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

Q4 FY07 Earnings Call

January 31, 2008, 5:00 PM ET

Executives

Timothy M. Ring - Chairman and CEO

John H. Weiland - President and COO

Todd C. Schermerhorn - Sr. VP and CFO

John A. DeFord - Sr. VP - Science, Technology and Clinical Affairs

Analysts

Matthew Dodds - Citigroup

Taylor Harris - JPMorgan

Robert Hopkins - Lehman Brothers

Kristen Stewart - Credit Suisse

Caroline Corner - Pacific Growth

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the C.R. Bard, Incorporated Fourth Quarter 2007 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions].

Today's presentation will be hosted by Timothy M. Ring, Chairman and Chief Executive Officer, along with John H. Weiland, President and Chief Operations Officer; Todd C. Schermerhorn, and Senior Vice President and Chief Financial Officer; and John A. DeFord, Senior Vice President, Science, Technology and Clinical Affairs. Also in attendance today are Frank Lupisella, Vice President and Controller; and Eric J. Shick, Vice President Investor Relations.

Before we begin the call, you are reminded that Bard's management will be discussing some forward-looking statements the accuracy of which is necessarily subject to risks and uncertainties. Please refer to the cautionary statement regarding forward-looking information in Bard's September 30, 2007 Form 10-Q/A and the information under the caption Risk Factors in the company's Annual Report on Form 10-K/A for the year ended December 31, 2006, including in each case disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

Management will also be referring to net sales on a constant currency basis, as well as income and EPS from continuing operations excluding certain items that affect the comparability of results between periods and other non-GAAP measures during this call. Management believes that when discussing revenue growth, eliminating the impact of changes in foreign exchange, which have a non-operating impact, provides an additional and meaningful assessment of the core operating performance of individual product franchises. Reconciliations of non-GAAP measures to the most comparable GAAP measures are provided in Bard's earnings press release and on the company's website at www.crbard.com.

Please also note that all information that is not historical is given only as of January 31, 2008, 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.

Timothy M. Ring - Chairman and Chief Executive Officer

Thank you. I'd like to welcome everybody to Bard's fourth quarter '07 earnings conference call. Thanks for joining us today. I would expect the presentation portion of this call to last about 20 minutes.

The agenda today will go as follows. I'll review the fourth quarter and full-year results for '07. John Weiland, our President and COO, will cover the fourth quarter product line revenue. Todd Schermerhorn, our CFO, will review the fourth-quarter income statement and balance sheet, as well as expectations for Q1 of '08. John DeFord, our Senior VP, Science Technology and Clinical Affairs, will then provide a brief product development an update, and we'll close with the Q&A.

Looking at sales, fourth quarter 2007 net sales totaled $583.3 million. This represents an increase over the fourth quarter of '06 of 12% on an as-reported basis and 9% on a constant-currency basis, in line with our guidance for the fourth quarter. Currency impact this quarter versus previous year’s Q4 was favorable by about 300 basis points. Looking at sales for the full year, net sales were $2.2 billion, an increase of 11% on a reported basis and 9% again on a constant currency basis.

Income from continuing operations for the fourth quarter was $105.2 million and associated diluted earnings per share were $1.01. As reported, income and diluted EPS from continuing operations were up 64% and 68% respectively compared to the prior-year period. Adjusting for items in the prior-year quarter that affect compatibility between periods, fourth quarter '07 income and diluted EPS from continuing ops were up 12% and 15% respectively over the prior-year period.

Looking at the full year, reported income from continuing operations was $406.4 million and the associated diluted EPS were $3.84. Adjusting for items that again affect the comparability between periods, full-year '07 income from continuing operations was $404.2 million and associated diluted EPS were $3.82. That's up 15% and 16% respectively over the full-year '06 results, again on a comparable basis. For your reference, the adjustments to our results are detailed or reconciled to GAAP results in the tables and notes to the financial statements in our press release and listed on our website.

Looking at revenue growth on a geographic basis, again on constant currency, fourth quarter net sales in the U.S. increased 9%, Europe grew at 7%, Japan increased 22%, and our other international businesses grew 7%. Our results from Japan reflect sales into our joint ventures. As you may recall, our sales to them for Q3 were only up 2%. So we're likely seeing some inventory rebalancing here. Year-over-year sales from the joint venture to its customers were up, in other words sales out the door were up about 11% in the second half of '07.

Taking a look at sales growth by product line in Q4, our vascular category grew within our full year '07 constant currency guidance, while urology was slightly above and oncology was slightly below their guidance ranges. Our surgical category began regaining momentum in Q4, reversing the trend of the declining sales in both the second and third quarters and were up 15% sequentially from Q3. Fixation represents about a third of this sequential improvement, despite ending the quarter with some residual backorder. The balance we would attribute more to seasonality than growth at this point. We'll need to get a couple of positive quarters under our belt before we're fully satisfied that we're out of the woods here. And we know that the first-quarter comp is very difficult, so we're not declaring a victory here. We're staying very focused on executing the recovery in the surgical category.

On the business development front, we covered the acquisition of the LifeStent and Sepramesh IP products in our press releases, and again at our December analyst meeting. I will just comment that we feel these both represent great strategic adds to their respective businesses and product lines. And I would say that overall I'm pleased with the step-up in productivity we are seeing since adding dedicated business development people in each of our operating units over the last couple of years. And again, looking ahead, we continue to actively pursue additional opportunities across our businesses.

As we said in our analyst meeting in December 2007, marks a fifth consecutive year of meeting or exceeding our strategic EPS growth objective of 14% adjusted. I will tell you, we are very pretty proud of that. I would like to take a moment here to thank our employees around the globe for their hard work and commitment it took to make this happen. That being said, I will remind them and you, we have plenty to do today and throughout 2008 to position ourselves for another five years of growth. We continue to wake up with just a little bit of [inaudible] everyday and continue to focus on improving our execution. So, thanks and keep at it.

Let me turn you over to John Weiland for a review of our product line revenue.

John H. Weiland - President and Chief Operating Officer

Good afternoon, everyone. Before I being, let me note that all percentage growth data will be in comparison to the prior year period on a constant currency basis unless specifically noted otherwise. So let's begin with the vascular category. Total net sales for the fourth quarter in this category were $141.9 million, which represents an increase of 8% over the prior year quarter. This increase was 13% on an as-reported basis. The United States business, which represents 52% of global revenue, grew 8%. Internationally, we were also up 8%.

Our EP business, which represents 23% of the vascular category, grew 7% for the quarter, impacted by low single-digit growth in our EP lab systems business versus a strong comp. Due to the capital nature of the system sales, we often see fluctuations from quarter-to-quarter that impact our overall EP business growth. We continue to see nice growth from our steerable diagnostic catheter, was up 20% for the quarter and is very close to becoming our largest product line in EP.

As we discussed in detail at our analyst meeting, the measured rollout of our HD MESH Ablation catheter for the treatment of atrial fibrillation in Europe continues to show very positive clinical performance of the device. Graft product sales were down 15% this quarter with OEM sales at roughly half their prior year level. This is another case where the variable nature of these sales can materially impact the whole graft business.

Our endovascular products grew 16% for the fourth quarter, our strongest growth this year, a nice base to build upon with our LifeStent acquisition. Within endovascular, our biopsy product line had another healthy quarter growing 28%. The UltraClip Tissue Marker line, we acquired late in Q2 continues to add to the strong momentum of our Vacora line. Our peripheral PTA line was up 13%. In late Q3, we launched our new Dorado peripheral PTA catheter. With its low profile and exceptionally strong balloon, this new 5-French catheter is being well received so far in the market. At the analyst meeting, we discussed another new PTA catheter we are calling [inaudible] that is designed for the standalone nephrology and dialysis center market. We recently received 510(k) concurrence and we’ll be launching it in the coming weeks.

Our vena cava filter line was up 34% for the quarter. Our G2 Filter continued on a healthy growth trend that we began back in the first quarter. We are pleased to report that the G2 was recently approved as removable filter in the United States. And in the second half of the year, we anticipate receiving approval for the G2 Express, which will give clinicians the option of retrieving the filter with either our recovery cone or snare catheter. Our stent business grew 4% this quarter while our FLUENCY Stent Graft continues to grow internationally, it was off-pace in the United States.

As we announced on the 14th of this month, we've closed on the acquisition of the LifeStent product from Edwards. With our U.S. vascular sales efforts currently limited to PTA Catheters and vena cava filters, we don't expect a much organic growth in this product until it receives PMA approval for an SFA indication in the United States, which we are currently anticipating to occur in the fourth quarter. Upon that approval, we look forward to capitalizing on the size and strength of our U.S. vascular sales organization to drive growth. Adding to our evolving position in the U.S. stent market, in the back half of this year we anticipate receiving PMA approval for two additional vascular indications and launching both our Flair AV Access Stent Graft and the E-Luminexx Iliac Stent. With these three approvals, we anticipate having one of the broadest and most diverse peripheral vascular stenting offerings in the United States.

Let's now turn to urology. Total net sales in the fourth quarter of 2007 were $176.4 million, an increase of 12% over the fourth quarter of 2006. This increase was 14% on an as reported basis. The United States and international businesses were both up 12%. Standalone sales of our StatLock catheter stabilization line increased 63% after the third quarter growth of 82%. On the last earnings call, we attributed the really strong Q3 in part to the increased dealer inventory levels and said we expected to see some offset in Q4. That didn't happen, although we believe it was just delayed till Q1 of this year, so we'll see what develops. Needless to say, these growth rates exceeded even our most optimistic expectations. Given the robust growth to date and the continuing potential of this franchise, we currently plan to add 20 plus dedicated StatLock sales reps globally in 2008.

Our basic drainage business, which was 56% of the urological category grew 9% in the fourth quarter. Our Bardex I.C. infection control catheter line had a particularly strong quarter growing 16%. As you know, this is also a dealer-based business. Normally, we see a 5% or 6% growth in basic drainage, so dealer inventory adjustments may have impacted Q4 results somewhat as well.

Our overall continence business was up 15% in the fourth quarter, with our surgical continence products growing 27%. Our Align TBT and TO surgical slings and our Avaulta Plus and Avaulta Solo pelvic floor repair devices, which all launched in mid '07, continue to drive the growth here. Our Contigen product line sales were also up 7% in the fourth quarter. And finally, sales in your urological specialties, which were roughly flat versus... were roughly flat versus 2006. Brachytherapy, which is about half the business this category, was down 3%.

At our analyst meeting, we announced the launch of our Agento I.C. respiratory infection control product on December 18. To date, we are encouraged by the positive reaction we are getting with the device. Clinicians have been very impressed with the data and the value the product provides both clinically and economically. Feedback from our early interactions tell us that clinicians recognize the high cost of ventilator associated pneumonia and view our pricing as on track. While we expect most hospitals to follow a traditional committee-based approval process prior to implementation, in a few weeks since launch Agento has already gained approval in a handful of institutions.

Now, let's turn to oncology. Total net sales in this category were a $148.0 million, an increase of 12% over the fourth quarter of 2006. This increase was 15% on an as reported basis. Geographically, net sales in the United States, which represented 74% of global revenue, were up 14%. Outside the United States, we grew at 8%. Implanted ports grew 10% for the quarter as compared to Q4 '06. You may recall that the PowerPort passed the anniversary of its launch in the third quarter. Our PICC and Midline products grew 18% in the fourth quarter, with the SHERLOCK Tip Locator System having passed the one-year market of its launch in Q3 as well. We launched the new PowerPICC SOLO late in Q4, so we didn't see much impact in the quarter. We expect the SOLO along with the recently improved next-generation SHERLOCK 2 System to make a nice contribution as we progress through 2008. We see the PowerPICC SOLO as a significant advance in specialty venous access technology. Today, standard PICC flushing protocol requires daily heparinized saline infusion to reduce the likelihood of catheter clotting and thrombosis. In contrast, the PowerPICC SOLO only requires weekly flushing without the use of Heparin, significantly reducing the risks, costs and inconvenience associated with central venous therapies in both the clinical and home-based settings.

Our vascular access ultrasound product line had a robust quarter growing 27% on the success of our recently launched Site-Rite 6. You may recall that the Tip Locator functionality of our new SHERLOCK 2 will be integrated into both our Site-Rite 5 and 6 imaging devices. This not only means greater ease of placement for our PICCs, it means the SHERLOCK 2 will be backwardly compatible with more than 1500 Site-Rite systems already in the field.

And finally our Surgical Specialties business, net sales increased globally 5% from the fourth quarter last year to $96.5 million. This was a 7% increase on an as reported basis. Sales in the United States were up 3% for the quarter, internationally we were up 9%. Over the past few quarters, we have discussed the challenges we are facing in the surgical category. While we still have more work to do to put the issues fully behind us, we've started to make some gains here.

Our soft tissue repair business, which includes both the core hernia and hernia fixation lines, was up 5%. Core hernia products, which include both synthetic and biological devices, were up 3% in the fourth quarter while fixation products were up 24%. The improvement in core hernia performance was helped by strong growth, both year-over-year and sequentially, in our AlloMax human tissue patch for complex hernia repairs. Based on our experience with multiple biological offerings, we're beginning to segment our approach to the complex hernia market to provide physicians with targeted solutions to address specific types of cases. To improve our current natural tissue offering as we discussed at our December analyst meeting, we have a project to enhance both the physical characteristics and the processing of CollaMend. Longer term we believe that natural tissue technology for complex hernia repairs will have to advance significantly to approach the effectiveness of synthetic devices for standard repairs and we have ongoing projects that are working towards that goal.

Our Sepramesh IP acquisition did not make any meaningful contribution to the fourth quarter since we acquired it just before the holidays. We recently completed training our sales force on Sepramesh and they are now well armed to market the product line. We’ve heard early feedback that customers welcome our ability to provide market-leading hernia repair technology across all product segments. Going forward, we expect Sepramesh to contribute to the recovery of our synthetic hernia line.

Later in 2008 and early 2009, we expect to launch the new configuration of CollaMend, an absorbable ring Kugel device and the first of multiple new hernia products employing either the Sepra or tyrosine coating technologies.

Getting back to our hernia fixation products, within our soft tissue repair businesses as Tim indicated, the 15% sequential growth in surgery over Q3 included a rebound in fixation. I said at our December analyst meeting that we expected to fill the majority of the backorder in the fourth quarter we did just that. It was certainly a welcomed event when our customers began to see Salute II flowing back into the market. We have always maintained that physicians really like the device, and despite the fact that supply was interrupted their appetite for the benefits of this unique technology seems unchanged. While units are again flowing, we expect to continue to be somewhat hand-to-mouth in the first quarter. Our new production molds are being brought on line and we anticipate having a sufficient supply of Salute II devices in Q2. I'll add that PermaSorb, our resorbable hernia fixation product, continues to enjoy positive market acceptance as well. The combination of Salute II and PermaSorb have brought our fixation business back from a year-over-year decline of 37% in Q3 to an increase of 24% in Q4.

Turning to our performance irrigation business, the line was down 2% for the quarter, and finally our hemostasis business, which represent only 5% of the surgical category, was again impacted by the timing of dealer shipments. After declining 11% in the third quarter, the line was up 28% in the fourth quarter.

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

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Thanks, John. As we always do, let's... excuse me, let's start with the income statement for the quarter. Gross profit was 61.0% of sales, up 20 basis points sequentially from Q3 and within the range that we have been discussing and forecasting.

Incremental amortization of intangibles from new transactions cost us about 10 basis points sequentially and about 30 basis points year-over-year. SG&A was $169.7 million for the quarter, 29.1% of sales, showing good control once again this quarter. I would note for you that on a dollar basis we're up $9 million over the third quarter, reflecting some increased investments in sales and marketing.

R&D totaled $36.6 million for the quarter, an increase of 17% over the prior year quarter, excluding purchased R&D in the prior year. On a same basis, R&D as a percent of sales has increased each quarter in 2007 and stands at 6.3% for the fourth quarter. The clinical trial costs for our new infection control foley and our obesity program were notable contributors to the increase this period.

Operating margin increased 90 basis points over the prior-year quarter and 140 basis points for the full-year, again on an adjusted basis. Interest expense was $3.1 million for the fourth quarter, down $600 k from the prior year. And other income and expense was $7.2 million of income for the quarter, driven almost entirely by interest income. Tax rate for the quarter was 31.4%, getting us to 30.2% on a full-year adjusted basis.

The balance sheet as of December 31 shows cash in short-term investments of $571 million versus $575 million at September 30, 2007. For the full-year, accounts receivable days were down 1.9 days and inventory days were down 2.7 days, showing some good working capital discipline. Capital expenditures totaled about $15 million for the quarter, puts us at about $51 million for the full-year, a little below our guidance range for 2007.

And on the liability side, total debt was $150.6 million at December 31, no change from the prior quarter. Debt-to-total cap at the end of the fourth quarter was 8% and total shareholder investment was $1.848 billion at December 31. We repurchased a little over 1.9 million shares of our stock this quarter, getting us to roughly 5.1 million on a year-to-date basis. We'll continue to be buyers of our stock as cash balances and market conditions permit.

Let's turn to guidance then for the first quarter 2008. We’re expecting constant currency revenue growth of about 9% for the first quarter. We would expect revenue growth to accelerate throughout the quarters of 2008 as a result of more favorable comps in surgery and also our new products as well. From an earnings standpoint, we expect Q1 to be in the $1.03 to $1.04 range, excluding any items that affect comparability. I would note that we do expect a fairly sizeable purchased R&D charge in Q1 associated with the Edwards LifeStent transaction. We're still working through our valuation process, but at this point I put that charge at roughly $40 million.

I will now turn you over to John DeFord.

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

Since we covered our product development pipeline at our December 18 analyst meeting, we'll wait to provide a detailed update on our first quarter earnings call. However, we’ve made a recent decision concerning our bariatric product strategy, and the timing is appropriate for a discussion today. Last week, we decided to cap enrollment in RESTORE, our study of the EndoCinch Endoscopic Suturing Device in the repair of a dilated gastrojejunal anastomosis, after failed Roux-en-Y gastric bypass surgery. As we discussed in December, enrolment was expected to continue into Q1 of 2009, resulting in anticipated approval for a weight loss claim in 2010. This is about a year beyond our original plan.

With our next-generation Endoscopic Suturing Device, the RS2, nearing development completion and slated for our primary weight loss trial named Trim, which we are preparing to start next quarter, our analysis indicated that continuing the RESTORE study on its projected schedule with the older generation EndoCinch technology didn't make much sense. And at the same time, rolling RS2 into RESTORE would essentially require a restart of that study. Therefore, we've concluded that the best course of action is to put our efforts into Trim and build our bariatric platform around the RS2. This new plan will result in anticipated approval for a weight loss claim a few quarters later, but with the newest technology. In essence, clinical feedback from clinicians of RS2's handling characteristics is so superior to EndoCinch that we don't believe it makes sense to invest for in a weight loss claim specific for EndoCinch.

Let me now turn you over to the call moderator for Q&A.

Question and Answer

Operator

[Operator Instructions]. Our first question is from the line of Jared Holt [ph] with Bear Stearns. Please go ahead.

Unidentified Analyst - Bear Stearns

Thanks a lot. Good afternoon. Just a couple of questions, one on LifeStent and the second one on guidance. It looks like Edwards is going to do roughly $30 million in that product this year. So based on the comments on the call, can we expect roughly the same amount since you kind of guided towards flat organic growth there?

Timothy M. Ring - Chairman and Chief Executive Officer

Yes that this right.

Unidentified Analyst - Bear Stearns

Okay. And just as far as guidance is concerned, gross margins looks like roughly flat year-over-year, maybe up 20 basis points to 30 basis points. Is that what where we can expect them to be?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Well, I guess we were 20 basis points sequentially, and I think you just look for continued growth each quarter, that's what we're trying to do. We said, I think in December, that despite the fact that we'll have 60 basis points of new amortization from the two deals we did recently, we think we still increased our gross margin in 2008, so year-over-year.

Unidentified Analyst - Bear Stearns

Okay, great. And then lastly on Hernia, good quarter or better than expected given the Salute was back on the market. You have a tough comp in that category in the first quarter of '08. Is there going to be more positive benefit in that quarter from Salute? Can we expect, mid... actually growth in this quarter or could there be some pressure, given your focus on that line item in the fourth quarter.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

No, definitely see some pressure from the surgery comp in Q1, no doubt about that.

Unidentified Analyst - Bear Stearns

Okay, great. I appreciate it, guys. Thanks.

Operator

And our next question is from the line of Matthew Dodds with Citigroup. Please go ahead.

Matthew Dodds - Citigroup

Thank you, a couple questions. First, on the stent business, Tim, that’s the slowest that business has grown in a long time. And I am just wondering if you think there… it's just the products have gotten a little stale or is the market slowed overall for peripheral stents? That's the first question.

And then for Todd, if you look at that first quarter guidance, if it's 9% organic sales growth and you assume the margins stay roughly the same as in the fourth quarter, unless the tax rate is not going to be 28.5% next year, at least in the first quarter like you said in December, it just seems your earnings guidance doesn't match up perfectly with some of the other line items.

Timothy M. Ring - Chairman and Chief Executive Officer

Let me cover the stent question, and John if you want to jump in feel free. I don't think it's a reflection of the market slowing down. As you recall, we’ve gotten a pending submission that's been with the FDA for several months. We have planned on launching a new generation product and we don't have approval yet from the agency. As you know, they’ve slowed down everybody's approval. I think one company has got an approval since… probably in the last year just recently. So I think it's probably our line gets a little bit stale. Obviously, we've got pretty active R&D projects there. And as John mentioned, we expect to get some nice approvals on the Edwards device also two of other devices including one covered stent. So it's kind of a step plateau for a period of time and that is how I’d characterize that.

John H. Weiland - President and Chief Operating Officer

Matt, relative to the financials I think there is probably just a little bit of improvement in some of those key quotients, key metrics in GP and so on. But then, the other thing I think you’ve got to factor in is that the share basis… we bought pretty heavily in the fourth quarter. We ended the year with basic shares at right around 101… I think 101.1. So the average shares for the first quarter will be lower than what you’ve probably got in your models.

Matthew Dodds - Citigroup

I mean, isn't that also going to help… then that would push the earnings above the 103, 104?

John H. Weiland - President and Chief Operating Officer

What... are you saying--?

Matthew Dodds - Citigroup

It looks to me like the first quarter guidance that… the 103, 104 should be a little higher based on the 9% organic and the operating margins stay in the same and even coming down little bit in Q1 versus Q4.

John H. Weiland - President and Chief Operating Officer

I can't help you there, Matt.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Well, I would say this. The R&D values we have are a little high for the first quarter.

Matthew Dodds - Citigroup

Is the tax rate, Todd, still expected drop to 28.5?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Actually, it's going to drop 100 basis points from the full year end point.

Matthew Dodds - Citigroup

Okay. Thanks, John. Thanks, Todd.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Okay.

Operator

And our next question is from the line of Lennox Ketner [ph] with Lehman Brothers. Please go ahead.

Unidentified Analyst - Lehman Brothers

Hi guys. Congratulations on the quarter. Just quickly, could you go back to hernia for a second? I think you’ve mentioned that the core hernia business--.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

I am sorry, Lennox, can you speak up, we can barely hear you.

Unidentified Analyst - Lehman Brothers

Oh yes, sorry. Can you hear me now?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Little bit better.

Unidentified Analyst - Lehman Brothers

Is this better?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Yes, that is a lot better.

Unidentified Analyst - Lehman Brothers

Sorry about that. Just to go back to the hernia business, I think you said that the core hernia business in biologics had grown about 3% combined. Is it possible to break that out into the growth rate for the core business and biologics separately?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Yes. The core business was 3% and I think the biologics was kind of was single digits, kind of mid-single digits.

Unidentified Analyst - Lehman Brothers

Okay, great. And then... I mean just on the biologics growth you mentioned that you're working on some product advancements there. Are you expecting that growth rate to stay kind of in the mid single-digit rate until we see new products there?

Timothy M. Ring - Chairman and Chief Executive Officer

I would think that will be supplying the most of the growth in that category when we come out with new… the next generations of products in biologics.

Unidentified Analyst - Lehman Brothers

Okay. And then just one another question on Agento I.C. pricing. I think at the analyst day, you’d suggested that should be priced somewhere in the $85 to $100 range. Now that that's launched is that still a fair ASP or are you seeing any pushback there?

Timothy M. Ring - Chairman and Chief Executive Officer

No. We're not seeing any push back at all. That’s a very fair ASP.

Unidentified Analyst - Lehman Brothers

Okay, great. Thanks again.

Timothy M. Ring - Chairman and Chief Executive Officer

You bet.

Operator

Our next question is from the line of Taylor Harris with JPMorgan. Please go ahead.

Taylor Harris - JPMorgan

Thanks a lot. And first question is just as we look at the second half of '07 and the third quarter versus the fourth quarter where you had an uptick in growth obviously sequentially, you talked about dealer inventory movements hurting Q3, helping Q4, and the Japan issue. Is it fair to assume growth would have been about even in the third and the fourth quarter without those two movements or are there other factors causing an acceleration in the fourth quarter?

John H. Weiland - President and Chief Operating Officer

Well, I think the surgery piece was an issue as well, Taylor.

Taylor Harris - JPMorgan

Sure, yes.

John H. Weiland - President and Chief Operating Officer

Yes, that is the other factor there.

Taylor Harris - JPMorgan

Yes, okay. How much did... any sense of the overall impact of the inventory movements?

John H. Weiland - President and Chief Operating Officer

Well, we don't even know as it relates to StatLock right now. We just had those two monster quarters, and we just... we don't think it is... obviously, it is not sustainable to grow 80% a year. So whether it is dealer or not, it is probably going to decline in the first quarter. With respect to the medical business, the foley business, it was what... it was a couple of hundred basis points higher than normal.

Taylor Harris - JPMorgan

Okay.

John H. Weiland - President and Chief Operating Officer

You can kind of do the math on that.

Taylor Harris - JPMorgan

Okay, great. I just big picture question. We've seen with some of the other companies they reported so far this quarter, especially companies involved in elective surgeries, an increase in surgical volume toward the end of year. And I realized you guys don't have too much elective procedures in your base, but any comments on just the overall procedural environment within hospitals? Have you seen a pick up towards the end of the year?

Timothy M. Ring - Chairman and Chief Executive Officer

We haven't seen anything noticeable from that area.

Taylor Harris - JPMorgan

Okay, great. And then just a couple of detail questions. Todd, do you have an estimate on share count for the full year '08?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

I... didn't we give that at the analyst day?

Taylor Harris - JPMorgan

No, you said it was dependent on--.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Yes. I guess we said dependent upon what we see in terms of deals, Taylor.

Taylor Harris - JPMorgan

I see. Okay. But you--.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

I could tell you, the starting point is at a $100 million in terms of basic shares and three and low change relative to dilution from the options. And then after that it will be a function of whether we have some deal flow or not. We’re sitting at year-end with about $240 million of U.S. cash again on the books despite the fact that we bought some 2 million shares in the fourth quarter. So we had a great cash flow in the quarter. So it continuous accumulate, and if we don't have opportunities for it we'll begin buying.

Taylor Harris - JPMorgan

Okay. And you mentioned good cash flow fourth quarter, what was the operating cash flow for full year '07?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

555.

Taylor Harris - JPMorgan

Okay. So your guidance for '08 is 525 to 550, does that need to be realized upward or is there a working capital adjustment?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Not yet, Taylor. We ended with some nice reductions. It's all really about inventory and AR and we ended up some pretty well balances. So I'm not prepared to say that that we need to adjust those numbers just yet.

Taylor Harris - JPMorgan

Okay, great. Thank you so much.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Okay.

Operator

And our next question is from the line of Frederick Wise with Bear Stearns. Please go ahead.

Unidentified Analyst

This is Adam Cohen actually with Keller Investments [ph]. A couple of things for you guys. In terms of manufacturing in a lot of your plants, what are you guys doing in terms of lean manufacturing, TPM, and Six Sigma? And how do you expect them… that actually to improve throughput within your plants?

Timothy M. Ring - Chairman and Chief Executive Officer

We've launched two years… almost three years ago now a major lean program in all of our plants worldwide. That rollout process continues to happen. It continues to provide very positive results for us in terms of the cost savings that we see year-over-year on projects in our plants. If you look at next year… I should say this year '08 for example, we have 19 major projects in our plants, which will be combinations of lean, coast savings, and of tax savings that we’ll we implementing. So, it's an important part of our whole operating philosophy and it's an important part of our educational process for all of our plant managers and operations teams around world.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Laurie, next question please.

Operator

Thank you, and that is from the Bob Hopkins with Lehman Brothers. Please go ahead.

Robert Hopkins - Lehman Brothers

Hi, thanks. Can you hear me, okay?

Timothy M. Ring - Chairman and Chief Executive Officer

Yes. Hi, Bob.

Robert Hopkins - Lehman Brothers

Okay. Great. Just a couple of quick questions, clarification on the hernia business. It seems like you’re definitely more bullish as it relates to fixation and the core businesses as looks at '08, but then biologics is going down a little bit until you get better product flow. So you gave on the analyst day I think items for soft tissue being up roughly 4% for '08. Is that still a good number to use or given the different trends here, are things looking a little bit better, a little bit worse, just some comment would be helpful.

Timothy M. Ring - Chairman and Chief Executive Officer

Yes, we are not changing anything relative to the interim guidance at this point.

Robert Hopkins - Lehman Brothers

Okay. But specifically as it relates to hernia, that 4% is a good number, and then it seems like, Todd, that’s just still at a pretty low pace. Could you just walk in a little bit more detail what you think are the issues up there and what the time frame is for getting more competitive product out?

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

Well, the overall guidance we gave Bob, we had a range of 4% to 9%, so there is obviously some optimism in terms of what we think on our new product flow that comes out of that group this year. First of all, we were very encouraged with the transaction where we purchased the Sepramesh IP product line. We are in the process of rolling that out with our sales forces. They were trained last week fully on that product line, and they'll start to introduce that to their customers. At the same point in time, downstream… further downstream, we expect to have the resorbable ring patch that we talked about in December to be launched near the end of the year. And also having a… returning to full supply of Salute II in the second half of this year should be a very positive momentum item for us as well.

Final item would be that you may recall the PermaSorb resorbable fixation product that we acquired last year and rolled out. We continue to see very nice momentum in the product line from a fixation standpoint. That will positively affect us for the whole year. And I'd say as a final point, we’re starting to see data in the industry which has substantiated our long-held position that synthetic products, specifically for use in ventrals, really hold a very compelling place clinically and in fact there was a paper that was recently published in the American College of Surgeons by Dr. Ian Eddy [ph], which looked at four major institutions in the United States and looked at 455 patients, 76% I believe had recurrent ventral hernias. And the clinical outcomes as substantiated by that paper and using Kugel Composix for major ventral hernia repairs were pretty compelling overall. So I would suggest that as that data continues to get out into the marketplace, I think that those surgeons that may have been considering other alternatives will have a very positive input on our existing product lines being Kugel Composix.

Timothy M. Ring - Chairman and Chief Executive Officer

Hey, Bob, one other thing I think I'd just highlight to you, guys. The growth in hernia will… for 2008 by quarter, will be as much above the comps as it will above business. I don't know if you've noticed, but the first quarter comp is by far the highest of the year and it goes up $7 million from the prior Q4 and then drops $11 million and then another $4 million into the third quarter, so $15 million difference in surgery from Q1 to Q3 down. And I... we don't expect at this point that our trajectory would look like that. So I think you'll see some ups and downs relative to the growth rates. But we're going to have a couple of pretty easy comps in Q2 and Q3.

Robert Hopkins - Lehman Brothers

Right. Okay, thank you, and that was good explanation. And then one final question from me is just you'd mentioned on the analyst day that you felt FDA approval for SFA indication specifically would come I think you said in the third quarter. Is that still your best estimate at this point?

Timothy M. Ring - Chairman and Chief Executive Officer

We've said… Bob, we said fourth quarter and that is still our estimation at this point in time.

Robert Hopkins - Lehman Brothers

Great. Thank you very much.

Operator

And our next question comes from the line of Greg Simpson with Stifel Nicolaus. Please go ahead?

Timothy M. Ring - Chairman and Chief Executive Officer

Hi, Greg. Hello?

Operator

Greg, your line is open.

Timothy M. Ring - Chairman and Chief Executive Officer

No, Greg today.

Operator

Okay. Greg, if you have your phone muted, please unmute your phone or please pick up your handset.

We will move on to our next question, and that is from the line Kristen Stewart with Credit Suisse. Please go ahead.

Kristen Stewart - Credit Suisse

Hi, good evening. Can you guys hear me?

Timothy M. Ring - Chairman and Chief Executive Officer

Yes, we can. Hi, Kristen.

Kristen Stewart - Credit Suisse

Okay, just making sure that the phone is working. I was wondering, Todd, if you could just kind of talk about given where current exchange rates are what we should expect to see in the first quarter, maybe for the full year, and then also to the extend you can maybe comment on kind of what are the... what's been really affecting gross margins on the kind of positive and negative side, if there is anything with your hedges, that have been negatively influencing things there?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

No, I think, we have a nice hedging program. We're hedged out through 2008. We think… we don't think currency can hurt us as we get through 2008. We think we're going to be in pretty good shape there.

Relative to the ups and downs in the margins, well, one of the things is we're trying to do a better job at talking about the amortization of intangibles and making sure that's clear each period. It's 30 basis points year-over-year and that's not a small issue in terms of a headwind, and we are doing more business development and we tend to do a lot of our amortization through the cost of sales.

Price continues to run pretty neutral for us, Kristen. Foreign exchange has been pretty good, although I think it's probably going to be a little better next quarter than this one. We tend to lag a quarter while we work ourselves through inventory. So it was okay this period. Mix has been a little bit of a challenge since we've been in the hernia funk, but hopefully that's improving a little bit. And as we've said at the analyst meeting, we're optimistic about cost improvement as we lookout through 2008.

Kristen Stewart - Credit Suisse

Okay. And just in terms of the full-year, with your guidance for constant currency growth, that does include the Edwards LifeStent business, correct?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Yes, as we look at the first quarter, I think maybe there mat be numbers in you folks minds that might be a little higher than reality for the LifeStent deal. We will get 2.5 month of sales in the U.S., but that is only half the business. Outside the U.S, we are on a lag, a one-month lag. So we are only going to see about half a quarter from the LifeStent business outside the U.S and in addition to that we are working through some dealer inventory issues around the world. So that has got kind of a slow start. So it is not LifeStent… the full year view that you folks are thinking about, it won't necessarily be full-year divided by four for the first quarter.

Kristen Stewart - Credit Suisse

Okay. And just as a point of clarification, with the StatLock business you’d said you saw dealer inventory in the third quarter, you think you saw it in the fourth quarter as well, but you think it should moderate in Q1?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Well, yes. We got 80% plus growth in the third quarter. We were looking for a step-down in the fourth quarter that never happened. Our guys still think it’s coming, so we will see.

Kristen Stewart - Credit Suisse

And the price increase that you took there, that was in the third quarter… at the end of the third quarter, when did that occur?

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Fourth quarter. Yes, I think in the fourth quarter. Correct.

Kristen Stewart - Credit Suisse

Okay, perfect. Thanks. Have a good night.

Todd C. Schermerhorn - Senior Vice President and Chief Financial Officer

Okay, see you.

Operator

And our last question comes from the line of Caroline Corner with Pacific Growth Equities. Please go ahead.

Caroline Corner - Pacific Growth

Hi, thanks for taking my call. Can you hear me?

Timothy M. Ring - Chairman and Chief Executive Officer

Sure. Yes, we can.

Caroline Corner - Pacific Growth

So, I have another few questions about the hernia space. You mentioned that you are making some enhancements to CollaMend. I was wondering if you could comment a little bit on what specifically you are trying to do there? And also since your are segmenting the approach to hernia, can you talk a little bit how you expect Collamend and AlloMax to play out together going forward?

Timothy M. Ring - Chairman and Chief Executive Officer

As you know Caroline, this is a very competitive area for us right now and I think everyone is watching this thing pretty closely. For competitive reasons, we are not going to roll out exactly what the differential-ed offerings that we will be bringing out before the end of the year. And I think the same with our segmentation strategy, I think we have a nice gem here that is backed by great clinical data and I think we're going to keep it internal at this point in time.

Caroline Corner - Pacific Growth

Okay. And so the whole hernia space seems to suffer from a loss of clinical data. Do you have any clinical trials with your biologics where you are going to be presenting data, whether it's head-to-head or standalone?

Timothy M. Ring - Chairman and Chief Executive Officer

There are a number of trials that are being done in the marketplace, none that we are specifically fostering, but I would say the most breaking news is the Dr. Ian Eddy publishing of his materials. That is by far the largest sample of patients and the longest follow-up data that has been published to date with over 455 patients with ventral hernia. So I would say, right now, that is in our minds the most significant piece of new data in hernia space.

Caroline Corner - Pacific Growth

And that was done with mesh?

Timothy M. Ring - Chairman and Chief Executive Officer

That's correct, Kugel Composix.

Caroline Corner - Pacific Growth

Okay. And then, my final question, has there been any impact to your relationship with Tutogen due to Tutogen being acquired by Regeneration Technologies?

Timothy M. Ring - Chairman and Chief Executive Officer

No.

Caroline Corner - Pacific Growth

Okay. Thanks very much for taking my call.

Timothy M. Ring - Chairman and Chief Executive Officer

You're welcome.

Operator

Thank you, and that concludes our Q&A session. I would now like to turn the call back over to Bard's Management for closing or for any additional comments.

Timothy M. Ring - Chairman and Chief Executive Officer

Thank you. I don't have any additional comments. I'd just like to thank everybody again for taking the time to listen in this evening. And as usual as you can the follow-up with Eric if you have any more detailed questions. So thanks everybody. We will see you next quarter.

Operator

Thank you, ladies and gentlemen. That does conclude our conference call for today. Thank you for your participation and for using AT&T's executive teleconference. You may now disconnect.

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Source: C.R. Bard, Inc. Q4 2007 Earnings Call Transcript
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