerink Swann LLC

And on SG&A, obviously, there were some special factors there, investment, et cetera. How do we think about that as a percentage of sales going forward? Do we take the fourth quarter rate then assume that investment continues? Or get in 2011, we'll see more leverage as you get sales and productivity and launch the new products? How do we think about that?

Todd Schermerhorn

We guided to 20 to 50 basis points of improvement for the full year next year, Rick. I do think it looks like it's going to come out of the box a little higher, and I think that trend might be down as we move through the year towards that 20 to 50 basis points of improvement.

Frederick Wise - Leerink Swann LLC

So first quarter looking as a percentage of sales or in dollars more likely?

Todd Schermerhorn

As a percentage of sales. We won't see quite that savings in the first quarter year-over-year.

Operator

We have a question from Mike Weinstein with JPMorgan.

Michael Weinstein - JP Morgan Chase & Co

You started to anniversary some of easy comps in the Surgery business, about tissue repair. What do you think you're growing relative to the market at this point? And you're surprised you didn't see more pick up on the synthetic side given your early launches there?

Timothy Ring

We certainly think we're growing above the market in Biologics. We looked at our full-year growth rates in there and the market's growing in the, let's say, 10% to 11% category. We've grown dramatically faster than that. An eventual market is probably in the area that we have been in essence flat from a full-year basis in terms of our growth. We expect to correct that in 2011 as we've said with the significant number of launches that we have in that category. I mean, the Ventralex ST, Ventrio ST, Ventralite ST and then the Echo PS on the top of that. And I think we'd say that in the inguinal market, which we believe is very low single digits growth, we're starting to see some share there with some new product launches that has given us some growth in the inguinal side again for the first time in about five years.

Michael Weinstein - JP Morgan Chase & Co

So I'm just thinking about -- I recognize the cadence in the Ventralite ST launch, I think you'd commented that, that had been growing relatively well. But it's really the accumulation of these products you're expecting to start to reinvigorate the competitive side of the business?

Timothy Ring

No question about it. We have an awful lot for clinicians to view in terms of the technologies and combinations of with our face products, which we think will be very compelling.

Michael Weinstein - JP Morgan Chase & Co

And if I can just get Todd to just maybe elaborate on the gross margin line, you suggest that there was some onetime items that might have -- basically everything came together to make this a good quarter on the gross margin line, and then you kind of talked us down to the first quarter. So can you maybe flesh out why was this such a good quarter for the gross margin? That wouldn't necessarily have been apparent to us?

Todd Schermerhorn

Yes, well I would say overall, the manufacturing and the operational results ebb and flow, you know, a fair amount here. I'd say it generally looks a lot smoother to you than it does to us as we go through the various pieces. The regression line's still going up, but it can be lumpy from time to time. We had a real strong cost improvement period in the middle of the year in 2010. And we had volumes strong in the middle of the year, maybe too strong in that we built a little bit of inventory. And then we report those efficiencies as we move into Q4, as we sell that inventory to Q4. And so those efficiencies were washing through the P&Ls in the fourth quarter. And they were fairly significant. So basically, I think timing in that respect. I think in addition there are a few sort of inventory valuation, onetime true ups that you do at year end. They're not huge, and they do them every year. But they were also favorable as it happened this year. And so kind of the combination of those things that's got us a little better than maybe we think we can hold for a little while. I would also say, Mike, in early 2011, we're making some efficiency investments back in the manufacturing for the next cycle and so that's going to weigh us down a little bit as we get into Q1, maybe Q2 as well, okay?

Operator

You have a question from Joanne Wuensch with BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets U.S.

Your EP Labs in the quarter were flat. I know this gyrates a fair amount. Any comment on that and is it reflective of any thoughts on hospital capital equipment environment?

John Weiland

I don't think you can read anything into it. I mean it was a strong quarter for us. In the fourth quarter of last year, we had some pretty difficult comps we competing against. So I wouldn't read anything into that, Joanne.

Todd Schermerhorn

It's a huge quarter for us, Joanne, actually. So it looks like capital leases as it relates to our EP is doing fine.

Joanne Wuensch - BMO Capital Markets U.S.

Can you comment on the integration of some of the acquisitions you made over the last 12 months and what the revenue growth would have been like without those acquisitions?

Timothy Ring

Well, we've said, I think we've been updating on SenoRx, about $13.5 million of SenoRx in terms of the volume. And that's really the only one of any size that had any previous sales that brought with it. I think full cardiac acquisition was maybe $10 million a year in size when we bought that product line. Other than that there's nothing of significant size. As far as the physicians concerned, John?

John Weiland

I think the transition from the sales standpoint has been relatively flawless. All those sales forces particularly for La Cardia [ph] (47:22) and SenoRx have been integrated to our larger sales forces. Territory realignments are all completed. We've rolled out SenoRx in Europe now, which we are very optimistic about the market potential for that in that it's heavily driven by x-ray orientation to breast biopsies. And I'd say on the quality and manufacturing front, we have not had a single hiccup in the integration of those products. So I'd finally add that R&D also is integrated to our systems now and, we look like we are right on the time frames that we had for ourselves for all of these integration steps.

Operator

You have a question from Tom Gunderson with Piper Jaffray.

Thomas Gunderson - Piper Jaffray Companies

I was going to ask what SenoRx sales were, but you took care of that so I'll move to Echo PS that was -- you're going to launch that in this quarter. And I think it was approved mid-December on a 510(k). Is that launched or about to be launched?

Todd Schermerhorn

Yes, so we actually said we were going to launch those in the second half of the year, but you've picked up that we are going to get ready to launch those in the first half of the year is our anticipation right now, at least with the COMPOSIX L/P product. And the Ventralite, as you saw, had the 510(k) concurrence. So we're moving through that path right now and pretty excited to get that product into the marketplace.

Thomas Gunderson - Piper Jaffray Companies

And then Tim or John, could you comment on just sort of overall your belief of what's going on in the hospital market now relative to the recent six to nine months on patient admissions and demand in the United States?

Timothy Ring

This is Tim. As we stated in December, we didn't see a reason to call out any dramatic improvement at all in the environment going forward. We think things are much more correlated to unemployment rates than anything else relative to healthcare expenditure. And as you know, there's no prognosis for those to decline dramatically anytime soon. So if it does better, we'll do better, but we don't see a reason to be overly optimistic on the environment.

Thomas Gunderson - Piper Jaffray Companies

And then, Todd, just a quick clarification on the Puerto Rico tax, I understand what you're doing there. But the auditors have said this is okay, but has the IRS confirmed this yet?

Todd Schermerhorn

No, nothing from the IRS yet. The auditors just opined on sort of the classification of the accounting so not a major event. But no, we have not heard from the IRS.

Operator

You have a question from Bob Hopkins with Bank of America.

Robert Hopkins

Todd, I just wanted to clarify on the guidance. Obviously, $5.60 plus 14% gives us $6.38. And I'm wondering would the R&D tax credit add to that or is that included? I think you said at the Analyst Day that the R&D tax credit would add a few more pennies to that.

Todd Schermerhorn

Well, it did, Bob. It added it in Q4, right? So we needed that $0.04 to get to the $5.60 so it's in the base. And so we have 14% of the base, it's obviously included in the next year as well.

Robert Hopkins

And then on SenoRx and the sequential growth, I think you said it was 30%. Can you just talk a little bit about the sustainability of the growth that you see there as a result of what you're seeing from the integration right now?

Timothy Ring

I'd say that we certainly like what we've seen in terms of our SenoRx integration. When we finally got the entire sales forces all trained, territories realigned and Europe fully integrated and then kicked off, from our vantage point, we see an awful lot of growth in front of us there. I mean, there's an awful lot of share that we don't have, and I think we're truly marshalled to go after that share.

Todd Schermerhorn

Our Europe organizations are very excited about the product.

John Weiland

And we've got some new products to launch here with EnCor inspired[ph] (51:47) coming up.

Robert Hopkins

Todd, I'm sure someone else will ask this if I don't, but just organically then this quarter, you grew a little over 5%. As you look through the quarters to 2011, would you expect slow and steady acceleration from that based on what we've heard today from the timing of your pipeline being pushed forward just a little bit? Or just kind of walk through maybe some of the lumpiness on the organic growth outlook throughout 2011.

Todd Schermerhorn

I don't know that I have a lot of insight there, Bob. It will be a function of the new product launches, which can be a little bumpy. We're obviously going to run into the SenoRx comp issue in the second half of the year so that's going to push us on the other side. So 6% to 8% for the first quarter, and then we'll be right with you all the way updating you every 90 days.

Operator

Our next question is from Kristen Stewart with Deutsche Bank.

Kristen Stewart - Deutsche Bank AG

Todd, I was wondering with the matrix recall, is there any reversal of revenue accounted for in the fourth quarter?

Todd Schermerhorn

Yes, it was real small, Kristen, maybe $1 million.

Kristen Stewart - Deutsche Bank AG

And then can you just give us an update on Japan since that was down this quarter, kind of when we would expect that to return to growth?

Todd Schermerhorn

Yes, we were up, what, 20% in the third quarter. So it does, it bounces around a little more timing. Sometimes it puzzles us actually to the degree which it does bounce around. But I would say what we know about the business is solid 7% out the door, which is a good sign for us. Actually there's a little bit of improvement at 7%. So eventually, this will normalize somewhere along the way or at least average over full quarter period. It should average somewhere around 7%.

Kristen Stewart - Deutsche Bank AG

Are there any dealer price increases that we should think about for this year?

Todd Schermerhorn

Not a lot of activity on that front. Things have normalized quite a bit since the first half of this year.

Kristen Stewart - Deutsche Bank AG

Any hope for Urology to turn around? What's kind of going on in Foley, I see it's being down just a little bit more?

Timothy Ring

This is Tim. We guided kind of a negative 1% to 3% for Urology and it's kind of within that range. A lot of that, obviously, is depending upon admissions in the U.S. So we'll see how that goes, but that's kind of how we see it for the year.

Operator

You have a question from David Roman with Goldman Sachs.

David Roman - Goldman Sachs Group Inc.

I wanted to just to come back to the restructuring that you talked about. I know you announced at the analyst meeting. So if you kind of go through the results across med tech for the fourth quarter, it looks like at least from an admissions perspective or procedure volume standpoint, that things are at least bottoming if not seeing a slight improvement. I'm just wondering if you could talk a little bit about how the restructuring fits into what may be a modest improvement in the environmental or at least the stabilization versus something that might be going on in your own business and how you view the structural underlying growth rates of the market where you recompete?

Timothy Ring

Well, let me start off with that. I mean, what you're seeing here, and I don't think we're unique in this respect, we're going to be redeploying resources to the growth areas around the globe. And those areas that are in the businesses that are a little bit slower, we're going to pull resource out and put it into the faster growing segments. And in addition to that, we're going to reinvest as we have been all along in terms of increasing sales forces. We added, in 2010, I think 30 or so sales reps to our U.S. surgical sales force and considerable investment in the emerging growth markets. And we'll continue to kind of invest that way going forward.

Todd Schermerhorn

I don't think we saw any particular inflection point, David, at least from our point of view in the fourth quarter. We certainly, this restructuring, it takes a little while to work these things out. This was not a reaction really to any specific event in the fourth quarter.

Timothy Ring

As a matter of fact, it's more of our ongoing redeployment of assets and looking at our manufacturing efficiencies and moving products where we think they can be more profitable and/or tax advantage for us so...

David Roman - Goldman Sachs Group Inc.

And then maybe coming over to the P&L on the share count, is it a correct thought that you exit the year at about 86 million shares outstanding and that should be the starting point for 2011?

Todd Schermerhorn

Yes. Fully diluted, I'd say maybe 86.5 million, something like that. It's hard to do the treasury method of calculation for the first quarter without knowing what the stock price is. But I'd say it would be safe to be in the mid 86 million range.

David Roman - Goldman Sachs Group Inc.

And then the rest of the P&L guidance remains the same, I think, you said except for the tweaks you talked about between gross margin and tax rate, which would -- assuming the revenue guidance is unchanged gets you to a number above 14%. Is sort of the delta in there meant to be cushioned for potential change in the operating environment or transactions you might do over the course of the year?

Todd Schermerhorn

I'm not sure what you mean, David. I mean, the earnings guidance is sort of what it is $1.43 to $1.47. I think that is a little better than 14% to your point, but we had a really down GP quarter in the first quarter last year. So I think it's basically a little easier comp.

David Roman - Goldman Sachs Group Inc.

But even in the full year, I guess what I'm saying is if you walk through the individual line items in the P&L guidance you'd given in December, I think you do arrive at a number slightly above 14% on EPS. Is the difference related, I don't know, maybe in interest expense, but there's some flexibility in the P&L for changes in the operating environment or diluted M&A?

Todd Schermerhorn

That 14%, fits right within the ranges. We obviously, when we give that guidance. We test the highs and the lows of all those range calculations, and 14% fits right in there. And obviously, once we communicate that, it becomes a battle cry here so we'll be working towards 14% EPS growth.

David Roman - Goldman Sachs Group Inc.

On vena cava filters, I think, were down pretty meaningfully in the quarter, you commented in the prepared remarks, and then the New England Journal of Medicine article having an impact. Any way to quantify what type of rebound we can expect from that MERIDIAN filter launch, for example? I mean, would we get back to normalized growth in that business over the course of 2011 or does it take longer?

John DeFord

This is John DeFord. We are working to get MERIDIAN onto the market. As we said, we are working with FDA. How that's going to impact the market? I wish I knew. Everybody around the table here -- I don't think our crystal ball is that good.

Timothy Ring

We talked about it a lot, David. We're going to have to wait and see.

Operator

You have a question from Matthew Dodds with Citigroup.

Matthew Dodds - Citigroup Inc

Todd, for you, for emerging markets, generally most companies of med tech talk about, the gross margin being a little lower, but the operating margins being similar to corporate average. Is that fair for you based on the scale and the businesses that are doing more business there right now?

Todd Schermerhorn

Yes, I would say actually, Matt, if not that, maybe a little better.

Matthew Dodds - Citigroup Inc

And is that a function of the Surgical business getting more traction early?

Todd Schermerhorn

It could be. I would say PICCs and Surgery being really strong in China is probably a component of that, if I was going to do all the math.

Matthew Dodds - Citigroup Inc

And then, John, for you to follow up on Mike's question earlier, the ventral market, are you saying the market's declining there or are you still losing share? Because it sounds like inguinal's growing a little bit, but just for ventral, the split of what you think the market's doing?

John Weiland

No, we think we have not gained share in ventral over the last few years, Matt, but we think that the new product launches will get us back on a growth trajectory once again.

Matthew Dodds - Citigroup Inc

So is the ventral market still growing?

John Weiland

The ventral market is still growing in about the mid-single digits category.

Operator

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

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

Just another question on the emerging markets side of things, given your investment there in recent years, do you think that's an opportunity and I'm calculating at about $100 million right now in total revenue, do you think that's an opportunity to be a couple hundred million dollars in five years?

Todd Schermerhorn

We have no upper limit for it. So we're going to continue to invest and train and build training facilities and et cetera, et cetera, everything you need to do to get a market fuel for growth. And where we see those opportunities, we'll continue to invest and we've added several hundred people actually in the last year or so. So nothing holding us back there.

Timothy Ring

I think if you look at the aggressiveness of our investment posture in those markets, that's right in our wheel house.

Todd Schermerhorn

And I would just add, just do the math at 40% growth and you'll get there pretty quickly.

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

On specialty surgical, during the analyst meeting, you provided a guidance range of 8% to 11%. Is the bottom end of that range, did that assume synthetic is basically flat again this year and that any upside from that level would come from growth in synthetics?

Todd Schermerhorn

I'm not sure that we pegged a specific story to each aspect of our range, Matt. So I think we sort of look at what are the possibilities and where do we think we can go and grow. And we try and create, bracket that in a way that manages risks. So I can't tell you that the 8% has a specific story that goes with it per se.

Operator

You have a question from Larry Keusch with Morgan Keegan.

Lawrence Keusch - Morgan Keegan & Company, Inc.

Todd, I think I know the answer to the question, I just want to make sure I understand this. You're obviously sitting on a good amount of cash, your cash flow generation will be strong this year. How do we think about, again, uses of that? And I guess where I'm going is I know you'll seek to make some acquisitions as you indicated in the prepared comments, but also where does incremental share repurchase fit in?

Todd Schermerhorn

Well, we have to get through the ASR first, Larry, but I would say after that, our patterns will be fairly similar to what they've been; first, use strategic acquisitions. And for the first time, I think maybe ever, we did -- we were able to invest the cash that we intended, the $300 million. And if we continue to find good targets, we'd like to continue to do that. But I think going forward, post the ASR, our behavior would be very similar to what it's been historically.

Lawrence Keusch - Morgan Keegan & Company, Inc.

And then if I have my numbers correct, and again correct me if I'm wrong here, did the drainage and the IC Foley business get slightly worse in the fourth quarter? And if they did, sort of what do you think is behind that?

Todd Schermerhorn

Well, basic drainage was, what, dead flat for the period.

Lawrence Keusch - Morgan Keegan & Company, Inc.

It was up 4%, I think, in the third quarter.

Todd Schermerhorn

Well, it's up 1% for the year, it's up 1.8%. But we had some dealer benefit in the first couple of quarters, which we knew about and forecasted. We kept saying, I think, at that time that sort of the organic growth rate was zero. So arguably, I guess maybe you changed a little bit there, Larry, but sort of a difference without a distinction, I would argue.

Operator

You have a question from Paul Choi with Caris.

Paul Choi - Caris & Company

First, just quickly a product question either for Tim or John. It seems like [indiscernible] (1:04:38) continues to be really well. I think you said you grew 37%. Are you just kind of observing any change in clinical practice? Or do you see this largely as a function of you outgrowing the market there?

Timothy Ring

I think its largely of us outgrowing the market and really entering different segments that we hadn't entered in the past quite frankly, small vessel's a pretty good example, of that. So being able to compete pretty rigorously across the board in all segments is really what we're seeing.

Paul Choi - Caris & Company

So a lot of new segment entry is contributing to that incremental growth [indiscernible] (1:05:11), do you think?

Timothy Ring

Correct.

Paul Choi - Caris & Company

And then a question for Todd, I think, Todd, at the December meeting you said you expected currency at the time to be neutral to EPS. Can you just give us your updated view given the movements we see?

Todd Schermerhorn

I said that for the full year, in '11?

Paul Choi - Caris & Company

Yes.

Todd Schermerhorn

I don't have any big change to that. Concurrently as far as currency is concerned, the fourth quarter we saw a little bit of a headwind, very manageable. You saw 100 basis points in sales. As we look forward, I'll just, maybe just talk about the first quarter, we think we are seeing between 40 and 80 basis points of headwind on the top line and a modest amount on the bottom line. So it's a little hard to predict further than that, Paul.

Timothy Ring

The only other thing I would add, if your reference was to the yen, we sell into the joint venture in dollars so we don't have any yen exposure there.

Operator

[Operator Instructions] Our next question from Douglas Tsao with Barclays Capital.

Douglas Tsao - Barclays Capital

Just a question on the R&D front where we've begun to see some step up. I was just curious, in terms of where the investment is going, is it largely focused on new areas for the company, new product lines or is it more driven by sort of increasing the cadence of products in your existing categories or perhaps during sort of more incremental sort of extension?

Todd Schermerhorn

Now, Doug, couple of things there. We're certainly investing in increased capacity and capability. So we're adding more teams, we're adding the capabilities that we need. So essentially we're adding projects between 2009, 2010. So beginning of 2010 to the end, we grew our active projects by about 15%, and it launched a number of products in the midst of all of that. So it's a mix throughout and, of course, we're always looking for new opportunities, we're growing within our spaces and looking for appropriate adjacencies.

Douglas Tsao - Barclays Capital

And then the second question in emerging markets, are you largely seeing competition or is the key competition coming from the same competitors you see in the U.S. markets or are you having to fight out for share against local and domestic manufacturers as well?

Timothy Ring

I would say for the most part, it's the worldwide competitors that we see normally in all our markets. In some degree, for example, in China, the very low end of it, there are local competitors, but for the most part, we're competing against the same multinationals.

Douglas Tsao - Barclays Capital

And then generally their, sort of tactical approach is similar especially in terms of something like prices to what you see in domestic markets?

Timothy Ring

I would say that you don't see a big disparity accordingly.

Operator

We have a question from Robert Goldman with CL King.

Robert Goldman - CL King & Associates, Inc

I want to go back to the R&D question because when you guys reset the bar in late 2009, you did talk about R&D to sales going up somewhat considerably. But at least on average for the year 2010, it wasn't up a whole lot from 2009. Have you given guidance on R&D to sales for 2011 and 2012?

Todd Schermerhorn

For '11, we have, Bob. We said 7% to 7.5%.

Robert Goldman - CL King & Associates, Inc

If it's at the lower end, it sort of continues a several year trend of sort of creeping up. Is there a year that we should expect to see something more than 20 or 30 basis points of increase?

Timothy Ring

Well, as you know, it takes a while once you get resource hired and so on to get them up to speed and function, but I think you're not going to see a cliff where all of a sudden it jumps up a huge amount. I think it will continue to be incremental. I know John DeFord, who can speak to this, is aggressively putting plans together to enable us to not only use internal resource but external R&D resource as well.

John DeFord

Yes, Bob. To Tim's point, we're doing what we can in growing our teams and making these investments and looking at ways to leverage our ability to add projects kind of on all fronts.

Todd Schermerhorn

It's not, Bob. We talked about this a little at the analyst meeting. It's just not like you can take $50 million put it into R&D and expect to be productive. It's a progression and it's got to be -- particularly now, in sort of a difficult upselling circumstance, it's got to be thoughtful. One idea is going to snowball into the next, we have to make sure that the dollars we're putting in there are ultimately going to be productive. So for next year, 7.5%, maybe even a little more if everything goes right, but that's kind of the way we look at it. As John said, got to create capacity, you have to do business development and buy technology from time to time, and then those things together can become projects. But if you try and kind of do it all at once, you're not going have the same kind of returns that we've experienced. That's just something that we've learned over time.

Robert Goldman - CL King & Associates, Inc

One other question and this goes into products in Neurology. I think it was mentioned that your Continence device sales were down and your sling sales were up a little bit. I think I know what's going on with slings, you had some new product approval delay, but the Continence device sales going down strikes me that you're clearly losing share on a growing market and perhaps you can explain what's going on there.

Timothy Ring

I think one of the things you probably don't have in the equation is Contigen, which is a product that we've had in the pipeline now for about 20 years, 16 years, I think to be exact. And the manufacturer of Contigen will no longer be supplying that after about mid this year. We've notified customers of all that and that is ramping down pretty substantially already. That's one of the other product lines you don't have in the equation.

Robert Goldman - CL King & Associates, Inc

And how big is that, Tim?

Timothy Ring

It's big enough to have a meaningful impact on the overall number in Continence, that's for sure.

Robert Goldman - CL King & Associates, Inc

So Continence would be growing if it weren't for that?

Timothy Ring

It certainly would have a higher growth rate. Let me take a look at it quick. Give me one second. Yes is the answer, slightly.

Operator

At this time, we have a follow-up question from Kristen Stewart with Deutsche Bank.

Kristen Stewart - Deutsche Bank AG

In the fixation sales, how much were those up in the quarter?

Todd Schermerhorn

Fixation in surgery? Strong period. Let me just -- Eric...

Eric Shick

They were up 37%.

Kristen Stewart - Deutsche Bank AG

And then, Todd, can you just update us on pricing overall for the quarter whether it was net positive or negative?

Todd Schermerhorn

30 basis points decline, right in the range, maybe a little less than it was. I think it was 40 last period so at the topline, 30 basis points.

Kristen Stewart - Deutsche Bank AG

Do you think overall, looking out to 2011, does your forecast assume that pricing gets a little bit tougher or stays about the same?

Timothy Ring

I would say -- let me just think for a second. It's right about where it is now. I think that's the forecast for next year.

Operator

There are no additional questions. This concludes our Q&A session. I would like to turn the call back over to Bard's management for closing or additional comments.

Timothy Ring

I'd like to thank everybody for taking the time to spend with us this afternoon, and we look forward to seeing you and speaking with you at the end of the next quarter. Have a good evening.

Operator

And that does then conclude our conference for today. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CR Bard's CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts