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CR Bard (NYSE:BCR)

Q2 2011 Earnings Call

July 21, 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

Analysts

Matthew Dodds - Citigroup Inc

Michael Matson - Mizuho Securities USA Inc.

Brooks West - Piper Jaffray Companies

Robert Hopkins

Michael Weinstein - JP Morgan Chase & Co

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

Anthony Petrone - Jefferies & Company, Inc.

Robert Goldman - CL King & Associates, Inc.

Frederick Wise - Leerink Swann LLC

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Lawrence Keusch - Morgan Keegan & Company, Inc.

Unknown Analyst -

Joanne Wuensch - BMO Capital Markets U.S.

Jason Wittes - Caris & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CR Bard Inc. Second Quarter 2011 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for future on-demand replay through the Bard website. Today's presentation will be hosted by Timothy M. Ring, Chairman and Chief Executive Officer; along with John H. Weiland, President and Chief Operating Officer; Todd C. Schermerhorn, Senior Vice President and Chief Financial Officer; and John A. DeFord, Senior Vice President, Science, Technology and Clinical Affairs. Also in attendance today is Todd W. Garner, 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 March 31, 2011 form 10-Q and the information under the caption Risk Factors in Bard's 2010 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 release and on the company's website at www.crbard.com. All information that is not historical is given only as of July 21, 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 Mr. Timothy Ring. Please go ahead, sir.

Timothy Ring

Thanks, Kathy. I'd like to welcome everybody to Bard's second quarter 2011 earnings call, and thank you for taking the time to join us today. I would expect the presentation portion of the call to last about 30 minutes. The discussion today will go as follows. I'll begin with an overview of the results for the second quarter. John Weiland, our President and COO, will review second quarter product line revenue. Todd Schermerhorn, our Senior VP and CFO, will review the income statement, balance sheet, as well as our expectations for Q3. John DeFord will review an update on our product development pipeline, and I'll close with the Q&A.

Second quarter 2011 net sales totaled $725 million. That's up 8% over Q2 of last year on an as-reported basis and 5% on a constant-currency basis. The currency impact for the quarter versus the second quarter of last year was favorable by 220 basis points. As we previously reported, we took a charge this quarter related to the proposed settlements of the hernia product claims, which drove us to a net loss position on an as-reported basis for the second quarter of $47.8 million, with a diluted loss per share of $0.55. Excluding all items that affected the comparability of results between periods, which Todd will cover later, second quarter 2011 net income and diluted EPS were $141.7 million and $1.57, up 6% and 13%, respectively.

Looking at revenue growth geographically compared to Q2 of last year, second quarter net sales in the U.S. increased 3%. This is the lowest growth rate we've seen in the U.S. in quite a long time. When John Weiland takes you through the product line review, you'll see that this softness in the U.S. is across multiple product lines. Specifically, you'll notice reduced growth rates in product lines with no significant change in competitive dynamics, such as our vascular stent and dialysis product lines, which leaves us to conclude that the softness is probably bigger than just us. As you know, we don't have the public data for the most recent quarter yet since that data is always trailing. So we're limited to the same reports and surveys that you see, which do seem to indicate further softening in volumes, especially in surgical procedures. But all we really know for sure at this point is that we had a challenging sales quarter in the United States.

The positive sales news this quarter was that our International business grew 17% on an as-reported basis and 10% on a constant-currency basis, making that the best quarter outside the U.S. in 2.5 years. Sales in Europe increased 5% on a constant-currency basis, driven by continued strong execution with our SenoRx products. And Japan grew 6%, with minimal impact this quarter from inventory fluctuations or any lingering effects of the tsunami. Our other international businesses grew 23% this quarter, driven by 43% growth in our emerging markets as our strategic investments there continue to hit the mark. We talk a lot about the portfolio effect here, usually referring to the product breadth. This quarter, our geographic portfolios on display, and our strategic moves outside the U.S. over the last few years, have produced our best recent international results.

You'll also hear more today about the contribution this quarter from the acquisitions we made in 2010 with the 2 that we've talked about, FlowCardia and SenoRx, we have demonstrated our ability to dramatically ramp sales and at the same time, advance the product development pipelines that we acquire. We believe one of our strengths is selecting the right targets and quickly integrating them into our model. In Q2, we closed a small deal in Electrophysiology and we remain very active in the business development process.

With that, 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, let me point out that 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 begin with vascular. Growth in this category was 11% for the quarter. Total net sales were $215.2 million, up 15% over last year on an as-reported basis. Our United States business was up 12% this quarter. Internationally, we grew 11%. The softness in the U.S. that Tim talked about impacted us in nearly every vascular product line this quarter.

Our Electrophysiology sales were down 1% for the second consecutive quarter. EP Lab system sales were down 1% this quarter. Revenue in our disposable EP product lines was down 1%, impacted by our conventional EP catheters, which were down 6% and Steerable Diagnostic Catheters, which grew at a below trend 3%. Sales in our surgical graft category were down 5% in the second quarter, at the low end of our historical experience for this product line. Our endovascular business increased 18% globally this quarter, reflecting the last period with no SenoRx comp. We are pleased with the performance of our European endovascular business, which grew 17%, its strongest performance in 10 quarters. Within endovascular, our Biopsy products were up 57%, driven by the SenoRx products, which increased 14% sequentially over the first quarter. We continue to see strong growth across all geographies as we mark the anniversary of this acquisition this July with the launch of our next-generation vacuum-assisted console system named ENCOR ENSPIRE. Excluding the SenoRx products, our Biopsy business grew 9% in the second quarter. The FINESSE vacuum-assisted biopsy device and our tissue marker line were bright spots for us this quarter as they continue to grow near triple digits for the third straight quarter. Sales in our peripheral PTA line increased 15% as we anniversary-ed the acquisition of our chronic total occlusion or CTO product line this quarter. Our CTO and specialty small vessel product lines are experiencing nice sequential growth, and we expect that they'll help us continue to see double-digit growth in PTA as we move through 2011.

Sales in our vena cava filter line were down 27% this quarter, consistent with the trajectory we've seen recently. Our combined stent and stent graft business grew at 1% this quarter. Despite no changes in the competitive landscape, we are seeing significant softness in the United States, while internationally, we grew 13%. LifeStent was up 7% in Q2, snapping our 9-quarter streak of double-digit growth in this product line. We're confident this is due to procedural volumes in the United States as the latest IMS data shows that we've gained share to the point that we believe we are now the market leader in the SFA space. We continue to drive our new product pipeline and compile long-term data results to stay ahead of the competition here. But I'll get in trouble from John DeFord if I steal his thunder, so I'll let him give you the updates.

Next, we'll turn to Urology. Total net sales were $182.7 million, flat this quarter on a constant-currency basis and up 2% on an as-reported basis. The United States business was down 3%, while internationally, we were up 7%, with emerging markets growing over 50%. Our basic drainage business grew 3% globally in Q2 and was up 1% in the United States. Our I.C. Foley business was down 2% globally and down 3% in the United States, which is consistent with recent experience here. So no change to report at this daily used product line. Our Continence business was down 17% in Q2. We told you last quarter that we would have headwind in the comps due to the discontinuation of our Contigen product line. Slings grew sequentially over Q1 but we were down against a tough comp from a year ago. DIGNICARE was impacted by the delay in our highly anticipated next-generation device, DIGNISHIELD. We did launch the product in June in a controlled manner and we suspect that customers are delaying purchase in anticipation of the full launch. We continue to see double-digit declines in the pelvic floor repair line. We do have some news on our next-generation of pelvic floor products and John DeFord will provide update on those projects.

Sales in neurological specialties were up 2%. The biggest product line in this category is brachytherapy, which has been declining double digits globally for years but came in flat this quarter because the growing international business is now about the same size as the shrinking United States business. Standalone sales of our StatLock catheter stabilization line grew 3% for the quarter, the U.S. sales being flat and international sales growing 23%. We did have some minor supply issues in the quarter. From a demand standpoint, we're not materially off of our high single-digit growth trend.

We'll now discuss Oncology. Total net sales in this category were $192.8 million, an increase of 6% over Q2 last year on a constant-currency basis and 8% on an as-reported basis. Geographically, net sales in the United States were up 4%. Outside the United States, sales were up 12%. Our Port business was up 6% versus the Q2 last year, with strong growth coming from emerging markets and Japan. PICC revenue was up 9% this quarter, with emerging markets starting to make and become a meaningful number, growing over 100% this quarter over prior year and over 25% sequentially. The rollout of our Sapiens Tip Confirmation System continues to go well and is picking up steam. In fact, of the accounts that have completed the evaluation phase of the sales process, over 85% have committed to the product and over half of those accounts have already eliminated x-ray in their PICC placement procedures. Between evaluations and conversions, we're in well over 100 accounts at this point and our momentum is building. So we like what we're seeing so far. Our vascular access ultrasound product line was up 2% this quarter and as we warned you on the last call, the tougher comps started this quarter. And to finish off Oncology, our dialysis catheter business grew 6% in the second quarter, with the United States being up 2% and international growing 15%.

Now, let's finish up with surgical specialties. Total net sales in this category were $110.9 million, up 3% on a constant-currency basis and 4% on an as-reported basis. United States sales were up 1% and international sales were up 8% for the quarter. As Tim mentioned, it appears that surgical procedures were off this quarter in the United States, but this space is more active competitively as well. Our soft tissue repair business grew 4% this quarter. Within soft tissue, our natural tissue products grew 27%. We remain on offense here and we still have a big opportunity to grow share. Our synthetic hernia repair products were down 2% from the second quarter last year, consistent with our recent experience. We did have 3 key product launches this quarter. VENTRALEX ST for umbilical hernia repair was first and was in full market release mid quarter. VENTRIO ST for ventral hernia repair was in limited release in June and had full launch just last week. These new mesh products incorporate our patented, lighter weight polypropylene mesh designs with the Sepra resorbable barrier technology. Our proprietary and highly innovative ECHO PS mesh positioning system was in limited release at the end of the second quarter, with about 70 cases performed and it has exceeded our expectations for feedback and performance. We're moving to full launch next month and expect to drive share in the faster growing laparoscopic segment of the market, where this product should reduce the surgical time required to position and fix the mesh to the abdominal wall. That leads us to hernia fixation. This quarter, we grew 1%, reflecting a decline in the United States and strong growth internationally, including the sixth straight quarter of very high growth in Europe. We've taken a lot of U.S. share in past years. Competitors are now responding and we are seeing significant trialing. Closing out the surgical category, our performance irrigation business declined 9% for the second quarter in a row and our hemostasis business rebounded from a weak first quarter to grow 11% 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 with the items that affect comparability of our results between periods. For Q2, we had charges for legal settlements and commitments totaling $195.9 million -- excuse me, $195.5 million and acquisition-related items of $900,000. We also reversed $1.1 million of the unspent restructuring charge we took in Q4 of last year. The legal settlements included $184.3 million related to the hernia matter as we included in our recent 8-K and 4 small unrelated matters totaling $11.2 million. These items are detailed in the notes of the financial statements and the reconciliation accompanying our Q2 earnings press release.

Let's go to the statement of income for the quarter. Gross profit was $449.5 million or 62% of sales, down 90 basis points from the prior year quarter. New amortization of intangibles relating to transactions closed in the last 12 months cost us about 40 basis points year-over-year. We were looking for a modest sequential improvement in GPs over the first quarter, but we didn't see it. Price erosion was greater than we expected this period, with 80 basis points on sales and the soft surgical sales hurt our mix. Looking forward, the softer sales volumes will also dampen our manufacturing efficiency. So we still expect sequential GP improvement into Q3 and Q4, but I'd say we're a bit less bullish than we were a quarter ago.

SG&A expenses were $196.8 million for the quarter or 27.1% of sales. On an adjusted basis, it was $196.1 million or 27.0% of sales, reflecting a 20 basis point decrease from the prior year period. The restructuring savings we expected in 2011 are right on track and we are controlling our discretionary expenses well. R&D expenditures totaled $46.9 million for the second quarter, 6.5% of sales, down 10 basis points from the prior year on an adjusted basis. This is obviously lower than our guidance. As we began to see softness in the U.S. sales, we became a little more conservative with our investments. Again, we haven't cut any programs but we're being cautious about spending on new projects. Interest expense was $9 million for Q2, consistent with last quarter. Other income expense was $194.1 million of expense for the second quarter. Reflecting the items we talked about on an adjusted basis, it was $400,000 of income. Effective tax rate this quarter is really only meaningful on an adjusted basis at 28.4%, which is in line with our full year guidance. We'll use cash out of Puerto Rico to settle the hernia claim, so that charge has very little tax credit against it, causing the reported tax rate to be inflated.

Our diluted shares for the period were $86.2 million. Because of the reported loss, we don't calculate dilution the same way, so the basic and diluted shares were the same this quarter. On an adjusted basis, diluted shares were 88.6 million. The balance sheet, as of June 30, reflects cash and short-term investments of $911.9 million versus $748.3 million at March 31. For the quarter, accounts receivable days were down 0.2 days and inventory days were down 1.2 days. Capital expenditures totaled $15.4 million for the quarter. On the liability side, total debt was $901.1 million at June 30 compared to $895.3 million at March 31. Debt to total cap at the end of the second quarter was about 32% and total shareholder investment was $1.875 billion.

Moving on to financial guidance for Q3, we're expecting constant-currency sales growth of 4% to 6%, assuming we continue to see a weak U.S. demand environment. At today's rates, currency would add between 250 and 300 basis points to those results. From an earnings perspective, we are expecting Q3 EPS in the range of $1.57 to $1.61, excluding items affecting comparability, if any. We remain focused on the $6.38 target for the full year, although with more modest sales assumptions now, we'll need to be more selective with our investment agenda.

I will now turn you over to John DeFord.

John DeFord

Good evening. So far this year, with a couple of exceptions, our new product launches have been in line with our planning. A number of these launches occurred later in the first half and we'd expect to begin seeing some impacts from these new products in the second half of the year. For the pipeline, I'll start with our atrial fibrillation oblation technology named ENCOMPASS. We're in the start-up phase of our multi-centered feasibility study to be conducted in centers outside the U.S., and we're finalizing our submission seeking the CE Mark. We expect to enroll up to 60 patients in this feasibility study and use those data to support our pivotal IDE submission in the second half of 2012 and provide marketing data for our European rollout.

Also in electrophysiology, in Q2, we began the rollout of our new EZCROSS fixed curve sheet system to support septal crossing, but don't expect to be in full launch until Q4. We have a few other developments that support the A-Fib ablation procedure scheduled to launch over the next few quarters and we'll provide more details as we bring them to market. In stents, we reported in Q1 our submission of a PMA supplement, including clinical data to support the expansion of the LifeStent family with lengths up to 200 millimeters, a new delivery system and enhanced x-ray visibility. Late in Q2, we received a request for additional information and we responded a few days ago. Contingent upon FDA approval, we continue to anticipate launching in Q4.

We also completed development and bench testing of our next-generation stent graft targeted for the treatment of SFA disease and built upon the LifeStent and our proprietary graft technology. We've received additional information from FDA in a pre-IDE discussion and now anticipate submitting our IDE late this quarter and commencing enrollment in roughly a 200-patient clinical study in Q4. European launch is also expected in Q4. In PTA, in Q2, we launched our new RIVAL AV PTA family and expanded products in our dialysis access center-targeted Vaccess angioplasty line. We're also on track to launch new diameters in our VASCUTRAK PTA family later this quarter.

Moving to filters, in Q2, our dialogue with FDA concerning 510(k) review of the Meridian Vena Cava Filter continued. FDA asked a few additional questions and we submitted our response a few days ago. We believe we've addressed all the FDA's concerns and are prepared to launch Meridian upon FDA concurrence, hopefully later this quarter. Development of our next-generation DENALI filter was completed and we received conditional approval on our IDE in Q1. Patient enrollment began just a few days ago and we're now actively recruiting for this 200-patient clinical study to evaluate both permanent placement and filter retrievability. Our current timeline has enrollment continuing through Q3 of 2012 and U.S. launch in the second half of 2013.

And in Biopsy, we received 510(k) concurrence for our next-generation vacuum-assisted console system named ENCOR ENSPIRE and we're in the early stages of launch. In addition, we've recently launched our Contura cavity maintenance catheter. This is a temporary balloon catheter that allows surgeons to maintain the lumpectomy cavity and track while awaiting diagnosis. This new device is designed for an easy office-based removal or exchange to the Contura Multi-Lumen Balloon if partial breast irradiation is indicated.

Now, turning to Urology Incontinence, early in Q2, we received FDA concurrence for our ALYTE pelvic floor repair mesh, with the sacrosuspension and sacrocolpopexy indications, and the launch is underway. We've also had several discussions with FDA over the last 2 quarters concerning the appropriate regulatory path for pelvic organ prolapse repair kits, including our NuVia SI single incision system. Though the U.S. launch remains unclear, based upon FDA's guidance, we're submitting the NuVia SI 510(k) later this year, but I really can't speculate on the timing of the U.S. launch. Nonetheless, we're gearing up to launch NuVia SI in Europe later this quarter. In the intermittent urinary catheter space, we submitted a 510(k) this month for the first synthetic polyisoprene catheter. We've named the product COMFORTGLIDE and designed it with the highly desired physical characteristics of a natural rubber latex catheter without the risks associated with latex allergies. We anticipate launch of this product in 2012.

Now, moving to Oncology, we've begun the launch of our Sapiens TCS and Sherlock TLS integrated system for accounts that utilize non-Bard ultrasound devices. We also have other TCS enhancements planned for launch in the coming year. Our 3CG system that integrates ultrasound, Sherlock Tip Location and tracking and ECG tip confirmation is being studied in the clinical trial we discussed in December. We're continuing enrollment and now anticipate study completion in 2012. Enrollment is much lower than we'd hoped and as a result of our rigorous study design that requires placement of the PICC and the 3D angio suite and the use of contrast to definitively identify patient vascular anatomy and catheter placement. These requirements have made selection of suitable patients difficult. However, we believe the study design will further reinforce the reliability and accuracy of using the ECG per PICC tip placement. In PICCs, we launched several line extensions and custom kit options in the quarter. We also received more questions from FDA on our thromboresistant PICC family, including request for additional bench testing and clinical data that we feel are impractical to perform at this time. We've halted this project and are evaluating other possibilities for bringing the technology to market. On the other hand, our antimicrobial PICC family, named the COVERT PowerPICC, is in the final stages of testing for 510(k) submission. We've taken into account the FDA questions and intent surrounding the thromboresistant PICC family and are performing some additional testing that will push our 510(k) submission out until about September, and we're hopeful for U.S. launch around the end of the year or early next year.

Turning to Ports, we're facing the same issues on the antimicrobial PowerPort family as we described with the thromboresistant PICC. FDA has provided us a list of additional testing requirements that we don't feel we can justify performing given the low infection rates seen in ports. So at this point, we put this project on hold and are evaluating alternative solutions. We'll let you know when we feel we have a viable plan to move forward.

And finally, moving to surgery, we've had a very busy launch quarter in ventral hernia repair as John described. In the pipeline, we continue to advance our antimicrobial ventral hernia repair products. Our technology was unveiled early in the quarter at a poster session at SAGES where Dr. Yuri Novitsky presented animal study results summarizing the performance of this antimicrobial technology. We anticipate commencing our dialogue with FDA for this product in Q3. Our recent antimicrobial experience with FDA on other products have left us a bit cautious of providing any filing our launch dates until we have further clarity.

I know we've covered a lot of information here and I thank you for your attention. Let me now turn you back to Tim Ring.

Timothy Ring

Thanks, John. That concludes the formal part of the presentation. I'll now turn it back to the moderator for questions. Kathy?

Question-and-Answer Session

Operator

[Operator Instructions] That will come from Rick Wise with Leerink Swann.

Frederick Wise - Leerink Swann LLC

Perhaps, any change in trend as you proceeded through the quarter and here we are at the end of July or just seemed like we're just going to bump along here for a while. What do you think, in general, after the second half with U.S. procedures?

Timothy Ring

This is Tim, Rick. As we've kind of mentioned even going back to December, we assume there will be no improvement in the environment this year. Clearly, the U.S. business was softer in the second quarter. And there was nothing that we've seen in the second quarter that would indicate that that's going to get any better any time soon.

Frederick Wise - Leerink Swann LLC

And just 2 quick follow-ups. Gross margins, you talked about some of the issues there. Should we think about a flattish margin in the third quarter or given the new products, we should see it sequentially higher in each quarter? And last, maybe you all can talk about surgical and your comment about more active competition and whether that's likely to persist.

Timothy Ring

Let me take the margin question first and then probably John will take the surgery situation. As I said, mix, price and the volumes are all working against us, I guess, currently. Really, nothing dramatic in there, Rick, in terms of the change. It's just that all those components are kind of going in the same direction at once. And it's created a modest amount of pressure. We weren't looking for a whole lot of improvement into Q2. Maybe we did 62.1% in the first period and we're probably looking at 62.2% or 62.3%. So we're dealing with 10 or 20 basis points. I do think that we'll still see improvement sequentially into 3 and 4. I think we're now probably talking about mid-62s whereas a quarter ago I might have said high 62s or even 63%.

John Weiland

And Rick, as related to the surgical side and then the competitive arena there, primarily the biggest change had been the entrance of J&J into the fixation market, which they really hadn't been a player in, of any size up until recently. They also launched a new mesh and I think in a full launch position for the entire quarter. So they had the advantage on us in the quarter in terms of the new product pipeline that was delivered. But on the same side, we're back on the offense now with our new launches, and that being the VENTRALEX ST, VENTRIO ST and ECHO PS, all have pretty unique positions for us and we also launched 2 new fixations or upgrades to our fixation platform. So the name of the game is one new position at a time and we're right in the middle of that battle.

Operator

We'll go next to Mike Weinstein with JPMorgan.

Michael Weinstein - JP Morgan Chase & Co

Todd, as starting point, you've mentioned pricing to be a little bit more challenging. You said it was 80 basis points of pressure this quarter. Can you put some context around that? One, what would have been first quarter or last year? And then two, are there particular areas where you're seeing more pricing pressure than before?

Todd Schermerhorn

Sure. That sort of oscillated maybe between 10 basis points and maybe the highest would have been 30 over the recent past. So it's effectively doubling or more, I guess. But still, compared to what some other folks are seeing, I mean, we're still under 1%. And I would say that what we saw this period was fundamentally in the U.S. and arguably in markets where we're grinding out competitively.

Michael Weinstein - JP Morgan Chase & Co

Just a follow-up, just a commentary, we've heard from a number of companies this week and there are ones that hadn't reported yet that we've heard some commentary from. And my one question is in your commentary would be that, as you looked over the course of the quarter, did you find June to be more challenging than you were expecting or June more challenging than April and May? And I'm talking -- this is up the U.S.

Todd Schermerhorn

I've got to tell you, Mike, I don't think we know what the total sales growth is going to be till we get very, very late in the quarter. Obviously, there are day differences all around the world and we work on and we're evaluated on such small differences. 200 basis points is a big deal here, right? And so until we see, really, the final week in June, I don't think we really know where we're going to be. That having been said, if we were to look back on it now, I don't see a big difference between any one of those periods per se.

Operator

We then will move on to David Lewis with Morgan Stanley.

Unknown Analyst -

This is actually John Demcheck [ph] in for David. First off, the gap between U.S. and o U.S. growth has kind of been widening. And we saw the U.S. was -- struggled through utilization and pricing. But what was the cause of the o U.S. relative strength? Were there any specific segments that stand out more than others?

Todd Schermerhorn

I'd say the investments that we made in emerging markets was probably the biggest change in trend. For example, in the first quarter in emerging markets we grew 29%. In the second quarter, we grew at 43%. So, I think that's reflective of the investments that we've made in these emerging markets. We talked about last quarter the large increase that we made in our sales forces -- or investment we made in our sales forces, a significant chunk of which went into emerging markets, and I think we're seeing the results of that.

Unknown Analyst -

Okay, very helpful. We had organic growth decelerating I guess from 5% in Q1 to about 3.5% in 2Q. And I guess you could still hit the guidance at this organic rate but do you expect reacceleration into the back half?

Todd Schermerhorn

I would say as we talk about the environmental aspect of it, we've been -- in previous calls we've had, we talked about one of the surprises, I think, the entire industry has had over the last couple of years, is that the correlation between what's happening in healthcare and unemployment rates, and clearly, at least in the U.S., the unemployment news didn't get any better in Q2. So perhaps another confirmation that, that still holds true and the outlook for that to get better on a macroeconomic level is still very questionable anytime soon. So I think you'll still see that. And I think you'll see the same dynamic that we've seen in emerging markets continue and we continue to make investments there. So trend-wise, that's what I assume we'll see going forward.

Timothy Ring

And if I can add a little granularity to the change during the quarter, I mean, the big swing was the United States growth rate, which was at 3% versus 7% in the first quarter. And you know, that number, it represents about $20 million differential in terms of run rate in sales. And we really kind of limit, we looked at that, and it was really in 3 pieces. It is in the Vascular business, which represented about $10 million of that change. And then Urology and Surgical split the remainder. And as we look at it in Vascular, it was really confined to PTA and stents, and the answer to changing that downstream is what happens to the base growth rates but also what happens to the uptick in our new products. And I think there, we're highly focused on execution with our new 200-millimeter LifeStent, which John mentioned will be out in Q4, the new stent graft for Europe, which we hope will deliver in Q4, the new RIVAL PTA products, which we just launched in Q2, the Meridian filter, which we hope we'll be in a position after approval by the FDA for launch in Q3; and the new ENCOR ENSPIRE system, which we launched in Biopsy recently. So that's the key to vascular. If we look at Urology, about half of the issue there was in StatLock, which what we thought was an unusual aberration just in terms of demand. And the other half in the Continence. The Continence issue will stay because as we told you before, that Contigen business was about $10 million annually. So it's $2.5 million a quarter. The key to us there is going to be DIGNISHIELD launch when that's available. And we also launched recently in StatLock some new PICC dressing kits. So that's the offset there that we're going to be driving. And then I guess if we get to Surgical, the issue was about $5 million for us in surgical, split between biologics and fixation, and the real key there is again the new product launches that I mentioned earlier. VENTRALEX ST, VENTRIO ST, ECHO PS and our new additions to the fixation line. So wherever you saw the weaknesses that drove the trend down, the key has got to be new products to drive us back up into the growth rates.

Unknown Analyst -

And one more quick one, post the May appeals process, court filed a lawsuit on Flair and Fluency. I don't think you've commented on it yet, but just wanted to know if you've responded to the lawsuit, legally?

Timothy Ring

Of course, we'll respond legally. We're not going to get into exactly what the steps are there.

Operator

Next, we have Larry Keusch with Morgan Keegan.

Lawrence Keusch - Morgan Keegan & Company, Inc.

Just I want to make sure I understand what is being said here. It sounds a little bit like you're suggesting that procedures may have weakened a little bit. But I want to make sure that I'm understanding that or are you saying it's stable? And are we really talking about just you didn't get all the products out and you've got some product gaps here and you really need to execute on those product launches to kind of get growth back to where you thought?

John DeFord

I think it's a little bit of both of those things. As the data lags on the market data, so we won't know for sure for probably another quarter or so what actually occurred, but it feels to us like that, it slowed down a bit for sure in surgical procedure area. And then John just kind of went through a fair amount of detail on those product launches and the timing of those and I think some of those got launched very, very late in the quarter, especially in the surgical area. So as we mentioned, we hope those will pick things up end of the year.

Lawrence Keusch - Morgan Keegan & Company, Inc.

And Tim, I recognize that -- just 2 questions for you, I recognize, number one, it's early, it's hard to tell what's going on out there relative to the procedures. But again, the economy's been adding jobs, albeit slower than perhaps people would like, but it was a rocky soft patch in this second quarter, do you potentially think it's people sort of reacting to that and maybe get back to kind of the levels we're seeing in the first quarter? And then the second question is, obviously you guys are going to manage your discretionary expenses to make sure that you're focusing on the EPS targets, but how do you balance that discretionary spending and fueling R&D for future growth? Because it seems like that's obviously going to be very important here.

Todd Schermerhorn

Yes. We'll deal with the second part of the question first. The strategy hasn't changed here. We still believe, as you heard throughout the formal part of the presentation, John answered the question that was asked, new products are a big driver of growth here. And where we've had them, as you can see by some of the individual product line results, and they're best-in-class products, they do pretty well. So we still think that's the answer. We're very cognizant of our commitments relative to earnings. And when you slow down a little bit, you just have to be a little bit more careful about the choices you make and the timing that you ramp up the spend. But strategically, nothing is changing here. We still believe we have product leadership, is the answer. We just have to be responsible, maybe is the best way to say it, in terms of managing the business as we go through a little bit of softness on the revenue line.

Lawrence Keusch - Morgan Keegan & Company, Inc.

Then again, just a question of, again, scratching your heads on why things may have slowed down into Q2?

Timothy Ring

I cannot just -- I'm not an economist. I just think there was a lot more uncertainty in the second quarter this year, kind of across the board. Everything -- I was just in a meeting a couple of days ago with some insurance company CEOs. Obviously, they've been performing well financially because the utilization rates have gone the other way. So they get the benefit of that in their results. In their comments, and there were hospital CEOs in the room, and everyone's kind of talking about things certainly not improving. Say, in what part of the country they're in, they may be saying about same. Some places are getting worse and I think if you could look at the unemployment rates in those various regions, and they correlate pretty closely.

Operator

We have Bob Hopkins with Bank of America.

Robert Hopkins

So, again back to the U.S. growth and thinking about that sequential decline there, and I appreciate you guys breaking all that down for us. It's very helpful. But I guess my question is you talked about price. How much of that sequential decline was volume versus price? You mentioned that 50 basis points roughly but in terms of the sequential 400 basis point decline, is it 80% volumes and 20% price?

Todd Schermerhorn

Well, price went from, I think, 30 basis points, Bob, to subpoint A. And we do have mix in our calculation year-over-year. But certainly, mix sequentially didn't get any better. So you really have, the remainder is volume.

Robert Hopkins

And then as you look at the Vascular business, how confident are you that that's not some share loss? I mean how good do you think it is, your feedback from the field, that you just didn't get the products out and maybe lost a little share. How confident are you that, that's a decline in procedures?

Timothy Ring

Well let's look at the 2 pieces that I talked about, PTA and stents, which were the gaps for us. In PTA, we continue to be the market leader. We've launched a number of new products recently. And there's been, from our vantage point, there's been no share shifts at all in PTA. In stents, the IMS data tells us from Q1 that we're now the market leader in the SFA segment of stenting. And there have been no new entrants to the SFA segment recently. So we don't see any change in the competitive dynamics in that business. And that was, for the quarter, the largest shift in terms of the percentage point reduction in the U.S. growth rates.

Robert Hopkins

And then, Tim, I'm just curious from the hospital relationships that you have. I mean, a lot of us do surveys and have been getting back data on utilization, and you guys are looking at your own data and coming to some conclusions. But I'm wondering, as you communicate with hospital leaders throughout the course of the second quarter, were you actually hearing directly from them that, boy, second quarter utilization seemed to fall versus first quarter? Or is it more just you're looking at your data and coming to some conclusions?

Timothy Ring

Yes, it's more the latter. It really depends who you're talking to and where they are. I mean, in this one particular meeting, there were a couple of guys that said, we're about same as we've been, things haven't gotten worse, maybe even a little better. And then you have another guy from another city with a big group saying things are horrible and they've gotten a lot worse. So it's very difficult to get a common trend. You almost have to take it case-by-case, and that's kind of how we look at it.

Lawrence Keusch - Morgan Keegan & Company, Inc.

And, Todd, what was the M&A contribution in the quarter, last one?

John DeFord

SenoRx was $15 million this quarter.

Operator

The next question is from Michael Matson with Mizuho Securities USA.

Michael Matson - Mizuho Securities USA Inc.

I guess just with regard to your emerging markets business, you mentioned -- I just want to confirm the growth rate, it was 43%, correct?

Timothy Ring

That's right, that's correct.

Michael Matson - Mizuho Securities USA Inc.

Did you say what percentage of your sales are coming from those markets?

Timothy Ring

We did not. But if you ask your next question, we'll calculate it.

Michael Matson - Mizuho Securities USA Inc.

Can you tell me what it is?

Timothy Ring

We will. Just go on and we'll go -- we'll get it.

Michael Matson - Mizuho Securities USA Inc.

So the antimicrobial PICCs and ports, I guess I'm just wondering what's going on there because it seems like there's a couple other companies out there with antimicrobial PICCs that didn't seem to have the difficulty that you guys are having. Was that just the fact that they were able to kind of get theirs through the FDA before the FDA started to get a little more cautious on those products and other things?

John DeFord

Well, Michael, I think there's a couple of issues there. First off, it's the thromboresistant PICC that we got some questions on. The antimicrobial PICC, we've yet to submit our 510(k) on. The thromboresistant PICC, there are predicates out there. FDA has taken a very limited view now of saying if your technology doesn't have exactly the same mode of action as a predicate, you know it does the same thing, then it's different and we're going to treat it differently. On the antimicrobial port, we faced that issue. On the thromboresistant PICC, we faced that issue. On the antimicrobial PICC, we feel like, with our 510(k) that's going in later this quarter, we feel like we've got a clean predicate, straightforward mode of action, same kind of technology, those kind of things. And so, we think we've got a possibility to get home with that product. Likewise, in our hernia repair business, we feel like we've got a strong predicate with the same mode of action in our antimicrobial there. So we've got a different viewpoint from FDA these days on how they're treating this kind of technology. They're taking a very, very limited view, which on a historic basis, wasn't the case. And so you could clearly argue that the products that entered the market entered at a time when FDA -- before FDA had made these changes. And now, we're dealing with the consequences.

Timothy Ring

Mike, back to your other question. Emerging market's about 5% of the total.

Michael Matson - Mizuho Securities USA Inc.

Then just another related question on the international business and more broadly, international -- sorry, emerging markets more specifically. Are any of those -- in any of those countries and regions, are you selling through stocking distributors at all or do you have direct sales force and were there any stocking orders in the quarter that contributed to that big step up in the growth rate that you saw?

Timothy Ring

The driver of the largest portion of that growth differential would be China. Everybody sells through dealers but there has not been any big moves in inventories in China.

Michael Matson - Mizuho Securities USA Inc.

Okay. And then your margins on your international business, I mean, your gross margin was pretty stable in the quarter -- or sequentially, so is it safe to assume that just overall, international margins are consistent with your U.S. margins, I guess, at both the gross and operating levels?

Todd Schermerhorn

I think that's right at the gross margin level, Mike. I would say consistent with our global numbers would be the way to think about it. And that business, the emerging markets business is probably half China or better, and those are pretty good margins for us, certainly the corporate average. As it relates to operating margin, we're not investing in R&D and all that in those businesses. So it's not a relevant comparison.

Michael Matson - Mizuho Securities USA Inc.

Okay, fair point. And then finally, just on the -- is there any common update you can give on where things stand with the Gore patent suit? I guess there were oral arguments in early May and I haven't -- with the filings recently, so I'm just wondering if you could provide an update on where that stands?

Timothy Ring

We're just waiting for a ruling from the Appeals Court. I would say a couple of things. There's been plenty of talk out there relative to Gore. Just want to leave investors with a couple of notes of caution here. Even if we were to win at this phase, and we would agree that a win here would certainly stack the odds in our favor, there are still more procedural steps and more hurdles to go through. If we are to ultimately win, we don't think we're going to see any cash until well into 2012, and maybe even later. So I just want to make sure that everybody's got sort of the timing of this straight in their head. Secondly, if we were to win ultimately, we would look to invest some portion of that earnings power between the royalty rate and the cash value back into the business. I think -- I can't tell you today exactly what that is but I know our first thoughts would be to think about the strategic use of that. So there's more to come there at the appropriate time, but I just wanted to make sure everybody understood that.

Michael Matson - Mizuho Securities USA Inc.

That was helpful. That was exactly what I was looking for.

Operator

We have David Roman with Goldman Sachs.

Unknown Analyst -

This is actually [indiscernible] in for David. I just had one quick question for you, most of mine have been answered. Taking a look more specifically on the pricing pressure line, have you guys seen any price pressure involved in the peripheral stenting space and LifeStent?

John DeFord

We have seen a bit in the LifeStent. Part of that is, us being a little more aggressive on a share standpoint from those people that had not converted earlier into it. But I think that most of the pricing has been -- we've driven that more than anybody else driving it.

Operator

We go to Jason Wittes with Caris & Company.

Jason Wittes - Caris & Company

First question I had is on meshes. You mentioned several new synthetic meshes in the pipeline but I recall you guys had also discussed coming out with a new biologically derived mesh this year. Is that still on track or how should we be thinking about that?

John DeFord

Yes, so we've got new biologically derived mesh technology and offering that's, really, you can look at it more line extension, but we're certainly on track and expect to launch at least one of those new offerings later this year.

Jason Wittes - Caris & Company

And just looking at your pipeline or recalling your pipeline, you had a couple more for next year. I assume those are also more line extensions than entirely new biologically derived meshes?

Timothy Ring

We haven't talked about that in great detail. I'd say one of them we're looking at next year is a line extension and another one is a real new technology.

Jason Wittes - Caris & Company

Okay, and related to meshes, the FDA put out an advisory specific to pelvic organ prolapse just recently. I don't know. How does that impact your business or your outlook for 2011?

Timothy Ring

Well, I think we've been in discussions with the FDA for quite a while now on our NuVia SI Pelvic Organ Prolapse technology. And they've been kind of all over the map with what they wanted and it's still a bit up in the air. Now, as they have said most recently of course they put out a public health notice and they also stated that they're calling a panel meeting later this year to get a panel together of experts to give some greater guidance on what they want. They kind of moved to, we want randomized data. Then they got feedback that randomization would be very difficult and so they've kind of walked away from that. And now they're moving toward having a panel come in and provide additional detail and information. So I'd say at this point, we're submitting our 510(k). We're not giving any guidance right now on what we think is going to happen there. We think this is going to take some time and FDA is certainly being very cautious.

Unknown Analyst -

Just one piggyback question on pricing. Was there some contract-related changes that occurred this quarter? And related to that, do you expect similar type fluctuations throughout the year or do you think what we saw this quarter is kind of reflective of what we're going to see for the rest of at least 2011?

Todd Schermerhorn

There would have been nothing significant at all from a contract change. Now having said that, in the U.S. anyway, we annually renew or sign somewhere between 30 and 40 contracts a year. They tend to be multiple-year contracts. And that's been an ongoing thing, that's been that way for years. So nothing out of the ordinary course, I guess, is the best way to answer that.

Operator

We have Matthew Dodds with Citigroup.

Matthew Dodds - Citigroup Inc

Todd, a couple for you. On the gross margin, I assume that you still had a decent improvement in manufacturing/cost benefit? Can you give us an idea how much that was in the quarter?

Todd Schermerhorn

Yes, sure. Let me give you the pieces, Matt. We actually were flat in manufacturing cost, and really that's because of a weak December that was deferred into the second quarter. As a result, we talked about the fact that we're adjusting inventories in Q4, and the last month there was actually our weakest month, and so that rolled into Q2. And so -- but as it relates to cost, I think we're still fine relative to our outlook there. This is just a little bit of a timing issue. So it was not great here this period. Let me give you the pieces though of margins. So FX is about 10 or 20 basis points unfavorable, and I know that sounds a little crazy given the overall FX but the effect on margins is not always intuitive. Mix was 20 or 30 basis points favorable, although I would say we were looking for a little more. Price was 30 basis points on margin, so 80 basis points on sales converts to 30 basis points unfavorable on margin. We had new amortization of 40 basis points as we said in the script. We had that Puerto Rico excise tax reclass issue so that's another component here, and that's between 10 and 20 basis points. I know it sounds very busy so I hope you're working with your pencil there, Matt. And then cost is about 10 or 20 basis points unfavorable this period. But I don't think that's a trend that will continue.

Matthew Dodds - Citigroup Inc

And you commented earlier about potentially slower manufacturing because of U.S. volumes. Is that something that could impact the cost 2 quarters from now, sort of what you're seeing the lag?

Todd Schermerhorn

Yes, next quarter, really. It's about a 4-month lag in general over the life of the inventory.

Matthew Dodds - Citigroup Inc

And then one more for you, Todd. Tax rate doesn't seem to change but with emerging markets growing a lot faster, U.S. starting to slow, I would assume the profit mix is finally moving more o U.S. Can the tax rate finally maybe show some improvement?

Todd Schermerhorn

Well, some of that, Matt, is export business. So there's U.S. profitability in there. I think the bigger trigger is Puerto Rico and we were moving pretty well there and we thought maybe we had some upside in the tax rate but unfortunately, surgery is tied into Puerto Rico. So we got to wait and see how that works itself out before we know finally where that tax rate will go for the period. So we're 28.4% for the first 2 periods. I think we're comfortable there, and we'll see as we work through the year whether there's upside. Strategically, that 5% business in emerging markets isn't going to move the number, initially.

Operator

Next, we have Matthew O'Brien with William Blair.

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

just wanted to get your view on your momentum internationally. For example, where are your sales reps at that you hired late last year in terms of productivity at this point?

Timothy Ring

Well, as we launched that large expansion in emerging markets, a little bit over 100 people, for example, and we completed that about the end of the year. And the early part of the first quarter was used for training, getting people acclimated to their territories, et cetera. From our vantage point, Q3, Q4, we should really start to see some productivity out of those folks.

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

And then, Todd, you sort of talked about this a little bit in your answer to the last question, but as far as new products go, that you're launching, and given the slowdown that we're seeing domestically on the procedure side, are you able to still capture mix benefits or do you have an expectation that you won't be able to get as much pricing premium going forward given what we're seeing on the macro side?

Todd Schermerhorn

Well, we still have a little bit of mix benefit as I said, the 20% to 30%. I just -- I think it will be a function of where the surgery products go, as to whether we get -- they're high-margin products as you know. As to whether that grows or not, it will be really dependent upon the trajectory of those products.

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

But the ones you launched in Q2, you're still able to get similar type of premium?

Todd Schermerhorn

Oh yes, definitely, but just there's not enough sales in there initially. I mean, we're working with a couple of weeks and a couple of days in some cases on some of those products. So there's not enough dollars to really move the needle. Obviously, we hope there are as we get to Q3 and Q4.

Operator

We will go next to Joanne Wuensch with BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets U.S.

Share repurchases, did you do any in the quarter, where is your head on that for the next couple of quarters to make your EPS goal?

Todd Schermerhorn

We did not do any in the quarter, Joanne. It's very problematic to buy shares alongside of an ASR. So we need for the ASR to complete before we would be back in the market. We expect that -- so we saw shares 88.6 is up from 87 even in Q1, and which we expect. We think the ASR will end either in Q3 or Q4. And so, at that point, we'd expect to be buyers of our shares again, consistent with our historical patterns.

Joanne Wuensch - BMO Capital Markets U.S.

And you talked about third quarter revenue incorporating the slower U.S. surgical markets. Did you reiterate your full year thought process?

Todd Schermerhorn

We did not, in total. I think 5% to 8% for a full year guidance is still pretty good. In fact, if you go through all of our operating and financial guidance, I think it's all solid, maybe with the exception of the R&D number. I'm not sure we're going to get to 7%. So I think the 5% to 8% is still intact, as are pretty much everything else, including the $6.38, a 14% increase in EPS.

Joanne Wuensch - BMO Capital Markets U.S.

And you have mentioned that you did a small acquisition in the quarter. What was that? And what is your current thoughts towards using cash towards acquisitions?

John DeFord

Well, I'll take the second one first and that is, it is what it's been, Joanne. We're always using -- looking to use our cash strategically first and we're as active as we've ever been, just its opportunistic. You're never quite sure what you're going to find and whether you're going to be able to meet the market. As it relates to the technology, that as really small to look...

John DeFord

That was a small technology that we acquired in the Electrophysiology business. And so nothing of significant impact at least in the short term there.

Operator

We have Kristen Stewart with Deutsche Bank.

Unknown Analyst -

It's actually Katherine for Kristen. Some of the other companies that reported noted weakness in Europe. Your numbers seem okay. Can you talk about why that is and what you're seeing there and specifically maybe on pricing there?

John DeFord

Well, we certainly see -- there's certain markets in Europe that aren't having a difficult time. Obviously, Greece and the U.K. would come to mind first of all. We've been very successful though in Europe with our rollout of the SenoRx biopsy products. We acquired that about a year ago or so. There was really very little sales in Europe from that product line and as Todd mentioned, that $15 million run rate, I think it's important to note that when we acquired it, it was only about $10 million and that $5 million has been our own organic growth since we rolled that out to all those markets. So I think that has been a very positive driver of our growth rates in Europe.

Unknown Analyst -

And then you kind of touched upon this, but have your thoughts changed on the level of R&D spending for the year or longer term given the weakness in the U.S.?

Timothy Ring

Well as Todd mentioned, we have guided to $7.5 million. Given sales softness, it's probably going to be tough to get there. But directionally and strategically, as I mentioned earlier, we've not changed our thinking there. We just have to kind of manage it within other things that we told you relative to earnings. And we're still investing. It's just the pace is a little bit slower than what we had told you it was going to be.

Operator

Next, we have Robert Goldman with CL King.

Robert Goldman - CL King & Associates, Inc.

A couple of questions on the gross margins. If price hurt 30 basis points in the first quarter and have hurt 80 basis points in the second quarter, assuming prices don't go up, it sure sounds to me the math would work out that it would hurt by more than 80 points in the third quarter. Could you comment on that, Todd?

Todd Schermerhorn

Well, 80 is the number from a sales standpoint, Bob.

Robert Goldman - CL King & Associates, Inc.

I'm not talking about sales, though.

Todd Schermerhorn

I think the impact on margins was 10 and then 30. And so I'm not following your math exactly here.

Robert Goldman - CL King & Associates, Inc.

If the average price discount was 30 basis points in the first and 80 in the second, and assuming that the price discount in the second didn't start on the first day of the quarter, it must have gotten increasingly intense, meaning that the third quarter would have to be more than 80 basis points of price decline.

Todd Schermerhorn

That's possible, Bob. As we look out and forecast the business, Bob, I don't really get that discrete a level of breakdown because it's not an actual. These are estimates around the world. So I can't tell you exactly what level of price erosion or specifically, how it impacts margins on a forecast per se.

Robert Goldman - CL King & Associates, Inc.

I wanted to follow up on that, if I can, that once the payer has got to taste for a price decline and that they're able to get it and that you have to agree to it, how do you know where it stops? How do you know it's 80 basis points going forward rather than 200? I mean what gives you the sense of confidence that we've had the price declines that we're going to have?

Todd Schermerhorn

A bit of a brainteaser there, Bob. I mean, wouldn't that same situation have existed that when we went from 20 to 30? I admit that it was more of a change this period. But there's always been a negotiation of price here. That negotiation in the environment, the context around it, I don't think has changed that much. I think with respect to a couple of these businesses, we're grinding it out competitively and we're meeting the market and maybe that the market is dropping and to meet the market, those are the values.

John Weiland

Bob, just historically, you got to look at this thing, too. I mean it's a very difficult question here. And I'm not sure there's an answer to it. 2008 for the full year, we were 20 bps positive. 2009, we're negative 10. So if you figure you lock in your prices for a year in a contract, you would have thought 2009 would have been positive. It just doesn't tie that exactly to be able to give you an answer.

Todd Schermerhorn

I think the piece of the equation is new products, too. I mean, as you're waiting for a new product to come out and you have to meet a price in the market to hold onto your business, waiting for your new product to be able to engineer where you can get a premium, that has it. And I will tell you that one of the bigger chunks was in the Surgeries business this quarter. So, I mean, as we're able to offset that with new products and selling premiums, I think there's -- that's the opportunity to afford that phenomenon that you speak about, Bob.

Robert Goldman - CL King & Associates, Inc.

I've got a strategic question for you on the R&D. When you knew that the U.S. procedural growth just wasn't living up expectations, I guess you had a choice. You could cut back on some of the R&D programs and hit the 638 or say forget about the 638, you're going to maintain the R&D programs. And I'm curious why you chose the former and not the latter.

Timothy Ring

It's a great good question. And again, we're not getting strategically off to this. But as you've seen us over the last couple of years, there's more than just R&D products and projects that stimulate the growth in the revenue line. Acquisitions play a part of that, too. So when you sit there and you look at everything on your plate, and you say, okay, we could get this from here, you get that from there, you just kind of make judgment calls based on what your pipeline looks like to generate your growth, not only from your R&D pipeline but from your acquisition pipeline, too. So there are some trade-offs, there's no question, that you're making. We are very sensitive about the earnings situation. So we think we can get the growth from a couple of different ways, then we think we can manage the earnings at the same time.

Todd Schermerhorn

And I think, Bob, it's important to note, we haven't cut any R&D programs. We just have not been in a position to turn on additional ones that we did not budget yet this year for.

Operator

Jayson Bedford with Raymond James.

Unknown Analyst -

This is Eddie Onbridges [ph] calling in for Jason. You talked about investments in emerging markets and in Europe that are yielding productively. Are you still making investments there? How much more do you have to make? Where about in that progress you ended the quarter?

John Weiland

Yes. In fact, we are in the process continuing to make large rollouts in the emerging markets. We'll complete, in the second half of this year, an additional ramp equal to what we did in the fourth quarter of last year, which we think will benefit us in terms of our ongoing growth rates in those markets. So we are not pulling back at all on what our investment profile is in emerging markets.

Unknown Analyst -

And also in the synthetic market, we're assuming that the market is growing about 2% to 3%. Is that still fair? And when do you think or what do you think will drive you back to that level?

John Weiland

We think that's a very fair viewpoint on the synthetic market overall. Yes, I mean, over the longer term. But whether it grew that level in the second quarter is impossible to know. But over the long term, that's where we saw it as well.

Unknown Analyst -

What do you think that will drive -- drive you or the market back to that sort of 3% long-term growth range?

Timothy Ring

Well I think that to the extent that there are new products in that space, and we have a number of them which we've launched recently, that can have a positive impact on that. In fact, ours are a combination of synthetics and biologics in that space, depending also -- it all depends on where you could categorize them, we think that will have a positive impact on the synthetic space.

Operator

[Operator Instructions] We'll go to Thomas Kouchoukos with Stifel Nicolaus.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Looking at -- just one question on, I guess, your hernia side, and really off that last question. Looking at the new synthetic products you just brought out, it looks like VENTRIO and VENTRILEX are pretty straightforward well know type products. ECHO PS actually looks very interesting but I'm wondering, is there a learning curve that comes with that since it is a different type of approach, and how fast can you kind of hit the ground running with that product?

Timothy Ring

Well, there certainly is a learning curve. It doesn't take 10 procedures to learn that from a learning curve standpoint. But there's certainly a couple of procedures until an individual physician gets comfortable with it. But it's very obvious, very quick to the physicians the unique advantage of the ECHO PS.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Anecdotally, I know it's early. I mean, are you getting kind of -- a lightbulb that goes off in the physician's head, are they really attracted to the product?

John DeFord

Yes, this lightbulb goes off, they understand the benefits of it particularly as it relates to time on their parts and the efficacy of the placement of the device.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

If I could follow with one more on just the Sapiens product or the Tip Location in general, I think you said you're in 100 accounts at this point. I know, again, it's really early with this product as well. Maxed out, how big is this market? I know there's pull-through that happens with your products as well, but how do you size this market opportunity and how long is the process to kind of get to penetration?

John DeFord

Well, if you'd look at the whole PICC market, and we're just launching in the United States there, the United States market's a little bit over $350 million and this technology is applicable to the entire market in terms of the ability to place there and not have x-ray confirmation being necessary. So I mean -- and it's from a vantage point worldwide also, I think that the benefits of not having to use x-ray confirmation on when placing a PICC device becomes relatively intuitive once you learn exactly all the aspects of placing PICCs via ultrasound and Sapiens. John, have talked to you about it.

John DeFord

I think the other piece of this is just the timing and you're asking a little bit about that. The typical trial is a couple of months to maybe 4 months in a hospital to really get some use of the products, make sure that the team is trained and as John said, we're getting very good conversion. But it certainly takes some time and we expect that momentum will continue to build. So it's not something that just blows out the doors in one day. We are going out, making sure that people are well-trained and the technology works well for them, and then we're getting strong conversions. So it's going to be a ramp, it's going to take some time.

Operator

Then we'll go to Brooks West with Piper Jaffray.

Brooks West - Piper Jaffray Companies

One macro question. Trying to tease out from longer-term growth, product growth versus geographic opportunities. A lot of the larger, diversified companies that we follow are really looking at Europe and U.S. as kind of flat to low-single digit growth going forward and really looking at R&D pipelines as necessary to sustain that, but then are seeing big performance in emerging markets and opportunities. And I wonder if you share that view in general. And if so, how do you see emerging markets as a contributor to your growth profile over the next 3 years? And where should we look at that as kind of a percentage of revenue over the same time frame?

Timothy Ring

I'll take it and then I'll invite everybody else to jump in again. We would agree directionally maybe our numbers in terms of the U.S. market growth rates might be a little bit different from what you had echoed in -- to the positive. But still in the kind of low-, mid-single digit rates. Europe, probably a little slower than that. I think the U.S. -- the contrast to that is you still have demographics here. And I think you'll see in the U.S. if the economic situation improves, that you'll see some of that come back eventually. Clearly, the focus that we've had over the last several years on emerging markets is starting to pay off and we'll continue to invest in those opportunities as well as continue to look at other markets that we're maybe not actively investing in at the moment that might be a little bit further behind the curve. Having said that, as we've alluded to in several points during the conversation today, we still believe new products are a big driver of growth everywhere. So we've got to continue to with product leadership remains our strategy, and we'll continue to invest accordingly on the product side there. So we think it's a combination of both those things.

Brooks West - Piper Jaffray Companies

So how do you feel probably over the next 3 years? What's the necessity of emerging market performance as a contributor to your growth profile? And I think you said earlier, it's about 5% of revenue right now. I mean, where does that go?

Todd Schermerhorn

We don't give guidance out beyond the year, but if you look at the growth rates that we've been experiencing in emerging markets, anywhere from high 20s, this quarter 43%. It's 5% of our revenue. So it's going to increasingly become a more important piece.

Operator

We do have a question from Anthony Petrone with Jefferies.

Anthony Petrone - Jefferies & Company, Inc.

Just one on Vascular and one on R&D. Over on vascular, the AMA created a bundle code for the lower extremity procedures so you no longer have separate coding for vascular access interventions and radiological supervisions. So I'm wondering on the PTA side of the business, does this provide a headwind for products like ATLAS and DORADO? And then on R&D, a lot of discussions here. I'm just wondering on the cadence of product introductions, what is the potential slowdown on R&D spending needed for the cadence of product introduction. Said another way, is if you were at 7% or higher as a percentage of sales in this quarter in R&D, would you have had those new products out this quarter?

Timothy Ring

We can handle the second piece and John will handle the first piece. As we mentioned earlier, we have not cut our R&D spending versus our budgeted levels. And as you know, our products take a number of quarters to come out of our development pipeline to be commercialized, finish clinical trials, et cetera. So we have not cut any R&D spending in the organization and as a result of that, we don't see where that would have an impact on next quarter's sales because we're consistent with what we budgeted this year in terms of R&D.

John DeFord

That said, these projects take time and throwing money at it doesn't necessarily speed it up. And so, had we invested more money in the last quarter wouldn't have sped up these launches in any meaningful way. On the bundling side, on reimbursement, you're right, there's some changes in the coding now. As we looked at that, there's actually some potential positive benefit around combination of PTA and atherectomy and there is a little bit of a change in reimbursement to kind of bump that in a positive direction. And then there's offsetting some of the activities with PTA and stenting. So we think that there are some opportunities here and there and obviously some risk associated with some of the reimbursement. But we're not seeing a big impact from that, at least at this point.

Operator

Thank you. And gentlemen, there are no additional questions. So that concludes our Q&A session. I'd like to turn the call back over to Bard's management for closing or additional comments.

Timothy Ring

Great. thanks, Kathy. First of all, I'd like to thank Bard employees around the world for their dedication and hard work, again, another quarter, and thank all of you for spending time to join us this afternoon. So that's it. Thank you.

Operator

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

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