C.R. Bard (New Jersey) (BCR) Tim M. Ring on Q2 2016 Results - Earnings Call Transcript

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

Q2 2016 Earnings Call

July 26, 2016 5:00 pm ET

Executives

Tim M. Ring - Chairman & Chief Executive Officer

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

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

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

Todd W. Garner - Vice President-Investor Relations

Analysts

Robert Adam Hopkins - Bank of America Merrill Lynch

Thomas J. Bakas - Piper Jaffray & Co. (Broker)

Scott S. Wang - Morgan Stanley & Co. LLC

Robbie J. Marcus - JPMorgan Securities LLC

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

Kristen Stewart - Deutsche Bank Securities, Inc.

Matthew Taylor - Barclays Capital, Inc.

Anthony Petrone - Jefferies LLC

Matt Mishan - KeyBanc Capital Markets, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the C.R. Bard, Inc. Second Quarter 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. 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; Christopher S. Holland, 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, 2016 Form 10-Q and the information under the caption, Risk Factors, in Bard's 2015 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 historical 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 July 26, 2016, 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.

Tim M. Ring - Chairman & Chief Executive Officer

Thank you, Cathy. Welcome to Bard's Second Quarter 2016 Earnings Call, and thanks for taking the time to join us today. I would expect the presentation portion of the call to last about 25 minutes, and we're going to try and keep the total call to an hour. I'll also direct your attention, there's a slide deck that's available on the Investor Relations page of our website, which is intended to help explain some of the moving pieces in our results and guidance.

The discussion today will go as follows. I'll begin with an overview of the results for the second quarter of 2016. John Weiland, our President and COO, will review second quarter product line revenue. John DeFord, our Senior VP, Science, Technology & Clinical Affairs, will give you a brief update on our product pipeline, and then Chris Holland, our Senior VP and CFO, will go over the second quarter income statement and balance sheet, as well our expectations for the third quarter and the remainder of the year, and then finally we'll close with Q&A.

Second quarter 2016 net sales totaled $931.5 million. That's up 8% over Q2 of last year, on an as-reported basis, and up 9% on a constant currency basis. The currency impact for the quarter versus the same quarter last year was unfavorable by about 70 basis points. The organic growth rate was approximately 6.4% this quarter, which exceeded our expectations. As we told you earlier the prior year Q2 included the initial stocking of Lutonix by Boston Scientific, and when you factor that in our organic sales growth would have been above 7%.

Net income for the second quarter of 2016 was $159.2 million, and diluted earnings per share were $2.11.

Excluding amortization of intangibles and items that affect the comparability of results between periods, which Chris will cover later, adjusted second quarter 2016 net income and diluted earnings per share were $192.2 million and $2.54; that's up 11% and 12%, respectively. These adjusted results exceeded the guidance we provided for the quarter and the first half of the year has come in stronger than we had projected at the beginning of the year.

Looking at revenue growth, geographically, compared to the same quarter last year, Q2 net sales in the U.S. increased 7%. On a constant currency basis, Europe grew 7%, Japan was up 29%, benefiting from moving the customer pricing after the acquisition of our JV partner, and our other international businesses grew 15%. We continue to see strong growth in emerging markets, which represented 10% of our total sales in the second quarter.

As John Weiland takes you through the product lines, you'll see that we continue to have sustained momentum across all of our businesses even in the face of the tougher comps that we previewed for you last quarter. We continue to believe that executing our strategy will position us to continue to achieve an above market revenue growth rate for the overall portfolio with attractive returns for shareholders. With that, let me turn it over to John Weiland for a review of our product line revenues.

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

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. Total net sales were $255.3 million, up 3% over last year on both an as reported and constant currency basis. Excluding the Gore royalty, EP sales to Boston Scientific and Japan's sales, global Vascular sales grew 6% in Q2, with the United States business up 3% and international up 12%. Sales in our Surgical Graft category were up 5% in the second quarter, within the range of recent experience.

Our Endovascular business grew 6% in the second quarter. Our Peripheral PTA line grew 10% despite the prior-year stocking from the Boston Scientific distribution agreement for Lutonix. The growth rates may look a little lumpy quarter-to-quarter from stocking events in the prior year, but we track average daily sales as a metric, and we continue to see good sequential momentum in both the United States and internationally. And, we have third-party data that shows us maintaining our leadership position in this important long-term market opportunity.

Our Stent business grew 1% in the second quarter, and sales in our Vena Cava Filter line were down 13%.

And, to complete the Vascular category, our Biopsy family of products grew 10% this quarter globally despite running up against the tougher comps we talked about last quarter.

Now let's go to Urology. Total net sales were $240.0 million, up 15% on an as reported basis, and up 16% on a constant currency basis compared to the second quarter of 2015. The combination of the first full quarter of Liberator Medical sales and the benefit of the Japanese business moving to customer pricing added about 1,200 basis points to the growth in the category. Excluding these two acquisitions, the United States business was up 4%, while internationally we grew 5%.

Our Basic Drainage business was up 19% globally. Excluding the acquisitions the Basic Drainage business grew 6% both globally and in the United States, with our Infection Control Foley business up 2% globally and 3% in the United States. Our Targeted Temperature Management products grew 19% this quarter, demonstrating continued momentum in this significant long-term opportunity.

Our Continence business was up 34% in the second quarter, all driven by the benefit from the new acquisitions. Sales in Urological Specialties were up 9% this quarter, including our Brachytherapy business which grew 7% driven by Japan. And finally, in this category, standalone sales of our Statlock Catheter Stabilization line decreased 5% in Q2.

Now, let's go to Oncology. Total net sales in this category were $252.4 million, an increase of 7% as reported and 8% on a constant currency basis over Q2 of last year. The Japan acquisition added 200 basis points to growth globally, excluding that sales in the United States were up 4%, and international sales were up 13%.

Our Port business was up 4% versus the second quarter of last year. Our PICC business was up 10% this quarter, with continued impressive growth outside of the United States. As you'll hear from John DeFord, we continue to advance our PICC and Midline portfolio. Our Vascular Access Ultrasound product line grew 4% this quarter, and to close out the category our Dialysis Access product line was up 13%.

So, let's conclude with our Surgical Specialties business. Total net sales in this category were $159.9 million, up 11% as reported and 12% on a constant currency basis. United States sales were up 11%, and international sales were up 13% this quarter, excluding the impact from Japan which was minimal. Our Performance Irrigation business was down 3% and now represents less than 1% of our total company sales.

Our Soft Tissue Repair business continued its strong momentum, growing 12% in Q2. Our broad product offering and our value-added programs that help customers select the right product for the patient are having a significant impact on the treatment paradigm. With more procedures shifting from Natural Tissue to our Synthetic Hernia portfolio and specifically our Basics material. Our Synthetics business grew 18% this quarter, while our Natural Tissue products declined 27%. And our Hernia Fixation business, which is included in the Soft Tissue Repair subtotal, grew 49% this quarter on the continued impact from our recent product launches here.

Closing out the Surgical category in the second quarter, our Biosurgery business grew 16% and now represents between 20% and 25% of our Surgical Specialties business. This continues to represent a significant long-term opportunity for us.

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

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

Thanks, John, and good afternoon, everyone. We covered the pipeline in a pretty significant depth, just a few weeks ago at the Analyst Day. So, I'll try to just give you an update on a few of the key or near-term projects today. We'll start with our Drug-Coated Balloon pipeline. Our long lesion supplement is under review at FDA, and we're hopeful for approval of this expanded indication for the treatment of lesions up to 300 millimeters in length around year-end.

In our Below-the-Knee IDE, enrollment is progressing, and we're optimistic regarding our discussions with the FDA to bring this important treatment option to patients. The AV Access DCB IDE study is in follow-up after a very rapid enrollment. We remain on track to get a look at our results in Q4, and we anticipate PMA submission in Q1 of 2017. Assuming normal review timing, we expect a late Q4 2017 U.S. launch.

We're also on track to submit clinical data for the in-stent restenosis PMA later this quarter. In Japan, our Shonin submission for the Lutonix SFA indication is under review, and we anticipate a mid-2017 launch. While in China, we continue to enroll in our Levant China study that began last quarter.

Also in Vascular, in Q2, we launched our new True Flow Valvuloplasty Balloon family. This proprietary product is designed to reduce the stress placed on the heart by allowing blood to flow through the device during the procedure with limited restriction and back pressure. Early clinical results have also shown that in most cases, rapid pacing to reduce blood pressure has not been required.

Also in Q2, we received FDA approval for the LifeStent system with indications covering the entire popliteal artery. The LifeStent platform is now the first and only self-expanding stent in the U.S. with this indication. Labeling is being updated, and our launch and education programs will commence this quarter. In Stent grafts, our LifeStream Balloon Expandable Covered Stent trial has completed follow-up, and the final PMA module was submitted last week to FDA with approval and launch expected in mid-2017.

Our COVERA next-generation AV access circuit stent graft received IDE approval a couple weeks ago, and we anticipate commencing enrollment later this quarter or in early Q4. We expect enrollment will take about a year. Our VENOVO venous stent IDE study is in active recruitment. We anticipate enrollment throughout this year with follow-up in 2017 and PMA submission in 2018.

In Biopsy, we just began the rollout of the EnCor Enspire system in China. In addition, the UltraCor Twirl breast biopsy marker just launched in the U.S. and Europe about a quarter ahead of our schedule.

Now moving to Urology and Homecare. We continue to advance our broad-based initiatives designed to reduce catheter-associated urinary tract infections through the launch of additional SureStep Foley Trays and our new SureStep Daily Care products. The SureStep Trays are helping standardize indwelling catheter replacement around known guidelines. Our SureStep Daily Care product extends the solution to the maintenance phase and supports compliance to cleaning standards and awareness of indwelling time. Customers find this particularly helpful, especially in light of increasing nursing turnover.

In Endourology Q2 heralded the launch of two new stone basket configurations in our SkyLite platform providing a full range of sizes. And in Targeted Temperature Management, this quarter we received IDE approval for our new neurogenic fever prevention and control clinical study. This study will evaluate the use of the Arctic Sun system in this new indication. The study is anticipated to enroll more than 1,000 patients and will probably take about three years to complete.

Moving to Oncology, we've had a very busy few weeks since the Analyst Day. We received clearance on our new chemical resistant PowerPICC family named the PowerPICC EtOH. This new family will begin launching this quarter and is specially designed with a proprietary material that maintains all the benefits of the Bard PowerPICC and can withstand greater exposure to the sometimes harsh chemistry used in today's therapies.

We're also making steady progress on our new PICC family designed to reduce the risk of thrombosis or DVT. We remain on plan to launch products in this new family in the back half of the year.

We also received FDA clearance on our new Power Midline and clearance for our PowerGlide Pro family of intermediate dwell catheters. Both these products just launched and are shipping to customers. This quarter we added three new applications to our tip confirmation portfolio for pediatrics, ports and central lines through the launch of a first generation system in Europe. We're also developing an advanced version slated for launch in the U.S. and other geographies later this year.

I'll close my portion of the prepared remarks today with Surgery. As we discussed a few weeks ago, the TRIDYNE aortic sealant was approved by the FDA, and we're preparing to launch in the back half of this year. We're also working toward the launch of the Progel Emerald sealant, designed to improve visibility during minimally invasive and robotic thoracic surgery.

In Hernia Repair, we continue to anticipate the launch of additional of Phasix resorbable mesh sizes throughout the remainder of the year. This expansion is planned to provide surgeons and their patients the largest and most comprehensive size matrix in the market, including a 50 centimeter by x 50 centimeter mesh.

On the clinical front, we've completed one-year follow-up in our Phasix clinical study of over 100 ventral hernia patients, and expect results to be presented and published later this year. Similarly additional clinical data for our XenMatrix AB product family is expected to be released later this year.

And finally in Mesh Fixation, we anticipate launching the 15-count version of our OptiFix resorbable fixation device in Q4, with further launches in this category expected in the first half of 2017. I know we went through this quickly. Thanks for your attention. I think we covered 26 new products in about six minutes.

So, now I'll turn you over to Chris.

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

Thank you, John. Let's start with the items that affect comparability of our results between periods. This quarter we had acquisition-related items of $3.9 million, and an impairment charge of $1.2 million and charges of $11.9 million related to restructuring and productivity initiatives. P&L impact for these items is detailed in the notes of the financial statements and the reconciliation accompanying our Q2 earnings press release.

Now, let's go through the statement of income for the quarter. Gross profit was $580.5 million or 62.3% of sales for Q2. On an adjusted basis, GP [gross profit] was $616.2 million or 66.2% of sales up 140 basis points from the prior-year quarter, and better than we expected. Price was unfavorable at 40 basis points on the revenue line and about 10 basis points in GP, continuing the solid performance we saw in Q1. And FX was about 80 basis points of headwind to gross margin for the quarter. Mix was favorable by 110 basis points, which includes the positive impact from our Japanese business. And our cost improvement efforts drove approximately 120 basis points of favorability in Q2.

Our cost savings and margin improvement programs are on track, and we now expect to exceed the original full-year guidance for GPs that we gave you in January. SG&A expenses were $278.5 million for the quarter or 29.9% of sales. On an adjusted basis, SG&A as a percentage of net sales was 29.7%, 70 basis points above the prior year. Consistent with how we guided the full year as we integrate the recent acquisitions, we expect this leverage to improve somewhat in the second half. I would reiterate that as we see opportunities to do so, we will continue to make incremental investments in certain targeted areas, including for example emerging markets and our health economics capabilities.

R&D expenditures totaled $71.3 million for the second quarter or 7.7% of sales on a reported basis. On an adjusted basis, R&D expense as a percentage of sales was 7.6% up 30 basis points from the prior year and consistent with our full-year guidance. We do expect a somewhat higher level of R&D investment spending in Q3. Interest expense was $13.4 million for the second quarter, and other income and expense was $9.6 million of expense for the second quarter as reported, and $2.1 million of income on an adjusted basis. The effective tax rate for the quarter was 25.4%, down 60 basis points from the prior year.

Diluted shares for the period were $75.2 million, and we repurchased approximately 103,000 shares during the second quarter. The net result is adjusted EPS of $2.54, which excludes items affecting comparability and the amortization of intangibles. This was above the range we provided for the quarter, driven primarily by the overachievement in sales.

The balance sheet as of June 30 reflects cash, restricted cash and short-term investments of $1 billion, similar to March 31. For the quarter, accounts receivable days were down 2.1 days, and inventory days were up 6.8 days, as we responded to recent inventory depletion from increased demand.

Capital expenditures totaled $17.9 million for the quarter. On the liability side, total debt was $1.6 billion as of June 30, compared to $1.7 billion at March 31. Debt to total capital at the end of the second quarter was about 50%, and total shareholder investment was $1.6 billion at June 30.

Moving to financial guidance, given the strong first half of the year, we are again raising our guidance for the full year on both the top and bottom line. We now expect full-year constant currency sales growth to be between 8% and 9%, with reported sales growth between 7% and 8%, now implying a currency headwind of about 1%. On an organic basis, we had originally guided the year to be between 5% and 6%, but now expect that range to be between 6.5% and 7%.

We're also increasing our full-year adjusted EPS guidance range to be between $10.10 and $10.20, representing 11% to 12% growth. The U.S. dollar has strengthened somewhat since our last earnings call, and we now expect foreign exchange to be between $0.25 and $0.28 of headwind for the full year.

So, on an FX neutral basis, we're guiding to 14% to 15% growth for all of 2016. For Q3, we're expecting constant currency sales growth between 8% and 9% with reported sales growth between 7% and 8%, also implying an FX headwind of about 1% on the revenue line. This assumes organic growth between 6% and 6.5% for the third quarter. From an adjusted EPS standpoint, we forecast third quarter in the range of $2.51 to $2.55, representing 10% to 12% growth on a reported basis.

In summary, the first half of the year has gone well from both the sales and profitability perspective. As we now move to the second half, we remain focused on our continued execution, including smartly investing in strategic opportunities.

The overall objective of our balanced efforts is to drive attractive and sustainable revenue growth, profitability and shareholder returns over the long-term. I'll now turn the call back to Tim.

Tim M. Ring - Chairman & Chief Executive Officer

Thank you, Chris. That does conclude the formal part of the presentation. I'll now turn the call back to the moderator to facilitate the Q&A session. Due to the number of investors on the call, I'd ask you that you please limit yourself to one question and one follow-up. Cathy?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. And our first question will come from Bob Hopkins with Bank of America. Go ahead please.

Robert Adam Hopkins - Bank of America Merrill Lynch

Hi, thanks for taking the question.

Tim M. Ring - Chairman & Chief Executive Officer

Hey, Bob.

Robert Adam Hopkins - Bank of America Merrill Lynch

Hey, good afternoon. So good solid Q2, Tim, I wanted to just ask you kind of a big picture question. Since the first quarter, there were so many questions across the med tech landscape about volumes, and what was going on? And why everyone was supporting such good numbers? And now you've reported Q2 results. So, with that in mind, can you just give us a sense as to what you're seeing broadly with surgical procedure volumes in the second quarter versus the first quarter? Just wanted to see if you're picking up on anything that's kind of worth noting?

Tim M. Ring - Chairman & Chief Executive Officer

Well, I think, from my perspective the thing worth noting is it seems that some of the improvement that we saw in the first quarter seems to be sticky. So, hard to predict where that moves, there's a lot of moving parts that affect healthcare usage these days in the U.S. in particular, as you know, but as we watched other companies report, obviously we've seen good healthy growth in the quarter. So it appears that the improvement seems to be holding at least over the flattish levels that have been in the last few years.

Robert Adam Hopkins - Bank of America Merrill Lynch

And then also, Tim for you, just two other really quick things. Can you just comment on what you're seeing in emerging markets? It sounds like things are still very robust there, but just want to – try to get as specific as we can. There kind of growing at the same rate they've been in the last couple of quarters? And then maybe if you can just give us a quick comment on Hernia and how sustainable these low double-digit growth rates are that you've been achieving here these last couple of quarters? Thank you.

Tim M. Ring - Chairman & Chief Executive Officer

Sure. I'll let John Weiland to address both of those issues.

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

Well, I think that if you – we had a little bit of a slowdown in Latin America this quarter. Otherwise in emerging markets we continued the robust growth that we've seen across the board. We don't have any concerns there about our ability to continue to grow.

And I think that you hit the nail on the head in terms of growth in our Surgery business, and in particular, our Synthetic Hernia, which is the largest segment in hernia repair by far for us, had some of the finest growth we've seen in eight years to 10 years. And in fact the independent market share data that we saw for Q1 saw us pick up seven share points in Q1 alone. So, we have great momentum driven by the new product portfolio and the – and as well as the products that we said that we were going to be launching, such as the new products in fixation. So I think if you look at biologics, biologics, fixation and synthetics, I think we are in on hitting all cylinders there in Surgery right now.

Robert Adam Hopkins - Bank of America Merrill Lynch

Thank you.

Operator

Thank you. Our next question, I'm sorry, did you have something to add?

Tim M. Ring - Chairman & Chief Executive Officer

No, go ahead, Cathy.

Operator

We'll go to Brooks West with Piper Jaffray. Please go ahead.

Thomas J. Bakas - Piper Jaffray & Co. (Broker)

Hi, good afternoon, guys. This is Tom Bakas on for Brooks. Congrats on a great quarter.

Tim M. Ring - Chairman & Chief Executive Officer

Thank you.

Thomas J. Bakas - Piper Jaffray & Co. (Broker)

If I could, I would like to start with – just following up on Bob's line of questioning on emerging markets. At the Analyst Day, you had mentioned the stat that an average U.S. rep has a customer value of about $4 million annually; that in emerging markets rep was closer to $700,000. I was just kind of hoping you can help us think about what the right steady state number is for an emerging markets rep? And is it something like $0.5 million or $2 million fair, or how should we think about that?

Tim M. Ring - Chairman & Chief Executive Officer

Let me start with that, and then, I'll turn it over to John Weiland. So you got to start with the premise that we make like 15,000 SKUs across the company. We don't give every country manager a 15,000 SKU playbook and say, go sell everything. So, by definition and design, we're much more targeted in these markets. So, you're never going to get a comparable dollar value per bag or it would be an exception for probably some unique reason on a rep for rep basis, just based on the volume of SKUs that we're going to put in an emerging market bag versus a U.S. bag. So, it's a tough number for us to know for sure, but I'm not sure the answer is worth the chase. I think it's more directional in terms of the potential of the head count versus trying to get to a mathematical answer.

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

And I think there is a whole different philosophy in terms of how we're building these businesses. I mean, we're building these businesses from the ground floor up. We're building the markets, as opposed to competing in an already developed and built market. So, by definition, when you're building these markets from scratch, it takes an awful lot of effort, in terms of training, in terms of identifying of the right individuals to train. So we're always going to be chasing that. I think the other dimension is that, for example, we added 225 reps last year in emerging markets, continue to add more this year. So, if our philosophy and our investment plan continues to fold out, we're always going to be chasing this number, because that's our first source of adding new reps.

Thomas J. Bakas - Piper Jaffray & Co. (Broker)

Great. Thank you very much. And just one quick follow-up, if I may. I was hoping you could just talk about Japan and the full direct model there, and just how that's progressing, and perhaps what the biggest opportunities in that geography are for Bard?

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

Well, I think that if we look at our overall results thus far, we're delighted with where we are in Japan in such a short period of time. I think that the – we're working hard on building our sales force in the right capabilities and in the right product lines. That's gone extremely well. I think that we certainly have benefited by the change in the yen that has improved the profitability for us, and has allowed us to continue to make investments in that business where applicable.

And, I think if we look at our overall portfolio, we'd have to say that in the Vascular area and the area of Oncology, they're the two areas that we're underpenetrated in Japan. And, that we're putting more resources and more capabilities in our existing business over there. That's where we think we have the most significant growth opportunities.

Operator

Thank you. Our next question will come from David Lewis with Morgan Stanley. Go ahead, please.

Scott S. Wang - Morgan Stanley & Co. LLC

Hi, guys, this is actually Scott in for David. Two quick ones for me. Chris, looking at your guidance, the raise to 8% and 9% constant currency seems to suggest some deceleration heading into the back half of the year. Can you talk about what's driving that? And, also can you speak to any selling day impacts we should aware for the back half?

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

Yeah. I think for the full back half, it's going to – there is within quarters there is a little bit of noise, but there really shouldn't be any selling day impact. And, I think the guidance really does imply continued performance, a lot like what we saw frankly in Q2. And I think the math allows you to get the growth rates that frankly are pretty consistent, certainly at the high end of the range, but consistent with what we delivered in Q2. And that's – frankly that's really solid constant currency and reported revenue growth and really solid and I'd say high quality net income, and EPS growth.

So, again, there is a range, Scott, for reasons but I think the math allows you to show continued really strong performance through the next two quarters.

Scott S. Wang - Morgan Stanley & Co. LLC

Fair enough. And would you also care to comment on what Liberator did in this quarter? And can you give us an update on your longer term outlook on the homecare market? Thank you.

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

Yeah. I think, similar to Japan, we're off to a terrific start with Liberator, delivering on or frankly above the model. We're continuing to integrate the business with our previously existing homecare business, and really generating the synergies that were behind the acquisition of really capturing more prescriptions and having those prescriptions that then end up within the Liberator family over time.

So the growth rates, we obviously gave you some color on what urology and what the different categories look like on an organic basis, but Liberator is growing exactly as we had hoped, and frankly we're a little bit ahead of where we thought we would be at this stage of the game.

Scott S. Wang - Morgan Stanley & Co. LLC

Thank you very much.

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

You're welcome.

Operator

Thank you. And we'll go next to Mike Weinstein with JPMorgan. Please go ahead.

Robbie J. Marcus - JPMorgan Securities LLC

Hi. This is Robbie Marcus in for Mike. Congrats on the good quarter, guys.

Tim M. Ring - Chairman & Chief Executive Officer

Thank you, Robbie.

Robbie J. Marcus - JPMorgan Securities LLC

Just wanted to kind of flesh out some of the questions that have been asked already. Again, we saw an outperformance on organic growth, about 6.5% – 6.4% this quarter. A big part of it came from Surgical as we discussed, but also Urology and Vascular. Both really good numbers. Urology up 4%; organic, Vascular up 6%. So, maybe you could just touch on those for a minute and talk about what's driving that, particularly in Vascular? Thanks.

Tim M. Ring - Chairman & Chief Executive Officer

John, you want to take that?

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

Sure. I think that a number of our new products in Vascular, we've talked about those over the – during the last session that we had with – we're seeing great uptick there. We love where we're at with Lutonix, quite frankly. We're excited about where we stand on the potential new indications for Lutonix, which in our minds will be a great competitive edge for us in that business. Our Biopsy business has been tremendously strong, and our emerging markets performance, particularly China in Biopsy has been terrific.

Urology, we talked about the components of Urology. The urology market, if you look at the Basic Drainage business is not growing in the United States at all. In fact, it's relatively flat, maybe up 1%, but some of the new product offerings that we have introduced into that market, especially our SureStep Tray, has allowed hospitals to upgrade within their own existing framework, and it's given us a mix differential, which is driving really a substantial portion of growth in Basic Drainage for us.

And I'd also like to add, one of the areas that may not come out, but we have had excellent growth in Europe. They had another terrific quarter this quarter for us. And we've always been delighted with our growth in emerging markets, and that continues to be really a big positive for the corporation.

Robbie J. Marcus - JPMorgan Securities LLC

And maybe if I could just follow up on that, you mentioned Lutonix still doing really well. Can you comment on what you think global market is in terms of size and what you think your share is? Thanks.

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

I think the share question, we've referenced data that we've seen from third parties that continue to say we're holding our own – we're sort of sharing the market together with the other competitor. And as John highlighted, we're seeing really strong sequential growth within our business. I think the estimates that folks had coming into this year, Europe is still a relatively small number where we continue to take share there as well. That's frankly been held back, I think, as folks wait for some below the knee data, which we're anxious to be the one to provide them for.

So we think that data when and if it does arrive will really allow the opening of the European market and really have that growth really kick back in again. So we're – I think we're pleased with how the markets growing, we're pleased with how we're continuing to hold and gain share. And most importantly, I think when we look out over the next two years, three years, four years the portfolio of indications that we're going to have within the company, within Lutonix and the DCB franchise is going to be absolutely unrivaled, and we think that really sets us up in a very unique position.

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

The only thing I'd add to Chris's commentary is that the FDA recently approved our ability to use the one-year registry data in our labeling and in our promotions of the product, and as you know that one year registry data, all comers, real life use shows just tremendous efficacy of the Lutonix product line.

Operator

Thank you. Our next question comes from Larry Keusch with Raymond James. Please go ahead.

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

Hi, good afternoon, guys. Tim or John, I wanted to come back to PICCs, 10% growth in the quarter, obviously very impressive. Just, I know China is a big opportunity, but I'm not sure how much that's really driving the growth right now. So, I was just hoping if you could help us deconstruct that 10% a little bit, put in the context to the market? And what products are really driving that for you?

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

Sure. Well as you mentioned, we did have excellent growth within China, for example. That has been a big driver of growth throughout the world. But I will tell you, we've also had tremendous growth in PICCs and Midlines in Europe; that has been an excellent arena for us. We're starting to gain momentum in Japan based on the emphasis that we talked about before, and we continue to have strong growth in the United States. So it's a very balanced approach to where we're trying to grow PICCs, it's a core franchise for us. We're making the investments where we need to, to continue that growth on we're tracking. We like what we're seeing around the world in PICCs right now.

Tim M. Ring - Chairman & Chief Executive Officer

The only thing I would add Larry. I mean, that slide from the Analyst Day which was my favorite was the really the map that showed the level of penetration in most of the developed world and really highlighted the opportunity that exists for PICCs. And part of what you're seeing is us actually executing against opportunity. And to John's point, tremendous growth in Europe, a huge untapped opportunity in Japan and China. We're creating that market as we go and seeing tremendous growth there that we think has a lot of legs still to come.

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

Okay.

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

And I'd just jump into add that we've got a lot of great new products. Many of those just launching now, but we've had a real great cadence of product launches in that category over the last several years.

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

So, John, that actually was just a segue to my next question. And I do have a financial one for Chris, but on that, you've got the chemical-resistant PICC approved now. You're obviously working on the thrombo-resistant version of that. Is – I'm just trying to put the chemical-resistant into perspective. Is that kind of a nice to have and really the thrombo-resistant product is going to be the next real big growth driver, or am I thinking about that incorrectly?

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

Well, I think that one, this is a really new material that we've developed from scratch. We think that as time goes on, the importance of this chemical-resistant technology is going to be significant, and so there's some things in the pipeline I'm not really ready to talk about today that will bring that more to light as we go out into the future, but then our Provena family, which is what we're calling our thrombo-resistant, DVT-resistant technology will begin launching that. And we do think that that both of those are going to fit important niches in the marketplace, and I think we're just really excited to have them both out there.

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

Okay. Terrific. And then, and Chris, quickly, just help me understand, I think if I got the numbers right, there was a sequential drop in GM, despite more than $50 million of incremental sales in the 2Q. So just help me bridge the step down in gross margin, and then separately just your thoughts in the second half for price given what we've seen in the first half?

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

Yeah. It's really Japan. Larry, again, the Q1 impact was much more pronounced where we were getting the final sell through to the customer with no incremental costs. So, it was pure GP dropping through, and we were largely through that. There's a little bit of hangover into Q2, and then a very slight hangover for the rest of year, but it was really that Japan factor that caused that sequential move.

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

And then, price for the second half?

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

I think we're obviously really pleased that the first six months and the teams were frankly, I think, certainly contributing to that outcome. I think we're certainly going to do better than we had anticipated for the full year, I think that's clearly reflected in our ability to provide the higher sales guidance. But we're certainly not ready to say 40 basis points is the new normal, but certainly I think between 50 basis points and 100 basis points is probably what we're thinking about.

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

Okay, perfect. Thanks, guys.

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

You're welcome.

Operator

Thank you. We now have a question from Kristen Stewart with Deutsche Bank. Please go ahead.

Kristen Stewart - Deutsche Bank Securities, Inc.

Hey, guys. Hope you're doing well.

Tim M. Ring - Chairman & Chief Executive Officer

Hi Kristen.

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

Hi Kristen.

Kristen Stewart - Deutsche Bank Securities, Inc.

I just wanted to go back over the organic gross numbers just to make sure I understood kind of trends between the first quarter and the second quarter. I think the first quarter you guys had 9% organic growth, then it was 7.1%, both very great numbers. But I was just wondering what kind of – just kind of quarter-over-quarter or year-over-year rather comp issue or... Because it sounds like everything is continue to go very well in the marketplace and sounds like your comment suggest...

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

Yes.

Kristen Stewart - Deutsche Bank Securities, Inc.

...more of a continued strengthening, and it did look like the U.S. was up 9% last quarter and up 7%, so I'm just wondering if it's just simply year-over-year comparison, or if it's something else?

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

Sure, Kristen and we actually tried to be pretty prescriptive on the Q1 call...

Kristen Stewart - Deutsche Bank Securities, Inc.

Yeah.

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

A couple of items that were really unusual or certainly not going to be repeated in Q2. One of them was the Lutonix comp. Q1 was by far our easiest comp of the year coming out of that big Q4 and working through some inventory in Q1.

Kristen Stewart - Deutsche Bank Securities, Inc.

Right.

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

Flip to Q2 where we're obviously, don't have that and then also have the headwind associated with the Boston stock in order. We have talked about ports, there was a drag, we had a weak Q4 as we got ready for some new product launches in Q1, so ports were very strong in Q1. Biopsy was also incredibly strong in Q1 on the back of China. And China in general, we called out that China had an absolutely phenomenal Q1. Some of that was again as we're building out the Biosurgery Sales force, there were some stocking that went on as well. China had a terrific Q2, but certainly somewhat slower than again an unusual Q1.

So, I think the message we wanted to have you understand coming out of Q1, terrific quarter, some more one-time items, but leading into a Q2 that was going to be also very strong organically. So, actually the good news is it came our exactly as we had thought and...

Kristen Stewart - Deutsche Bank Securities, Inc.

Yes.

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

...the items that were more of a tailwind in Q1 indeed played out the way we thought in Q2.

Kristen Stewart - Deutsche Bank Securities, Inc.

Okay. So, would it be fair, I guess, to think about I guess the first half is the run rate, because then I guess it's more of like an 8& and I guess your guidance now more of 6.5% to 7%?

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

No. I think that, I mean, that 6.5% to 7%, I think if you normalize Q1 for all of those factors, you actually get in to more of the range that we did kind of in Q2.

Kristen Stewart - Deutsche Bank Securities, Inc.

Okay.

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

I will highlight Q3 will also have a stocking impact. Remember last year, we had noted, we launched a number of Lutonix additional lengths in Q3. And so Boston needed to stock all of those lengths in Q3 as well. So, there'll be a stocking phenomenon in Q3. So, it will be a little bit less than the Q2 stocking, but just to let you know that that's coming as well. So I think the way we're seeing the business is, we're growing pretty comfortable in that 6.5%-ish organic range, and it's really balanced, which I think is very important, and I think speaks to the quality of the overall results.

Kristen Stewart - Deutsche Bank Securities, Inc.

Okay. So, a little bit better volumes and a little bit better price from those assets.

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

Yes.

Kristen Stewart - Deutsche Bank Securities, Inc.

Okay, great. And then, just on acquisitions, are you guys seeing any difference in trends that are out there. And I'm also just curious going back and would be doing just a look at Rochester, were you guys able to get to the level of margin improvement from a gross margin perspective with that deal, now that it's almost three years?

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

Yeah. We're still – we're still actually working through that. We're certainly in the tail end, but a lot of that that manufacturing capacity build and standing up of that facility is actually still ongoing this year. We'll complete it towards the end of this year and early in 2017, and it's been a lot of work for the team, but we feel good about how we're trending there. And feel really good about that acquisition overall for sure, and certainly as we've now augmented it with Liberator.

Tim M. Ring - Chairman & Chief Executive Officer

You want to comment about acquisitions?

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

Yeah. I think more broadly, we're continuing to be very active. We've looked at a lot of things this year. We're continuing to look at things as we sit here today. I think valuations always need to make sense to us. And that needs to be on top of a strategic rationale that's pretty compelling. And so, again we haven't announced anything because we're not trying to find the things that make sense, but I think that the takeaway you should have is that we're continuing to be disciplined and stick to the strategy that we've laid out for you, and the kinds of things we've done recently, we're trying to find more of those. And I'm confident we will, but just through the first six months, the stars haven't aligned.

Kristen Stewart - Deutsche Bank Securities, Inc.

Great. Congrats on a good quarter.

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

Thank you, Kristen.

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

Thank you, Kristen.

Kristen Stewart - Deutsche Bank Securities, Inc.

Take care.

Operator

Thank you. Our next question is from Matt Taylor with Barclays. Go ahead, please.

Matthew Taylor - Barclays Capital, Inc.

Hi. Thank you for taking the question. So, I wanted to start with just some of the moving parts here, and I was hoping you could go over a couple of things. I don't think there were specifically given – if you could, just the Gore royalty, the emerging market growth rate, if you can give us a number? And then you talked about the benefit of Liberator in Japan, can you parse those out between, I guess the contribution to Urology?

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

I think there's a slide, Matt, on page four of the deck that tries to tease all of that out for you. And again we're doing this because the Japan impact on top of the acquisitions is pretty important. So, again, the – and I'm not going to give you the specific numbers, but Urology again, stripping out the impact of Liberator and the impact of Japan, grew 4% organic for us in the quarter, which again is a very solid result.

Vascular, where the big drag from sales to – of EP products to Boston, we had continued to OEM product for them through all of last year as they stood up their own manufacturing. And so they had been building inventory this time last year, and they're buying very, very little from us now, so a big drag there. And the Gore royalty of $39 million. When you strip all those out as well as the Japan impact, Vascular grew 6% organic overall. And again, that's in the face of Lutonix stocking order as well, which we called out as about 70 basis points overall to total organic.

Matthew Taylor - Barclays Capital, Inc.

Okay.

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

So the 6.4% becomes a 7.1% when you adjust for the Lutonix stocking.

Matthew Taylor - Barclays Capital, Inc.

Okay. That helps. And then, in the EM it seems like you're still growing really nicely. I was wondering if you could just comment a little bit more there on what you're seeing from an underlying market perspective versus the gains that you're getting from just Bard expanding its footprint and infrastructure?

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

Yeah. We saw another quarter were we're growing about 20% overall. John had said Latin America was a little bit softer, but frankly, we've done a good job, I think, of getting inventories in Latin America to a much better level, and we feel really good about the second half and going forward there. To John's other point in China, we're creating a lot of these markets as we go. And so, while there has been a lot of noise about slowdowns and macro factors impacting growth rates, we haven't seen that in China. PICCs are going terrifically well, Biopsy is going terrifically well. We're now building and have built a direct biosurgery sales force and are excited about that opportunity. We have our Lutonix SFA trial enrolling in China. So...

Tim M. Ring - Chairman & Chief Executive Officer

Just launched a new biopsy product there.

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

...as John had mentioned. So, I mean, Latin America is a tough place to do business, not – certainly not going to disagree with that fact. But it's still a relatively small business there, but we're building it the right way for the long term. And given the market opportunities we're targeting and as Tim said, we're pretty targeted about the products that we bring to market there, and they're generally trying to serve a very specific need, and some cases a need that's not being yet met by other products, and PICC's the best example in China. So...

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

I would add though to it that the – we have made a number of investments in the rest of Asia area outside of China, and their results have been stellar to-date too.

Matthew Taylor - Barclays Capital, Inc.

Great. Thanks a lot.

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

You're welcome.

Operator

Thank you. And we'll go next to Anthony Petrone with Jefferies. Go ahead, please.

Anthony Petrone - Jefferies LLC

Great. And good afternoon. Maybe to start out with a couple on Lutonix? And maybe just an update on the Boston Scientific distribution agreement, what percentage of sales are coming from Boston Scientific at this point? And when that agreement gets renewed? And then the longer term target of $1.5 billion by 2020 for the category, I'm just wondering how much of that is below-the-knee indications? And then one strategy question to follow up with. Thanks.

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

Well, if you look at our EP business when we entered into that agreement, and it's going extremely well, but the number of accounts they have is a limited number of accounts and as a result of that, it's a relatively small percentage of our overall business. It doesn't mean it's not important in certain segments that they're focusing on, and it doesn't mean the partnership has not gone well. But it is not a large percentage by any sense of the imagination in terms of our overall Lutonix business.

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

In terms of the market size Anthony, we target the below-the-knee opportunity at about $350 million globally by 2020. SFA and popliteal in the $850 million range globally. And then other indications, including AV Access, which we're really excited about where we are clinically there, at another $250 million. And what really excites us when you look across all those indications in 2020, we're the only company, we believe that's going to have approvals in all those areas, and we think that's going to really position us well over that timeframe.

Anthony Petrone - Jefferies LLC

That's helpful, and then just the strategy one, the reverse on I guess the M&A environment when you consider the valuations here have improved, I'm just wondering if divestitures have moved up the priority scale for assets that are maybe slower growing and not as core to the business at this point in time? Thanks again.

Tim M. Ring - Chairman & Chief Executive Officer

Yeah. Thanks. Yeah, no we – I think with the sale of our EP business a few years ago, I don't see any other businesses within the company that we would divest. Certainly with as many SKUs as we have, there is always some that are even by design when you come out with a next gen product, that are in decline, but we'd much rather have the management time focused on growth, and we've got plenty of opportunities through the investments that we've made to do that rather than focusing on a product line here or there that might be a bit of a drag.

Anthony Petrone - Jefferies LLC

Got it.

Operator

Thank you. And our next question will come from Matt Mishan with KeyBanc. Go ahead, please.

Matt Mishan - KeyBanc Capital Markets, Inc.

Great. Thank you for taking my questions. First question from me is, can you help me walk from your previous earnings guidance to your new guidance? I think you beat by about $0.09 in the quarter, but only raised the midpoint of the EPS guidance by about $0.04, and you also were able to bump the sales guidance.

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

Yeah. Sure. And I called it out in my prepared remarks, Matt. FX for us, relative to where we were when we had guided Q2 and the full year, actually has worsened by, call it $0.05 to $0.08, so at the midpoint sort of $0.065, and it's really for us driven by the pound, the RMB sort of quietly weakened relative to the dollar or the euro, Aussie dollar, Canadian dollars have all moved relatively materially. Now, it was very late in Q2, but as we sit here today, those are all going to cost us in combination $0.06 or $0.07. So effectively offset virtually all of the beat to the consensus number in Q2.

And, as we talked about on the Q1 call, and as I reiterated again today, we're continuing to invest incrementally as we have the opportunity to do so. So, I think the strength of the operating performance so far is allowing us to continue to make investments this year that coming into the year we frankly didn't think we were going in a position to do. And we think that's the right thing to do for the long-term.

I think looking at Q2 of an 8.3% reported and a 12% (58:07) reported bottom line, very high quality, and us taking some of the upside that we've delivered to invest back into the business we think it's the right balance. And you're seeing us continue to do that, and that's frankly also reflected in the guidance that we've just laid out for the remainder of the full year.

Matt Mishan - KeyBanc Capital Markets, Inc.

Okay. That's....

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

I think to give you an example that would be the neurogenic fever trial that was not in our original plans as we started the year, but as we went through it, seeing the size of the opportunity, and our ability to invest it in, as you could see that's a large, large clinical trial. That's an example of some of the things that we turned on when we saw we'd had a little bit of an opportunity based in our performance. And that's – that is only one example, quite frankly.

Matt Mishan - KeyBanc Capital Markets, Inc.

Okay. That's very helpful. And then just a couple of modeling questions. Can you help me out with the cadence of the EP sales to Boston Scientific as we walk through the rest of the year? I think you started calling that out in the fourth quarter of last year, and then, how should we be thinking about the comparison, the fourth quarter comparison in particular from – from Japan and Medicon?

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

So Q3, there'll be less of an impact in Q3 and then even lesser – less of an impact in Q4. And once we get into 2017, it'll be a very small ongoing level of sales. So we – we won't have the comp issue anymore. Medicon, there will be a positive impact in Q4 having a full quarter of sales through to the customer as compared to last year where again, we had to work through the inventory that was resident at the JV when we closed that transaction in early November. So there is couple of puts and takes related to both of those.

Matt Mishan - KeyBanc Capital Markets, Inc.

Thank you very much.

Todd W. Garner - Vice President-Investor Relations

Just one clarification there, Matt. The EP step down really began in Q4. So Q3 will still be a significant reduction. Similar to what you've seen these last couple of quarters, but Q4 that comparable will be much less.

Matt Mishan - KeyBanc Capital Markets, Inc.

All right. Thanks, Todd.

Operator

Thank you. And that does conclude our Q&A session. I'd like to turn the call back over to Bard's management for closing or additional comments.

Tim M. Ring - Chairman & Chief Executive Officer

Thanks, Cathy. I just like to close by thanking all of our employees around the world for a very strong quarter and their commitment to continue the execution of our strategic plan. And with that, thanks to all of you for joining us today, and we'll talk again next quarter.

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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