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CR Bard, Inc. (NYSE:BCR)

Q3 2007 Earnings Call

October 23, 2007 5:00 pm ET

Executives

Timothy Ring - Chairman and CEO

John Weiland - President and COO

Todd Schermerhorn - SVP and CFO

John DeFord - SVP, Science, Technology and Clinical Affairs

Analysts

Miroslava Minkova - Bear Stearns

Matthew Dodds - Citigroup

Mimi Pham - HSBC

Bob Hopkins - Lehman Brothers

Operator

Ladies and gentlemen, thank you very much for standing byand welcome to the C. R. Bard Incorporated Third Quarter 2007 Earnings ResultsConference Call. At this time, all participants are in a listen-only mode. And later,we will conduct a question-and-answer session. Instructions will be given atthat time. (Operator Instructions).

As a reminder, this conferencecall is being recorded and will be available for future on-demand replaythrough 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 Schermerhorn, Senior Vice Presidentand Chief Financial Officer; and John A. DeFord, Senior Vice President,Science, Technology and Clinical Affairs. Also in attendance today are FrankLupisella, Vice President and Controller, and Eric J. Shick, Vice President, InvestorRelations.

And before we begin this call,you are reminded that Bard's management will be discussing some forward-lookingstatements, the accuracy of which is necessarily subject to risks anduncertainties. Please refer to the cautionary statement regardingforward-looking information in Bard's June 30, 2007, Form 10-Q. In theinformation under the caption risk factors and our Annual Report on Form 10-K/Afor the year-ended December 31, 2006 including in each case, disclosure of thefactors that could cause actual results to differ materially from thoseexpressed or implied.

Management will also be referring to net sales on a constantcurrency basis as well as income and EPS from continuing operations, excludingcertain items that affect the comparability of results between periods andother non-GAAP measures during this call. Management believes that whendiscussing revenue growth, eliminating the impact of changes in foreignexchange, which have a non-operating impact, provides an additional and meaningfulassessment of the core operating performance of individual product franchises.Reconciliations of non-GAAP measures to the most comparable GAAP measures areprovided in Bard's earnings press release and on the company's website atwww.crbard.com.

And please also note that all information that is nothistorical is given only as of October 23, 2007, and the company undertakes noresponsibility to update any information. Unless otherwise noted, allcomparisons are to the prior year period. And with saying that, I would nowlike to turn the conference over to Mr. Timothy Ring. Please go ahead, sir.

Timothy Ring

Thank you. Good afternoon everybody and welcome to Bard'sthird quarter 2007 Earnings Call. I would like to again thank you for takingthe time to join us today and I would expect the presentation portion of thiscall to last around 25 minutes.

The agenda today will go as follows: I'll begin with thebrief overview of the results for the third quarter for 2007. John Weiland, ourPresident and Chief Operating Officer, will review third quarter product linerevenue. Todd Schermerhorn, our Senior VP and CFO, will review the thirdquarter income statement and balance sheet, as well as our expectations for thefourth quarter. And then after that John DeFord, our Senior VP of Science,Technology and Clinical Affairs, will give you an update on our productdevelopment pipeline. And then as we typically do, we'll close with theQ&A.

Third quarter 2007 net sales totaled $544.8 million. This representsan increase over the third quarter of last year of 10% on an as-reported basis,and 8% on a constant currency basis, in line with our guidance for Q3. Thecurrency impact this quarter versus Q3 of last year was favorable by about 180basis points.

Income from continuing operations for Q3 of '07 was $102.1million, and associated diluted earnings per share were $0.96. Reported incomeand diluted EPS from continuing operations were up 16% and 17% respectivelycompared to the prior year period. When you adjust the certain items thateffects comparability between the periods, our third quarter net income forthis year, diluted earnings per share from continuing operations where $98.4million and $0.93, up 17% and 18% respectively over 2006.

The adjustment to Q3 '07 results was for reduction in theincome tax provision due to changes in certain statutory tax rates outside the US, primarily in Germany, which resulted in therevaluation of deferred taxes. For your reference, the adjustments to our resultsare detailed and reconciled to GAAP results in the tables and notes to thefinancial statements in our earning release and also on our website.

When you look at revenue growth geographically and onconstant currency basis, third quarter net sales in United States increased 9%, Europe grew at 6%, Japan increased 2%, and our otherinternational business grew 6%. Our results in Japan reflect sales in to our jointventure, sales from the joint venture to the market where actually up 9% forthe quarter as they adjusted their inventory levels.

Looking at net sales growth by product line Q3, our Vascularand Urology categories grew within our full year '07 constant currencyguidance, while Oncology was below its guidance range. Our Surgical categorywas down from the prior year quarter due in large part to the issue wediscussed with you on the Q2 call regarding the scale-up of manufacturingrelated to our vendor supplied component for our Salute II hernia fixationdevice. We did start to ship that product again in last phase of third quarterand [John Weiland] will give you more details when he reviews the surgicalbusiness.

Turning to the business development front, after closing theUltraClip and PermaSorb transactions in Q2, we did not complete any deal thisquarter. However, we are actively pursuing a number of deals that couldpotentially close in the fourth quarter.

You may have noticed on October 10th, we announced a new$500 million share repurchase authorization following the nearly completed $500million share authorization that was previously approved in the fourth quarterof 2005 by our Board. At that time, we said that we would like to begin toshrink the share base something on the order of about 1% a year. Since thestart of the fourth quarter in '05, we've reduced our basic share amount byover 3 million shares.

And as we have always said our first priority for cashcontinues to be business development, but given our cash position, and strongcash flow, we expect to be in the position to continue with this program aswell.

And finally, I would like to note before going to thedetails, our annual Analyst Meeting is scheduled for December 18th at 4:30 atthe Palace Hotel in Manhattan.And for those of you that can't attain, the meeting will be webcast.

So, let me now turn it over to John for a review of ourproduct line revenue.

John Weiland

Good evening, ladies and gentlemen. Before I begin, let menote that all percentage growth data will be given in constant currency unlessspecifically noted otherwise. So, let's begin with the Vascular category.

Total net sales for the third quarter in this category were$134.1 million, which represents an increase of 9% over the prior year quarter.This increase was 11% on an as-reported basis. The United States business grew 7%,while internationally we were up 11% over the prior year quarter.

Our EP business grew 2% for thequarter. Overall performance here was impacted by a decline in our EP LabSystems business, versus a relatively strong comp. And as we've noted in thepast, due to the capital nature of these system sales, we typically seefluctuations from quarter-to-quarter that can move the needle on our overall EPbusiness growth.

The measured rollout of our HDMESH Ablation Catheter for the treatment of atrial fibrillation in Europe continues to show very positive clinicalperformance of the device. John DeFord will talk more about this in hisdiscussion.

Graft product sales, were down 2%this quarter, consistent with the range of historical performance. Ourendovascular products which were 63% of the Vascular category grew 15%. Withinendovascular, our biopsy product line had a very healthy quarter, growing 29%.The UltraClip Tissue Marker line we acquired late in Q2 is off to a strongstart adding nicely to the momentum of our core line.

Our peripheral PTA line was up10%, and I am pleased to note that at the end of September we received five10-K concurrence and launched our new Dorado peripheral PTA catheter. Itfeatures a low profile balloon with sizes compatible with either a 5-French or6-French sheet. The product is highly non-complaint with a maximum of 5%expansion between nominal and rated burst. The balloon material wasexceptionally strong here and puncture resistance with the highest rated burstpressure and largest working range of any standard balloon. This balloontechnology is based on our market-leading high-pressure and large-diametercatheters. We expect Dorado to help us gain share in the $350 million globalperipheral PTA market where we currently have little presence in the standardcatheter segment.

In our stent business, the FLUENCY stent graft continues tobe the growth driver, with an increase of 20%. And finally, our Vena CavaFilter line had a solid quarter growing 15%. John DeFord will update you on ourproject pipeline for stents, stent grafts and Vena Cava Filters.

So, let's now turn to Urology. Total net sales for the thirdquarter of 2007 were $166.4 million, an increase of 11% over the third quarter2006. This increase was 13% on an as-reported basis. The US business which represents 73% ofglobal revenue grew at 16% with international up 1%.

Standalone sales of our StatLock Catheter Stabilization lineincreased 82%, an increase in deal over purchases for the quarter and advanceof our price increase scheduled for November contributed to the growth. Webelieve growth from organic demand was in the range of 50% for the thirdquarter.

We expect to see some correction for the dealers inventorybuild in Q4, but we are obviously very pleased with our success with StatLockover the last five quarters, since we acquired the line.

Our basic drainage business grew 5% for the third quarter.Our BARDEX I.C. infection control catheter line delivered another solidperformance, growing 10%.

Our overall continence business was up 14% in the thirdquarter, with our surgical continence products growing 31%.

On the last earnings call, we told you about the late Q2launches of our new Align TVT and TO surgical slings, and our new Avaulta Plusand Avaulta Solo pelvic floor repair devices. Sales were strong in the Q3driving growth in our surgical sling and pelvic floor repair lines up 24% and35% respectively.

Our continence bulking product sales were down 3% in Q3. Andfinally sales in urological specialties, which were 18% of urology, were up 3%versus 2006. Brachytherapy, which is about half of the business in thiscategory was down 3%. Excluding brachytherapy, the Specialties category was up9%. And we continue to see improved momentum in the rest of the urologyspecialties business which is primarily our line of endourology devices.

Before I leave the urology business, let me comment on thepending launch of our Agento I.C. product. First, we plan to report Agentorevenue in the urology category because we see it more as an infectionreduction device than our respiratory product. So, it fits very well with theinfection reduction call point we have developed here with the BARDEX I.C.catheter.

Secondly, while you may have been Agento study results ininvestor research or in clinical meetings, we can't discuss them due to thenature of the review process both at the FDA and with the prestigious PeerReview Journal where a manuscript on the study has been submitted. Though weanticipate FDA concurrence this quarter on Agento our rollout is also gated bythe journal publication. We see this as an important new technology and a newspace. So, we are evaluating the benefits of timing the launch in concert withthe publication of the study.

Now turning to Oncology, total net sales in this categorywere $140.9 million, an increase of 11% over the third quarter of 2006. Thisincrease was 13% on an as-reported basis.

Geographically, net sales in the United States were up 12%. Outsidethe United States,we grew 9%. Our ports, PICCs and ultrasound line were affected by strong prioryear comparables. Implanted ports grew 13% for the quarter, as compared to theQ3 '06 which was when we initially launched the POWERPORT.

Our PICC and mid-line products grew 17% this quarter versusQ3 last year when we launched the Sherlock Tip Locator system, which as we havenoted quickly began making a meaningful contribution to growth of the PICCline.

Our vascular access ultrasound product line grew 3% againstthe particularly strong Q3 in the prior year. Sequentially, we saw a stronggrowth over Q2 when we introduced our latest technology with the Site-Rite 6.

Our new Aspira Pleural Drainage system for the treatment ofpleural effusion in end-stage cancer patients launched in the back half of thethird quarter, we received positive feedback clinically though it's too earlyto gauge commercially the results.

Overall, we continue to see good growth prospects for ourPICC franchise driven by further cannibalization of the IV catheter marketcontinued upgrade to POWERPICCs and the growingdemand for our Sherlock technology.

In the near-term, we are preparing to launch two importantnew products in Q4. The first is our next generation Sherlock Tip LocatorSystem. Sherlock, as many of you will recall, is designed to reduce thelikelihood of PICC malposition during implant by showing the operator therelative anatomical location of the catheter tip during placement. The newSherlock provides a larger scan area, adaptive sensitivity, an improved userinterface and connectivity to both our Site-Rite 5 and Site-Rite 6 ultrasoundplatforms.

The second anticipated launch isa new family of proximal valve POWERPICCs; we will market under the trade name Solo.Today standard PICC flushing protocol requires daily heparinized salineinfusion to reduce the likelihood of catheter clotting and thrombosis which canrender a PICC unusable. In contrast, the POWERPICC Solo will be indicated forweekly flushing, and will not require the use of heparin, significantlyreducing patient risk, nursing time and inconvenience associated within-patient, out-patient and home-based central venous therapies.

And finally, our SurgicalSpecialties business, global net sales decreased 3% from the third quarter lastyear to $83.4 million. This was a 2% decrease on an as-reported basis. Sales inthe United Stateswhich represented 75% of global sales were down 3% for the quarter,internationally we were also down 3%.

As we forecasted on our Q2 call,the surgical category was impacted by the issues that carried over to Q3 in oursoft tissue repair business. So let's start with the results for the softtissue line which incorporates both, our core hernia and hernia fixation lines.

Overall, our core hernia results were mixed. On the positiveside, our natural tissue products grew 25% for the quarter. However, the muchlarger synthetic hernia line experienced a slight decline for the period,resulting in a net decline for the core hernia category. We believe growth inthe synthetic hernia line will be challenging until our internal pipeline ofdifferentiated products begins the launch in the back half of next year. In theinterim, we are looking at some business development opportunities that could improvethe trend more quickly.

As we discussed on our second quarter earnings call,following the voluntary withdrawal of the reusable Salute I fixation device, weexperienced issues regarding the scale up of manufacturing related to a vendorsupplied component of our Salute II hernia fixation device. We began shippingproduct again in the last days of Q3, and we expect production ramp up tocontinue on a gated basis as we move through each month of Q4.

The PermaSorb Resorbable fixation device acquired late in Q2is off to a nice start exceeding our original expectations. We believe we arecurrently the only company offering both permanent and absorbable herniafixation products. Going forward, once Salute II is fully ramped we feelconfident in our ability to compete in the fixation space.

All in, our soft tissue repair line was down 4%. Lookingahead we have further work to do to regain momentum in our core herniaproducts. We feel one of the best ways to help achieve this is to leverage ourrole as innovators in this market. Our new product pipeline has projects forsynthetic, natural tissue, biosynthetic and coded products. The good news isthat we see a lot of opportunity for innovated technology to generate growth inthis market segment.

Turning to our performance irrigation business, we resolvedour Q2 back-order which contributed to the category showing 5% growth for Q3.And finally, our hemostasis business was down 11% due to the timing of dealershipments to Japan.

This concludes the net sales discussion. I will now turn youover to Todd Schermerhorn.

Todd Schermerhorn

Let's start with the income statement for the quarter, grossprofit was 60.8% of sales, down 30 basis points versus the prior year quarterand 30 basis points sequentially from an adjusted 61.1 in Q2. Our revenueissues in hernia are driving unfavorable mix in gross profit which is making itdifficult to show improvement. In addition, amortization of intangibles is up20 basis points sequentially in Q3 as a result of the two deals we closed andtalked about last quarter.

SG&A expenses were $160.9 million for the quarter, 29.5%of sales. As a percent of sales that's 280 basis points lower than the prioryear. The largest part of that improvement comes from leverage in administrativecost. We continue to fund our selling organizations sufficiently to meet oursales objectives.

Conversely, after adjusting for purchased R&D, R&Dspending as a percentage of sales has climbed each quarter 2007 and stands at6.2% for Q3 fueled by increasing clinical cost. Our operating margin for thequarter was 25.0% of sales versus 22.6 for the prior year quarter, on thestrength of obviously of our cost controls, bringing us to 150 basis points ofoperating margin improvement year-to-date on adjusted basis.

Interest expense was $2.9 million for the third quarter,down $1.1 million from the prior year. Other income and expense was $8.9million of income for the quarter, driven mainly by interest income. Thereported tax rate for the quarter was 28.2%, but excluding the reduction in thetax provision that Tim mentioned, tax rate for the quarter was 30.8% getting usto 29.7% on a year-to-date adjusted basis.

The balance sheet as of September 30th reflects cash andshort-term investments of $575 million versus $619.8 million at June 30th.Accounts receivable was up 0.7 days from June 30th, and inventory was up 1.3days from the same base point.

Capital expenditures totaled about $11 million for thequarter, continuing to run a little bit below our guidance for the full-year.On our liability side, total debt was $150.6 million, was no change from [630].Our debt to total cap at the end of third quarter was about 8%, and totalshareholder investment is $1.866 billion at September 30th.

We repurchased a little over 2.2 million shares of thecompany's stock this quarter, getting us to 3.2 million shares on ayear-to-date basis. And we'll continue to be buying our stock as cash balancesand our market conditions permit.

Now let's turn to guidance for the fourth quarter of 2007,we are expecting constant currency revenue growth between 8% and 9% for thecoming quarter. Our surgery business will continue to face supply issues in thequarter and as I am sure you noted in our results for the quarter, our internationalbusinesses are currently running little bit soft.

With to respect EPS fromcontinuing operations, we're looking for $0.98 to $0.99 for Q4, excludingitems, bringing us to a range of $3.79 to $3.80 for the full year, safely aheadof our 14% EPS growth objective.

And I'll now turn it over to JohnDeFord for an update on the product pipeline.

John DeFord

Thanks Todd, and good evening.With our Analyst Day in New Yorkin just a few weeks, I'll just provide a brief update of our pipeline today. InDecember we'll share a more comprehensive overview with some of our portfolio.Let me begin with our HD MESH ablation product and our atrial fibrillationactivities.

We continue our controlledcommercial sale of the product in Europe wherewe are working with about 25 key centers. Our clinical experience is ramping upand we are very pleased with the product's early clinical success. We continueto refine and update our training program and continue to see reductions inprocedure time and improvements in isolation rates with MESH alone. Inparticular, we're pleased with the safety of this product. To date through allof our clinical studies and commercial activities, we've had no esophagealfistulas, no phrenic nerve injuries, and no cases of pulmonary vein stenosis.

We are also seeing proceduretimes in trained centers dropping 30% to 50% in vein isolation rates with MESHalone have been 89% in the last 30 cases, and reached 98% in the last sevencenters brought on board, further validating our training program.

In the US,we submitted our pivotal study IDE last quarter following FDA's CardiovascularPanel Meeting which was held on September 20th. The panel meeting was held todiscuss A-fib clinical study design and enrollment issues that are impactingall the players and constituents in this space. The results of this meetingdidn't really significantly change FDA's position on A-fib ablation studies,but did provide us with greater insight in the competitive study enrollmentrates and enrollment concerns. Armed with this additional information we nowbelieve our enrollment timeline will be extended beyond our original estimates.We are currently analyzing the impact of these changes on our timeline and planto provide you more information at our December meeting.

Moving to our E-LUMINEXX, self-expanding Biliary stent, thisproduct is still pending concurrence as FDA considers changes to its approvalprocess for Biliary stent designs. We have received no comments from the agencyand hope to receive concurrence and introduce the product this quarter. Recall,the E-LUMINEXX was launched in Europe lastDecember and incorporates an improved stent configuration with anelectropolished surface.

We are also completing our final module in our E-LUMINEXX, Iliacstent, modular PMA submission and anticipate filing this quarter. We expect FDAreview and approval towards the middle of next year and look forward to thelaunch of this vascular product in the US immediately thereafter.

On the Clinical front, our Vivexx Carotid Stent clinicalstudy has achieved our study enrollment target and enrollment is likelycomplete pending on our analysis of final patient details. Our Flair AV accessstent graft received PMA approval in Q3. We followed up with the submission ofan IDE for a small acute study of our new delivery system which receivedconditional approval just a few days ago.

Additionally, we submitted our protocol to FDA for a roughly300 patients post approval studies that they've requested. We hope to beginenrollment in the delivery systems study early next year and continue toanticipate commercial launch of the Flair with this improved delivery systemlate in 2008.

Turning to Vena Cava Filters, our G2 Filter retrievabilitystudy named [Everest], demonstrated successful filter retrieval with implanttimes ranging from five to 300 days with a mean explant at a 140 days. Thestudy concluded in Q2, and as we said last quarter, we're completing thepreparation of our regulatory documents and anticipate filing with FDA, seekingconcurrence for the optional indication in the next few weeks. We anticipatelaunch in the middle of next year with this expanded indication.

In the Oncology business, John Weiland outlined a couple ofour near-term launches and I will wait for our December meeting to provide youwith description of some of our pipeline for 2008 and beyond.

Finally, in our Surgical business, the Restore clinicaltrial for the treatment of patients with the dilated gastrojejunal anastomosisafter gastric bypass surgery continue enrollment with 10 active centers. Ourenrollment is slower than expected, primarily due to the study's strictscreening process and we're evaluating options for improving patientrecruitment.

Our original plan was to enroll through mid-2008. However,it's pretty clear that enrollment may take a few quarters longer than expected.We are analysis our early data as well as feedback from our investigators andplan to provide you our thoughts on a likely timeline for enrollment, follow-upcompletion and our estimated launch at the December meeting.

In addition to Restore, we're preparing to initiateenrollment in the Trim Trial to evaluate our next-generation endoscopicsuturing technology named RS II for the primary transoral treatment of obesity.In Trim, the RS II will be used to directly partition the stomach. Our IDE isapproved and we continue to work with study sites to complete all the relativepaper works, IRB reviews, contracts and training to support first patientenrollment in early 2008.

Thanks very much for your attention. I will now turn youback to Tim.

Timothy Ring

Thanks, John. That concludes our formal discussion of thequarter's results. Let me just hand it back to the moderator to introduce theQ&A session.

Question-and-Answer Session

Operator

Thank you. And ladies and gentlemen, we will now begin thequestion-and-answer session. (Operator Instructions). Our first question comesfrom the line of Rick Wise with Bear Stearns. Please go ahead Rick.

Miroslava Minkova -Bear Stearns

Hi, it's actually Miroslava for Rick, speaking here. Just acouple of questions, maybe if you could give us a little bit more color onwhat's happening in oncology. Growth does look a little bit slower this quarterthan it has been in the past. Is there something going on in this segment?

And also, I mean, again it was an impressive SG&Aleverage that you managed to achieve this quarter as well, can you also commenta little bit on how you get savings and to what degree we can expect thosesavings to continue in the future? Thank you.

Timothy Ring

Okay. I will turn it over to John there to deal with theoncology trend question and then Todd can you answer the SG&A expensecontrol question.

John Weiland

I think we did say in thecomments earlier that we had particularly tough comps in prior years based onthe launches of the number of products within the oncology space. And as youknow, we are really a story about new product launches and we have one majornew product launch in the fourth quarter and that's the POWERPICC Solo, whichwe think has a very unique position and a great space. So, no, we don't thinkit's a -- it was a little below our normal run rate in terms of oncology, butwe don't think that's a long-term issue for us.

Operator

Thank you. And our next questionfrom the line of Matthew Dodds.

Timothy Ring

Let me just…

Todd Schermerhorn

Matt, let me just, if you would,I'll go back and answer the second part of that question. And that is, as itrelates SG&A, it's really no magic. I mean as you guys know that salesgrowth was going to be able to light for the quarter and basically we pulledback a little bit relative to spending. I think we have good control and goodcapability to control when we need to, and this isn't the first time we'vedemonstrated that.

As it relates to the future, Imean, I guess when it comes to financial guidance, the only future we're goingto talk about right now would be the fourth quarter, since we'll give full yearguidance for 2008 in December. And I would suspect that SG&A will look verysimilar to what it looks like this period, maybe a tad higher. But, I wouldexpect the same type of cost consciousness as go through the fourth quarter.Okay.

Timothy Ring

That's great.

Operator

Thank you. All right. MatthewDodds has a question from Citigroup. Please go ahead.

Matthew Dodds - Citigroup

Hey thanks, couple of questions.Todd, first for you. On the fourth quarter guidance, I know you don't usuallybreakout gross margin, but given your comments on hernia, is it fair to assumewe were not going to see the kind of sequential expansion to too much of adegree until '08 or maybe until the hernia business starts to recover? That'sthe first question. And then the second question is on oncology, just a follow-upon the last question. Is there been any new competition coming on the Powerside? Is this just sort of the unique growth slowing a little bit or have youseen anybody enter the market at all in power PICC or Ports and take share?

Todd Schermerhorn

All right. Let me just deal with the margin issue, Matt. Ithink it could get just a little bit better in the fourth quarter. But, it'snot going to turn your head necessarily. The trend is kind of what they are.

John Weiland

And in terms of competitors into the power indication thereis a couple of players that had entered into market Matt. We see them at timesselling on price below us. We don't see it impacting us substantially and as amatter of fact we think that we have awful lot of runway in front of us interms of additional conversions, because we have not overly penetrated theconversion rates in those segments at this point in time.

Matthew Dodds - Citigroup

John, just one follow-up on that, you talked about a lot ofnew products coming in the power lines. How much more do they represent interms of how much you've already penetrated. Is this a third of what's left oris there a lot of opportunity left with the new products and size and thingslike that?

John Weiland

Well, if you add the PICC and Port segments together, Iwould say we're probably about 30% penetrated on average. And when you bring anew product to market, like this about, POWERPICC that we are talking about, iteliminate the need for using Heparin and eliminate the need for daily flushes.We think there is a very substantial market opportunity and runway in front ofus. We are pretty excited about that product line.

Matthew Dodds - Citigroup

All right. Thanks, John. Thanks, Todd.

John Weiland

Thank you, Matt.

Todd Schermerhorn

Yeah.

Operator

Thank you. And our next question from the line Mimi Phamwith HSBC. Please go ahead.

Mimi Pham - HSBC

Hi, good evening. Can you clarify on the Salute IImanufacturing, when it will be fully ramped up and did you lose any herniacustomers during the third quarter due to the Salute and Composix recalls?

John Weiland

I want to answer the second one. First, I don't know of thefact that we lost customers because of the Salute and Composix recalls. I knowthere is certainly without a doubt and we said it before some pressure in thatsynthetic marketplace, because of the fact that we withdrew Composix last year.I would say in terms of the ramp up of Salute II, we will be ramping ourproduction every month through the fourth quarter. We will finish with the backorder though. There is no question in mind that we will finish the fourthquarter with the back order and we will add up that in the early part of nextyear.

Mimi Pham - HSBC

And for the Agento, I know you are not commenting on the results,but can you comment on pricing strategy based on the results. Any initialsthoughts there?

John Weiland

We have really as we establish our pricing strategy, we tookinto effect the medical economic study that we did in conjunction with theclinical study and as well as the clinical results. And as a result of that, wethink we have pretty compelling strategy when we launched that product.

Mimi Pham - HSBC

But, in terms of pricing it at a different levels of premiumto go after different segments in the market?

John Weiland

No, we will have one price quite frankly that we'll enterthe market with. And it will be based on what we think the value that we aresupplying to hospital and the value that we think should come back to Bard as aresult of that as well.

Mimi Pham - HSBC

Okay. Thanks.

Operator

Thank you. (Operator Instructions) And our next questiondoes come from the line of Bob Hopkins with Lehman Brothers. Please go ahead.

Bob Hopkins - LehmanBrothers

Hi, thanks very much and good afternoon. Just a couple ofquick questions on hernia repair. First of all, I just wanted to clarify, didyou say that the total hernia repair business year-over-year was down 4%?

John Weiland

That’s a soft tissue business, that’s right Bob.

Bob Hopkins - LehmanBrothers

And then last quarter, you broke it down growth by biologicfixation and core. And you started to do that this time and maybe I missed it.But, could you just those growth rates for this quarter?

Todd Schermerhorn

Yeah sure, Bob. Maybe I could give you the delineation thatwe're going to use for it. Because we are trying to make it clear under thecircumstances. So, within soft tissue we break that down into core hernia, andcore fixation, okay. Within core hernia, we go to the next level and talk aboutbiologics and synthetics.

Bob Hopkins - LehmanBrothers

Okay.

Todd Schermerhorn

So now, let me build those up for you. We said biologicswere up 25% and we talked about synthetics having a slight decline for theperiod. I characterize that as low single-digits type decline.

Bob Hopkins - LehmanBrothers

Okay.

Todd Schermerhorn

So, combined that then gives core hernia a net decline, whatwe call the net decline for the period, it's actually flat, it's down 1%. Andthen fixation would be the other component, within a core hernia and fixationand as we said we have been struggling there, we are about half of the prioryear maybe 160%.

Bob Hopkins - LehmanBrothers

Okay. In Q2 you said your biologics business was up 200something percent?

Todd Schermerhorn

We did actually, Bob. That's a good pick up. And the issuewas not about this year, but more about the revamp last year. That was thefirst full quarter of launch and we were really flying. So, the second quarterwas almost a tripling of sales on that business, so that's why you get thosenumbers to 25%.

Bob Hopkins - LehmanBrothers

So, biologics is basically on your plan or is that a littledisappointing as well?

Todd Schermerhorn

I will let John answer that one.

John Weiland

I would say we were probably slightly behind our plan inbiologics, but not substantially. And we are seeing nice up tick from our humandermis product now, which is kicking in. So, that's been a very positive for usin that segment.

Bob Hopkins - LehmanBrothers

So then, two last questions here, what do you think the corehernia repair market is? Or not core, but overall hernia repair market isgrowing right now and all the segments in which you participate and at whatpoint you think you would be able to get to a growth rate that resembles amarket growth rate?

John Weiland

Well, I guess, you have to lookat in the both segments. And let's start with the biologics, that's been as youknow, growing pretty substantially and to put a number on it, it's difficultnow because of -- the fact is that there is only a few players in that segment.But, let's say if that's growing at 20% to 30% overall and the size of it isabout an $80 million market today. So, from our advantage point we like ouroffering. We have a number of new products coming in that category.

In the base hernia product orsynthetic hernia products, we think we're going to be struggling as we saidthrough the later part of next year when our new products are launched withinthat segment. And we have a number of new products that are launched in thatsegment, now later part of next year. But, in the interim period we're reallyfocusing on two things and that is, first of all, we're continuing to ramp upSalute II, as well as PermaSorb that has been beating our expectations sinceit's launch in the fixation line. And then secondly, trying to help add to thatgrowth via our business development activities and we'll see how that rolls outthrough Q4.

Bob Hopkins - Lehman Brothers

And then, so, my last questionwas kind of, I'll role this all up into a macro question on hernia repair.Should your hernia repair business overall model along at sort of the 0% growthfor a while, perhaps on a temporary basis, but does that jeopardize yourcorporate growth objectives? Again perhaps temporarily, but if hernia repairdoesn't get much better than sort of 0% growth can you still meet thoseobjectives?

Timothy Ring

Well, I think, Bob this is Tim.You know, I think that business for Q2 was down 10% over prior year, it wasdown 3% this year for this quarter, and we're still in my view deliveringrespectable revenue growth. This is all about new products and our deal flow aswell in terms of any new products in the portfolio. So, our goal has been andwill continue to be double-digit revenue growth is what we strive for.

I think the overall surgicalbusiness accounts for about, Todd may know the number exactly, 18% of ouroverall…

Todd Schermerhorn

Yeah, something like that.

Timothy Ring

17%, 18% of our overall revenuegrowth. So, you don't like the zero or negative or anything, but we like thebalance of the portfolio and we think that's the strength of the strategy thatwe are not depending upon one big thing and continue to believe that's a goodstrategy going forward.

Bob Hopkins - Lehman Brothers

So, I hear you on that, but I amjust kind of curious if, I mean if you know the degree to which -- again, ifit's no growth in this market, can you get to that 8% to 10% top-line growth?Or do we need to see some sort of improvement at hernia repair back up to the3% to 5% growth or greater to meet those objectives.

Todd Schermerhorn

Well, Bob, let me see if I cantry here. I mean, with the repair of the Salute business we should be able toeliminate the decline there at a minimum, and possibly get ourselves up to sortof low single-digits. But, obviously, a low single-digit soft tissue businessdoesn't necessarily -- its not going to be easy from there.

I think we will be a lot clearabout it when we give guidance and if you can wait about 60 days.

Bob Hopkins - Lehman Brothers

Sure.

Todd Schermerhorn

We'll layout the variousbusinesses and talk about next year and what we see in the near-term and thelonger-term. Okay?

Bob Hopkins - Lehman Brothers

Thanks very much.

Todd Schermerhorn

Okay.

Operator

Thank you. And there are noadditional questions, and this does conclude our Q&A session. I would liketo turn the call back over to Bard's management for closing or additionalcomments.

Timothy Ring

Let me just close by thanking everybody for participating inthe call tonight. And again, I would like to give my thanks as well to Bardemployees globally for their all efforts for a pretty solid Q3 and we lookforward to talking again in December.

Operator

Thank you. And ladies and gentlemen, that does conclude ourconference for today. Thank you for your participation and you may nowdisconnect.

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Source: CR Bard Q3 2007 Earnings Call Transcript

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