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Executives

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

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

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

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

Analysts

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

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

Matthew Taylor - Barclays Capital, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David R. Lewis - Morgan Stanley, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Topher Orr - Goldman Sachs Group Inc., Research Division

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Michael Matson - Mizuho Securities USA Inc., Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

CR Bard (BCR) Q2 2012 Earnings Call July 25, 2012 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the C. R. Bard, Inc. Second Quarter 2012 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and will be available for future on-demand replay through Bard's 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, 2012, Form 10-Q and the information under the caption Risk Factors in Bard's 2011 10-K, including disclosure of 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 products franchises. Reconciliations of non-GAAP measures to the most comparable GAAP measures are provided in Bard's earnings press release and on the company's website at www.crbard.com. All information that is not historical is given only as of July 25, 2012, and the company undertakes no responsibility to update any information. Unless otherwise noted, all comparisons are to the prior-year period.

At this time, I will turn the call over to Mr. Timothy Ring. Please go ahead, sir.

Timothy M. Ring

Thanks, Tom. Good afternoon, everybody. I'd like to welcome you to Bard's Second Quarter 2012 Earnings Conference Call and thank all of you for taking the time to join us today. I would expect the presentation portion of the call to last about 30 minutes.

I'd like to begin today by introducing Chris Holland. Chris joined us in May as our Senior VP and Chief Financial Officer, replacing Todd Schermerhorn, who, as you know, retired after 9 years of being in that role and 27 years in total at Bard. We all wish Todd the best in retirement, and I would like to publicly thank him for his passion, intellect and insight he brought to our organization.

He certainly left some big shoes to fill and I have to tell you, I couldn't be happier with our choice. Although Chris has only been here a short time, a couple of months now, his many years of senior management experience at ARAMARK and his extensive background in medical devices at JPMorgan have prepared him well to contribute significantly from day 1. As you get the chance to meet him in the coming months, I'm confident that you will quickly see, as we have, that he's an exceptional leader who will help us successfully navigate the sizable opportunities and the challenges ahead of us. So Chris, welcome.

Christopher S. Holland

Thank you very much, Tim.

Timothy M. Ring

The discussion today will go as follows. I'll begin with an overview of the results for the second quarter of 2012. John Weiland, our President and COO, will go through the second quarter product line revenue results. Then you'll hear from Chris, who will review the second quarter income statement, balance sheet and our expectations for the third quarter. And then John DeFord, our Senior VP of Science, Technology and Clinical Affairs, will give you an update on our product development pipeline, and then we'll close with Q&A.

Second quarter 2012 net sales totaled $742.6 million, up 2% over Q2 of last year on an as-reported basis and up 4% on a constant currency basis. Currency impact for the quarter versus the same quarter last year was unfavorable by about 170 basis points.

Net income for the second quarter of 2012 was $133.9 million. Diluted EPS were $1.54. Excluding items that affected the comparability of results between the periods, which Chris will cover later, second quarter 2012 net income and diluted EPS were $140.5 million and $1.62, down 1% and up 3%, respectively. That's within our guidance for the quarter, albeit at the lower end and reflects the impact from the challenging macro environment and currency headwinds. As a reminder, in Q1, we did exceed the top end of our guidance by $0.04, and Chris will give you further context on how we view the back half of the year a little bit later.

Looking at revenue growth geographically compared to Q2 last year, second quarter net sales in the U.S. increased 2% and once again, while internationally we grew 8% on a constant currency basis. Europe was a little weaker this quarter with a couple fewer sales bids compared to last year and grew 2% on constant currency basis. Japan had another strong quarter, growing 19% having some continued benefit from a competitor's quality issue in stents that we talked about last quarter. Our other international businesses grew 13% in constant currency, driven by 29% growth in our emerging markets.

On the business development side, we don't have any new deals coming up at this time. As we told you after the flurry of activity in Q4 of last year, this process is opportunistic and results can be a little bit lumpy. We do have a very strong business development process. We're mainly focused on adding the appropriate pieces to our portfolio that will improve our growth and profitability over time. As far as tracking the progress of our 2011 acquisitions, we told you to expect about 200 basis points of growth this year from those, and that was their impact in the second quarter.

You've probably seen our announcement that we've completed enrollment in the LEVANT 2 drug-coated balloon clinical trial, and we achieved this important milestone ahead of schedule. John DeFord will give you further details a little later, so I'll just say that we're very pleased with the rapid progress of our drug-coated balloon program, and I would like to take this opportunity to congratulate our team and also the investigators on this significant achievement.

Looking back at Q2, as usual we had some very positive developments in the quarter and some challenges. The macro environment remains difficult. The U.S. weakness continued with the fourth straight quarter at 2% growth for us, while Europe saw a step down in growth as I mentioned. However, our continued investments in our other geographies are keeping us within our guidance in total.

We remain committed to our original EPS guidance for the year, even with sales through the first half of the year at the low end of guidance and currency working against us. For the long term, we remain focused on shifting the mix of our portfolio to higher growth areas through geographic investments, internal R&D and business development.

While we have no plans to change our approach in general, we will, as always, stay very close to our customers and adjust to the facts on the ground as quickly and effectively as we possibly can.

Before I hand the call over to John Weiland, I want to give you an update on the Gore litigation. As most of you know, on June 14, the Court of Appeals for the Federal Circuit affirmed its previous opinion from February, except for the sole issue of Gore's willful infringement. In its June 14 opinion, the Federal Circuit clarified the standard for willful infringement and has remanded the case back to the District Court of Arizona to apply the newly created standard. The key take away from the June decision is that the Federal Circuit affirmed the significant infringement award and clearly stated that the ongoing royalty rates would not change regardless of the ultimate outcome on the issue of willfulness.

At this point, the timing of final resolution of this case, in whole or in part, is still uncertain. It may take several more weeks or months for that timing to become more clear, and we'll continue to keep you updated as things progress. In the meantime, we continue the process of evaluating alternatives for the use of these potential funds to drive shareholder value. As we've said in the past, it's our intention to invest approximately half of the earnings power associated with our favorable ruling in to growth initiatives for the business.

With that, let me turn you over to John Weiland for a review of our product line revenue.

John H. Weiland

Good afternoon, everyone. Before I start, let me point out that I will be giving all percentage growth data in comparison to the prior-year period on a constant currency basis unless noted otherwise.

So let's begin with Vascular. Growth in this category was 6% for the quarter. Total net sales were $221.3 million, up 3% over last year on an as-reported basis. Our United States business was down 1% for the quarter while internationally, we grew 15%.

Our electrophysiology sales were down 2% for the quarter with EP LabSystem sales down 1%, and our disposable EP product lines down 2%. Sales in our surgical graft category were down 7% in Q2, within the range of recent experiences.

Our endovascular business increased 9% in the second quarter with about 300 basis points coming from the ClearStream acquisition. Within endovascular, our biopsy products were flat this quarter compared to the second quarter last year. The sales trajectory here has leveled off recently with the notable softness in the United States. It's a very competitive space, and it's a little early to know how much of the impact is from fewer screenings, lower volumes or other factors.

Sales in our peripheral PTA line increased 5% where we continue to see double-digit growth in our chronic total occlusion, or CTO product. As you've heard, our drug-coated balloon program is ahead of schedule and in fact, we recorded our first sales in Europe this month. I'll remind you that the big opportunity, and therefore our focus, is in the United States based on the clinical evidence, but we're advancing as planned on all fronts here.

Sales in our vena cava filter line were up 2% in the second quarter, which marks the first positive period in 3 years. Our stent business grew 22% in Q2. As you know, this is a very dynamic area right now with competitors coming on label in the SFA in the United States. And we continue to benefit from the competitor's quality issue especially in Japan. We're very pleased with the results so far this year and how quickly our teams responded -- have responded to the needs of the market. We'll continue to stay very close to our customers and emphasize the quality, performance and longer lengths of our stent portfolio, backed up with clinical evidence from long-term data.

Let's go to Urology. Total net sales were $188.8 million, up 5% versus Q2 of last year on a constant currency basis and up 3% on an as-reported basis. The United States business grew 5% while internationally, we grew 4%. Our new targeted temperature management products accounted for about 600 basis points of the global growth for the total category.

Our basic drainage business was up 1% globally in the second quarter and flat in the United States, while our I.C. Foley business was down 2% globally and down 7% in the United States, which is a little softer than recent trends here. Our continence business was down 6% in Q2. Our fecal management products grew double digits due to the launch of DIGNISHIELD, which helped partly offset continuing declines in the women's health products.

Sales in urological specialties were down 10% in Q2 as the largest product line in the category, our brachytherapy business, was down 14%. And finally in this category, stand-alone sales of our STATLOCK catheters stabilization line increased 1% in the second quarter.

So let's now go to Oncology. Total net sales in this category were $199.1 million, an increase of 4% in constant currency and 3% over Q2 last year on an as-reported basis. Geographically, net sales in the United States were up 3%. Internationally, sales were up 6%.

Our port business was flat versus Q2 last year as we had some inventory timing issues working against us in Japan. During the second quarter, we launched our new family of intermediate-sized low artifact PowerPorts. These ports offer the first platform in the market that significantly reduces MR and CT imaging artifact, thereby reducing the effect of port placement on the interpretation of diagnostic scans. Moreover, the patented application of materials makes this port more transparent to radiation signals. This means that it has very little effect on the amount of radiation passing through the port and those patients that also undergo radiation treatment. Not only are these attributes very important in and of themselves, they also allow clinicians to place the port in the preferred right side of the chest. As we move through the remainder of the year, we anticipate filling out this line with other sizes and configurations in both single and dual chamber PowerPort designs.

Our PICC revenue was up 7% this quarter. Last quarter, we told you that we had over 350 accounts in the United States, who would either evaluate it or were evaluating our new tip confirmation system as an alternative to x-ray. That combined number now exceeds 500 accounts. This game-changing technology continues to be well received and is improving speed to treatment while reducing the cost and radiation exposure related to x-rays. We estimate that approximately 225,000 annual x-rays have been eliminated, accounting for over $11 million in direct cost savings to hospitals.

In the second quarter, we launched our new PowerPICC FT family in both solo and non-solo valve versions. The FT reduces the amount of catheter in the vein by up to 15% while not compromising the flow rate or the power injection capabilities offered by the PICC.

Our vascular access ultrasound product line was up 10% this quarter. In late May, we received 510(k) concurrence on our highly portable Site-Rite Prevue Ultrasound System and Pinpoint Gel Cap and Needle Guide. This technology is designed to ease the placement of difficult peripheral IVs by enabling point-of-care imaging coupled with needle guidance, yet without the application of ultrasound gel. We have commenced the initial rollout of this technology combination and are very pleased with the level of interest thus far. And to close out this category, our dialysis access product line was up 3% this quarter.

Let's conclude then with our Surgical Specialties business. Total net sales in this category were $111.4 million, up 2% on a constant currency basis and basically flat on an as-reported basis. U.S. sales were up 3%, and international sales were down 1% this quarter.

Our soft tissue repair business grew 2% in the second quarter within the range of recent quarters. We continue to see double-digit growth over prior year in our synthetic hernia products led by ECHO PS, VENTRIO ST and VENTRALEX ST, all of which were launched in the back half of last year. As we said last quarter, the sales trajectory in our natural tissue products has leveled off over recent quarters. That relatively flat trend continued in the second quarter of 2012 showing a decline of 4% when compared to Q2 of 2011.

Our hernia fixation business declined 26% this quarter, consistent with recent experience due to competitive disruption. And closing out the surgical category, in Q2, our performance irrigation business was down 1%, and our hemostasis business was also down 1% compared to the prior year.

This concludes our product line revenue discussion. I'll now turn you over to Chris Holland.

Christopher S. Holland

Thank you, John. Before I get into the P&L details, I just wanted to take a moment to thank Tim for his very generous introduction, and to let you all know that I decided to join Bard in large part because of the strong history, culture and track record of the company. I also saw a terrific opportunity to become part of one of the best management teams in medical devices during a particularly dynamic time in health care.

Today's environment is creating unique opportunities and yes, even challenges, which I look forward to tackling as part of the Bard team. I'm pleased to say that after an intense two-month immersion, the reasons that brought me to Bard have been confirmed. I'm now doing my best to come up to speed as quickly as possible, and I look forward to meeting those of you I haven't already in the weeks and months to come.

Now let's get into the P&L by starting with the items that affect the comparability of our results between periods. In the second quarter, we had acquisition-related items of about $800,000 associated primarily with the deals we closed in Q4. We also took charges for asset impairments of approximately $9 million and the write-down of a foreign tax receivable of approximately $1.1 million. And finally, we had a favorable adjustment of about $1.6 million to our restructuring reserve that was established last year. The P&L impact of these items is detailed in the notes to the financial statements and the reconciliation accompanying our second quarter earnings press release.

Now let's go through the statement of income for the quarter. Gross profit was $456.9 million or 61.5% of sales for the second quarter, down 50 basis points from the prior-year quarter. New amortization of intangibles relating to transactions that we closed in the last 12 months, cost us about 70 basis points year-over-year in the quarter.

Price, as we define it, was unfavorable at 150 basis points on the sales line and 50 basis points in GP. As a reminder, this only captures changes in ASPs on a like-for-like SKU basis and would not reflect the impact from new but similar products that may be selling at higher average selling prices, which we would capture in mix.

In any event, for the first half, pricing headwind has trended above our initial expectations of about 100 basis points of unfavorability on the sales line for the year. And at this point, we anticipate that it will likely continue to do so for the balance of 2012.

From a manufacturing standpoint, our cost improvement programs and manufacturing efficiencies continue to generate strong results, as our teams are doing a terrific job executing. These efforts are particularly important in the face of stronger-than-expected headwinds from both price and currency. While we do expect some variability in gross profit, given our traction with these improvement and efficiency programs, we remain comfortable with our full year gross profit guidance at this point in time.

SG&A expenses were $205.4 million for the quarter or 27.7% of sales. On an adjusted basis, SG&A as a percentage of net sales was 27.6% or 60 basis points higher than Q2 of 2011, with 80 basis points coming from the deals we closed in Q4. Again, this is consistent with our guidance. We will, of course, continue to carefully and appropriately manage spending in this dynamic macro environment.

R&D expenditures totaled $50.1 million for the second quarter or 6.7% of sales on a reported and adjusted basis, which is up 20 basis points as a percent of sales from the prior year. This growth is consistent with our expectations and with what we told you last quarter, as we look to productively invest in R&D. Interest expense was $9.7 million for the second quarter, up modestly from a year ago because of higher debt levels related to the acquisitions we closed at the end of 2011. Other income and expense was $6.2 million of expense for the second quarter as reported and $1.4 million of income on an as-adjusted basis, driven mostly by foreign exchange gains. The effective tax rate for the quarter was 27.5%, on track with our full year guidance.

Diluted shares for the period were 85.1 million, and we repurchased 550,000 shares during the second quarter. The net result is adjusted EPS of $1.62, within the range we provided for the quarter though in the lower half of that range, as we had sales come in at the low end of our guidance and the currency headwind to deal with in the quarter. When you combine this with EPS that was $0.04 above the top end of our guidance in Q1, through the first 6 months, our 5% growth in adjusted EPS is ahead of our annual guidance range.

The balance sheet as of June 30, 2012, reflects cash, restricted cash and short-term investments of $769.4 million versus $804.4 million as of March 31. For the quarter, accounts receivable days were down 1 day, and inventory days were up 1.1 days. Capital expenditures totaled $22.7 million for the quarter.

On the liability side, total debt was $1.214 billion as of June 30 compared to $1.239 billion at March 31. Debt-to-total cap at the end of the second quarter was about 39%, and total shareholder investment was $1.922 billion at June 30, 2012.

Moving to financial guidance. For Q3, we expect constant currency sales growth between 3% and 5%. The sales environment is certainly challenging particularly in the U.S., and we are being appropriately cautious in this environment. While our full year sales guidance remains unchanged, realistically, we are now focused on achieving growth at the lower end of that range, which as you recall called for constant currency sales growth of 4%.

From an EPS standpoint, excluding items affecting comparability, we see the third quarter in the range of $1.60 to $1.64 per share. For the full year, we still expect to achieve the full year earnings guidance range of 3% to 4% growth, which we provided to you in December, which excluded the renewal of the R&D tax credit. As a reminder, we estimate the tax credit is worth about $4 million or slightly less than 1% of incremental EPS growth.

With a somewhat more cautious sales growth outlook and currency now serving as a headwind as well, we are working hard to appropriately balance our business priorities, but still delivering on our full year earnings commitments to our shareholders.

I'll now turn you over to John DeFord.

John A. DeFord

Thanks, Chris, and good evening. I'm just going to hit some highlights today, starting with our ENCOMPASS atrial fibrillation ablation technology. We began enrollment in our multicenter feasibility study in Q1, and we expect to complete enrollment with about 45 patients around the end of August.

Our recruitment has been brisk, and we plan to use these data to support CE mark approval and European launch. With our follow-up requirements, we anticipate filing for the CE mark early this fall and then simultaneously launching the product and starting a broader European registry study early next year. We, of course, also plan to submit the results to FDA around the end of the year to support our pivotal U.S. IDE.

In PTA, as Tim mentioned, our LEVANT 2 pivotal clinical study of the Lutonix drug-coated balloon completed enrollment this month with 476 randomized patients recruited for the treatment of SFA and popliteal disease. We'll follow these patients for 5 years, but anticipate PMA submission with 1 year follow-up. Also this month, we began enrollment in the 650-patient LEVANT 2 Continued Access Registry study. This registry closely mimics the inclusion, exclusion and follow-up of the randomized study.

And on another note, the LEVANT 1 2-year follow-up data are in, and the first public presentation of the results is anticipated for the Sirsa [ph] meeting in August. The manuscript is also in preparation, and we anticipate publication early next year. The Lutonix drug-coated balloon is CE marked, as John said, and we started selling in Europe this month. We're also laying the groundwork for a large European-based registry study. And as we presented last quarter, we're in active discussions with FDA and working towards the submission of an IDE to study the Lutonix drug-coated balloon in below-the-knee arterial disease.

Also in PTA, we're building inventory for the launch of our new line of ATLAS large diameter PTA catheters upon 510(k) concurrence anticipated in Q3. We're also gearing up for the launch of a new CROSSER product for central lumen access across chronic total occlusions and new 300-millimeter length ULTRAVERSE balloons. All are anticipated to begin rolling out this quarter.

In biopsy, we're progressing on schedule with the development of our new SENOMARK ultra breast biopsy marker. This new marker is designed for long-term stability and visibility and is anticipated for launch in Q4.

Now turning to Urology. In our new temperature management business, we remain on track with our development of a new ARCTICGEL pad system for application in the emergency room or at the point of first contact with the patient. We anticipate launch around the end of the year. This new proprietary product we're naming ARCTIC BLAST allows for the initiation and support of cooling for between 60 and 90 minutes without the need to be tethered to the ARCTIC SUN system. However, the ARCTIC BLAST pads also support connection to the ARCTIC SUN to continue cooling and temperature control without the need to exchange pads.

Moving on to Oncology. As we discussed in the last couple of calls, we submitted our 510(k) for the antimicrobial COVERT PowerPICC late last year and continued to assess the process to create a reasonable path forward for U.S. introduction. We're still working with the FDA on this product and in parallel, we're evaluating several other opportunities and pathways to bring this technology to clinicians and their patients.

We submitted a 510(k) on our POWERGLIDE midline catheter in Q1, and we're very pleased to receive concurrence in early June. This device incorporates a number of very important elements, including an integrated guidewire that reduces the difficulty of placement and a dwell time of up to 29 days, all while retaining the technique of traditional peripheral IV placement. We're in the early phase of rolling this device out, and we expect full commercialization this quarter.

In imaging, we're making good progress on our Site-Rite 7 ultrasound platform scheduled for launch in Q4 in Europe and around the end of the year in the U.S. And our Fazer freehand stereotactic system is on schedule, and we anticipate a first launch in the first half of next year.

Finally, moving to surgery. After last quarter's launch of our flat sheet PHASIX mesh, we're making good progress on our PHASIX plug design for inguinal hernia repair. As a reminder, PHASIX Is designed to provide the look, feel and function of our standard polypropylene products with equivalent strength during healing. The PHASIX material is unique due to its monofilament construction and extended period of resorption, leaving the patient with no foreign material in the body after about a year. Our 510(k) is under review, and we expect clearance around late Q3 or early Q4. So we're about a quarter ahead of schedule as discussed last time.

In ventral hernia repair, we're on schedule and expect to launch several new sizes of the VENTRALIGHT ST product later this quarter and into Q4. We also anticipate the launch of a new and improved ECHO PS later in the year. This will further extend our leadership in this important segment of the laparoscopic hernia repair market.

Those are some of the highlights. Thanks for your attention. Let me now give you back to Tim Ring.

Timothy M. Ring

Thanks, John. 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. [Operator Instructions] Thank you. Tom?

Question-and-Answer Session

Operator

[Operator Instructions] And we will go to Jon Palmer's line representing CLSA.

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

Chris, first question. Could you just talk about the impact of FX on the gross margin? And then what happens going forward if the euro continues to deteriorate here?

Christopher S. Holland

Sure. I'd be happy to. If we look at the 50 basis points of degradation in GP year-over-year, currency was about 10 basis points of that. As I've mentioned, deal amort cost us 70 in the quarter. Mix was just slightly negative really due to the ClearStream products with their below-average GPs. And then price, as I've said, was 50 basis points and again, that was offset by the very strong effect of our cost improvement programs of 90 basis points.

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

And if the euro continues to head south here?

Christopher S. Holland

Yes, I think obviously sitting here today reconfirming full year guidance, we're comfortable with the current levels. Obviously, any material move lower makes that more challenging. But obviously, we're focused on doing what we can. But to the extent the move is material, it'll become more challenging.

Operator

The next question today comes from the line of Larry Keusch with Raymond James.

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

Tim, historically you guys have always been very active in share repurchase, and I just wanted to pick your brain a little bit on just philosophically how you think about dividends. Your current yield is kind of 0.8%. And if the world is getting more challenging and growth is harder to come by, does it make sense to kind of think about more of a total return strategy to reward shareholders as opposed to just repurchasing stock?

Timothy M. Ring

Sure. Well, let me go through the criteria as we have them set today, and I'll talk a little bit about our process. The first use of cash for us is clearly strategic. We are actively pursuing a lot of different things at the moment. That's not a new thing for us, so that remains the same. Second is share repurchase, and then the third is dividend. As you know, and you mentioned the yield, we paid a dividend for, I don't know, 30-something years and raise it every year albeit modest. So that's where it stands today. We do talk about this with our board at virtually every board meeting. If something changes there, we'll let you know, but that's the way we look at it currently.

Operator

Our next question today comes from the line of Matthew Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

Just wanted to ask about Gore. You provided the update on the litigation. But what can you tell us about your expectations for timing and/or the decoupling of the 2 awards?

Christopher S. Holland

Yes, I think as Tim said in his prepared remarks, Matt, the case is on its way back to the District Court. The timing of exactly when we get clarity on bifurcation is, as Tim said, weeks or months away at this point. We just don't know. As he also said we will let you know as soon as there's a material development to that effect. I think what certainly you should expect and what we certainly can tell you is that we will do everything we can to collect on the damages as quickly as we can. And that's something we're very focused on, and that's what we're going to do. But unfortunately, sitting here today, being more specific on timing is something we're just not able to do.

Matthew Taylor - Barclays Capital, Research Division

And just with that as a backdrop, I mean, how do you think about some of your plans to accelerate investments given some uncertainty there?

Timothy M. Ring

Yes, well, we go through an annual budgeting process, at which point in time we look at all the investments we want to make anyway. So that process is really just starting. It hasn't come to our level yet at corporate. And I'm sure the businesses will be looking at some of those ideas that they submitted to us as part of the investment strategy associated with the Gore proceeds versus their list that they currently have and reprioritize those accordingly in their budgets when the agreement affords [ph]. So in other words, we'll integrate the 2 and prioritize based on what we think the best returns will be. It's part of our normal process.

Operator

Our next question is from Mike Weinstein with JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Chris, so just to clarify, is your outside counsel indicating that the issue of bifurcation will be dictated by the lower court?

Christopher S. Holland

Yes, I think as we said, Mike, the case is going back to the lower court, and there will need to be a determination at the lower court as to how the case proceeds from there.

Timothy M. Ring

Certainly, if you read the appeal or the result of the case as it was written, that was pretty much a strong recommendation that they're separate issues, but that still has to be decided by the court.

Christopher S. Holland

Right.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

So it's still to be determined whether the clock has started on their need to file an appeal with the Supreme Court if they're going to do so?

Christopher S. Holland

I mean, I think that's fair.

Timothy M. Ring

The clock has started as it relates to that first decision. Depending upon what the next court decides, they would also obviously then have an appeal mechanism available there as well. So they kind of have 2 shots at that depending upon what the outcome is at the district court.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Let me ask a couple fundamental items. One, can you quantify the supply impact that would that had on the ports business this quarter if that's resolved? And then two, can you just spend another minute on biopsy? It was wide this quarter.

Timothy M. Ring

I didn't understand the first part of your question. The what impact? Was it the supply impact or...

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Yes. The supply issue that impacted your ports business.

John H. Weiland

Well, our Japan business, because it's a joint venture, we sell into the joint venture, at which point in time they sell out to the end-user customers. And the effect of that was about $1 million, but it was enough to change the trajectory on that port business overall for the corporation.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

So that was -- I misunderstood this. That was your own distributor stocking rather than [indiscernible]. Okay, understood. And then biopsy?

John H. Weiland

And what was your question on biopsy?

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Why was biopsy as weak as it was in this quarter?

John H. Weiland

We had a slower quarter in the United States quite frankly. And as we said in our earlier comments, it's hard to tell whether this is a trend or it's an aberration at this point in time. But it certainly is -- we're trying to get a better handle on the underlying demand in terms of the number of procedures that are moving through the biopsy arenas right now.

Operator

We'll go to the line of Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So 2 quick things. First, I just want to be clear on your comments on pricing. Are you suggesting that you feel pricing might get worse than the 150 basis points it's been at in the first half of the year? Or just that it's going to remain at this level and not go back down to the 100 you predicted at the beginning of the year?

Christopher S. Holland

Yes, just our expectations at this point is likely to remain at these levels.

Timothy M. Ring

Yes, we have guided -- in our guidance, we have put about 100 negative and we've been at 150 now for...

Christopher S. Holland

2 quarters.

Timothy M. Ring

2 quarters. So that's what that comment relates to.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then Tim, just -- you've being growing low single digits, excluding acquisitions, now for a couple of quarters, well below historical trends. And I just wanted to get your latest take on how much of this is just simply global markets being slower than they have been in the past and a little bit more pricing pressure versus Bard's specific issues that -- just kind of what's the split there in your mind at this point that's keeping the growth down at these low levels?

Timothy M. Ring

Yes. I would heavily weight it to the macro environment. I think with very -- with a couple of exceptions, maybe fixation being one where we think we're losing some share there, our share positions continue to be, for the most part, pretty much where they've been. And when you look at the broad breadth of the product line that we have, we're seeing it across the board. It's not like in any one area. And as you know, the diversity of the products, although they're all medical devices, clearly, they don't relate to each other very much within the hospital. So we think it's an overall softness. Can we execute better in certain areas? Absolutely, and we focus on that every day. But I would characterize this very much to be more of a macro issue.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then lastly real quick. Now that you've got Chris on board -- and Chris, welcome, look forward to meeting -- but also David on board. You've got a lot of in-house firepower from an M&A perspective. I was just curious, with these hires, you haven't done large transactions in your history. I think the largest was in the $300 million range. As we look forward and assume that Gore does happen, is there a potential that you guys would consider larger transactions at a higher probability than you have in the past?

Timothy M. Ring

No. And let me -- well, that has come up a couple times. I can say that absolutely that both of those hires are because they were well qualified, bright, aggressive people that we thought fit here, had absolutely nothing to do with both of them at one point having a banking background. In fact, we took them despite the fact they were bankers.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So is that a no though on the larger transactions?

Timothy M. Ring

Well, we've never ruled anything out as we said in past, and there's no change, I guess, in the strategy at all from what we've done in the past.

Operator

And we'll go to the line of David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Tim, I wonder, if we just think about -- Chris commented that was in the guidance for the back half of the year, and it actually doesn't look particularly aggressive. It basically implies flat organic performance into the back half. Is that sort of how you -- what kind of visibility you think you have right now sort of on back half of the year performance? And organic growth has slipped a little bit in the second quarter but not really dramatically. Comps get a little easier into the back half. So is your performance to assume market environment is sort of at neutral as you saw here in the second quarter and that really drives the back half updated guidance?

Timothy M. Ring

Yes, I think if you've been following us for a long time, you know we tend to probably be more on the cautious side of things. And we're definitely seeing some things in the marketplace, and you got the currency issue. We think the guidance was right where it should be in terms of what we think is going to happen with the business. John Weiland, if you want to...

John H. Weiland

No, I think that's absolutely appropriate based on what we're seeing in the marketplace. We haven't seen any new trends that would suggest that demand is going to increase substantially in the United States side of the equation yet.

Christopher S. Holland

And then adding to that, David, obviously if you read headlines out of Europe, things are not getting any better there, right? So there's -- it's hard to find reasons for optimism as you look around.

David R. Lewis - Morgan Stanley, Research Division

Okay. Very helpful. Just one more quick one on LEVANT. Based on the press release that came this evening, should we assume that Continued Access data or is it your assumption that you will submit some portions of Continued Access data with a full submission for approval in the U.S.? Or has that decision not been made yet?

John A. DeFord

This is John. We fully expect to submit some level of data from the Continued Access patients. I think there's no secret that FDA has been asking for more information on rare events, for example. And so collecting that information through our Continued Access as well as the LEVANT 1 data and the European registry, all of those things will be part of the submission.

David R. Lewis - Morgan Stanley, Research Division

And John, do you think that will affect your previously stated timelines in the U.S.?

John A. DeFord

No. We took that all into account in the timeline.

Operator

And we have a question from Matthew Dodds representing Citi.

Matthew J. Dodds - Citigroup Inc, Research Division

John, first for you. It looked like brachytherapy was coming back the last couple quarters and then it came down a lot this quarter. Is that U.S. or something happened o U.S.?

John H. Weiland

No. There was a little bit in the U.S., but also some of the decline we've also saw x U.S. and it was pricing primarily in one country in Europe.

Matthew J. Dodds - Citigroup Inc, Research Division

Can you say which country?

John H. Weiland

Prefer not to.

Christopher S. Holland

But there was a reimbursement changed, Matt.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then just one more on the product lines. Stent grafts to 22% constant currency. That was up from last quarter. Was that all S.M.A.R.T.? Or is LifeStent still gaining share in your view in the U.S. and in international markets?

John H. Weiland

It's holistic. It includes all of them, including LifeStar, our other new entry into that market of about 3 months ago.

Matthew J. Dodds - Citigroup Inc, Research Division

So it's not the full quarter of the S.M.A.R.T. stent being off the market that you think you gained share, or the market performed well?

John H. Weiland

We think we gained share for sure.

Operator

And we'll go to Topher Orr's line with Goldman Sachs.

Topher Orr - Goldman Sachs Group Inc., Research Division

I'd like to touch on a couple of the acquisitions you guys did back in the fourth quarter, ClearStream and Medivance. I know you guys had previously indicated you expected to do about 80 basis points to your SG&A line coming from incremental spending on these 2 acquisitions. I was wondering, is that still tracking about in that range? And from a top line perspective, how have these deals been tracking relative to your initial expectations?

Christopher S. Holland

Yes. In terms of the impact on SG&A, Topher, you're exactly right, about 80 basis points. So the impact we're seeing in the quarter is from the deals. I think as we also said, 200 basis points of our growth are coming from the deals, which is what we told you, you should expect. So I'd say by and large, they are tracking. We think they both continue to be very good opportunities. We're working hard on executing. We think the integrations have gone well. So I think it's still early days, but we think we're tracking.

Topher Orr - Goldman Sachs Group Inc., Research Division

Okay. And then just one follow-up, looking at your Oncology business. I know you guys mentioned the Japanese inventory issue had about a $1 million impact I think you said earlier. But just relative to first quarter the growth rate, this quarter looked to be slightly more than that $1 million decline. I was just wondering, are there any other issues that were happening in the quarter maybe in the United States that had an impact on the Oncology business?

John H. Weiland

There was nothing other major. That was by far the major point that impacted the quarter-to-quarter growth rates going from 7% to 4%. The majority of it is capsulated within that.

Operator

And we have a question from Tom Gunderson with Piper Jaffray.

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

On the drug-coated balloon and for sales in Europe, I think you said that U.S. is the focus. But can you give us a sense of what distribution would look like? Are you focusing on a couple of countries. As we all know, it's crowded over there in drug-coated balloon. So I'm just curious if you could give a little more color.

John H. Weiland

No. We're rolling it out across Europe within our vascular sales force. We built that team over the years. I think they're very well positioned with the relationships that we've had with customers on the stent business, PTA business, et cetera, to take advantage of it. So we're rolling that out across the board.

John A. DeFord

And Tom, just -- we think that clinical data and clinical information is really going to drive the opportunity here. And so that's why we think LEVANT 2 is so critical. We think the Continued Access is important, and this European registry that we talked about is also important. Right now, there's really no clinical data from anybody that's a game-changing information to really drive the market one direction or another. So we think until that LEVANT 2 data comes out, which is about a year from now, we're not going to be in a position to really drive much in that marketplace. So we're heavily focused on executing on those clinicals, getting that data out there, getting it published, getting it presented and so on.

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

Got it. And then Tim, with the pricing pressure up higher and all the stories we hear, et cetera, how have you -- have you made any changes recently as to how you focus the value proposition, particularly on the premium priced products? What have you had to do differently to get the contracts in and get the volume up?

Timothy M. Ring

Sure. Clearly, you've got to now have the clinical data to make the case. You also need the medical economic data to make the case. So I would say that over the last couple of years, especially if you looked at I think -- John DeFord, correct me if I'm wrong on my number, but I think last year, we did 51 clinical trials. And only about 1/3 of those were for regulatory approvals. The rest were for things like -- that generate that kind of additional information that's needed to create a more compelling value proposition.

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

And do those need -- sorry, just a quick follow-up. Does that need to be published? Or is it internal and shared with the purchasing?

Timothy M. Ring

It's a combination of those things. It's a multifaceted approach.

John A. DeFord

Yes. But actually, I'll just tell you that today, with the clinicaltrials.gov requirements, virtually every one of these studies will ultimately be published.

Operator

And we have a question from Kristen Stewart representing Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I just wanted to clarify one of the earlier questions on -- he was talking about gross margins. Did I hear correctly that mix was a negative 50 basis points?

Christopher S. Holland

Yes, it was -- it sort of rounds to 10 basis points, Kristen and again, really primarily due to the ClearStream acquisition year-over-year impact. So those are much lower average GPs, but they're just slightly negative.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then just going to R&D in the quarter, can you maybe just help us break out how much was incremental related to Lutonix? Because I know that kind of increased R&D for this, I guess, entire year. And then also, just maybe commenting on what your core R&D rate was this quarter relative to last year's spend?

Timothy M. Ring

Yes, Kristen, we're not going to break out separately investments for R&D and acquisitions that we make. I think what's important at a more strategic level is when we buy these things, we do look at them as platforms. So if you were to look at the last several years' worth of acquisitions, there's more R&D being spent there than maybe some of the older product lines because there's better growth there and higher potential. So we are investing more in the faster growing areas, but we're not going to break out separate R&D spend by product lines.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Right. I guess just as a follow-up to that then, looking at kind of I guess less favorable mix and pricing across your businesses. Should we also assume that as you look to reinvest those proceeds that may come with the Gore acquisition, that it may be more likely to be external investments with R&D and buying new products since it doesn't seem like the core R&D growth has really been there for the last couple years?

Timothy M. Ring

No. I wouldn't see a change in track there. We -- you could look at several of the product lines that John cited, John Weiland, in his review. I mean, we've got some new products growing double digits, well into the double digits. So we're not that disappointed with the outcome there. And I think as we look at the additional investments going forward, most of them will be in R&D. And then of course, you're going to have various geographic expansion opportunities, things of that nature as well. More of what we've been doing is just the pace and the timing of some of those things, and we've been moving forward.

Operator

Question comes from the line of Matthew O'Brien representing William Blair.

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

I just wanted to ask a bit more on the gross margin guidance for the year. I think you reiterated what you've said in the past, and I think the low end of that range is about a 20 basis point improvement year-over-year. When I look at what you did in 2011, up over 62.1%. To get up to 62.3% for the full year 2012 would assume some pretty significant improvements in the second half of the year on the gross margin line. Can you just provide a little bit more granularity as far as where that's going to come from and your comfort level there?

Christopher S. Holland

Yes, actually, Matt, I think I need to clarify your understanding of the guidance. The guidance was actually GP. It would be down 20 to 50 basis points including 70 basis points from the incremental amortization. So actually, what we're comfortable with is that guidance as well. So including the amorts, down 20 to 50 year-over-year.

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

Okay. Okay. That's helpful. And then just real quickly, you mentioned, I think Tim, that you're a couple of days late in terms of a couple of fewer selling days in Europe this quarter compared to last year. Can you just give us a sense for the impact in the quarter of those fewer selling days, maybe they had daily sales type of a number? And then just your comfort level on the health of the emerging markets out there because the growth, again, in the quarter was very strong.

John H. Weiland

We try, Matt -- this is John. We try not to get into this selling days issue because you end up chasing your tail for a year on it, and we don't allow our people to make any excuses on selling days to us in terms of performance. So we don't use them ourselves. But I would say it this way is the best explanation. As we looked at all the countries in Europe, we saw the same degradation in growth rates in essence in every market throughout Europe, both north and south. So that's what made us comfortable that there was a real issue there.

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

Okay. And the health of the emerging markets?

John H. Weiland

Emerging markets continue to do extremely well, and I think you'll see that -- you saw that in our results as well.

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

Sure. But just your comfort level that the outlook there is still quite dynamic.

John H. Weiland

Well, if you look at some of the largest geographies, China being a good example, our growth rates in China were identical to what they were in the first quarter. So...

Operator

We'll go to the line of Michael Matson with Mizuho Securities. [Operator Instructions]

Michael Matson - Mizuho Securities USA Inc., Research Division

I guess just on your -- the antimicrobial PICC, I'm just wondering what sort of uptake you expect from that product? And do you really expect that to be sort of a significant mix driver for that business? Or is it really something that's going to be more of a niche product?

John A. DeFord

Michael, that's a good question. We don't usually talk about our expectations for an individual product. I do want to remind you that, that product is not available yet. We continue to work with the FDA on getting concurrence for that product. So it is not available yet at this point.

John H. Weiland

I would say that the big movers in the category, which is really our focus, is the 5.4 French Triple Lumen PowerPICC that we launched in the first half, the Sherlock 3CG that we launched in the first half and I'd say the Site-Rite Prevue and the POWERGLIDE midline catheter. They're all pretty significant opportunities for us.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then on Lutonix, any updates in terms of partnerships for coronary application of that product?

Timothy M. Ring

No. Nothing to report on in that topic yet.

Michael Matson - Mizuho Securities USA Inc., Research Division

But you're planning to do something in that regard, correct?

Timothy M. Ring

Well, we're still going through the assessment of exactly what we want to do with it. And once we determine what that is, we'll let you know.

Operator

And we'll go to Joanne Wuensch's line with BMO Capital Markets.

Joanne K. Wuensch - BMO Capital Markets U.S.

When I think about the Gore litigation, I think of you as sort of winning a lottery ticket at the end of this year and a lot of cash coming through. How do you internally plan for that? How do you think about allocating between beefing up R&D, SG&A and acquisitions?

Timothy M. Ring

Yes. Okay. So what we've done, and I think I covered this in the last call, but we've had a process for 10 years here where we keep a standing queue of additional investments we want to make and those are reviewed and reprioritized, if need be, each month based on return. Those are decisions we make here at corporate because you could have one business' fifth submission will be better than another business' first submission. So we make those choices here. We basically use that same process in looking at the Gore money. So we told the divisions and the businesses, submit your ideas along with return on investment calculations, the way we would normally do those, and then we sat around as a group after a few different levels of review, a very senior level team here sat down and basically made those decisions of what we would do. I think the good news is that in fact, just anecdotally, that's a lot of money to invest, right? And John Weiland and I sat around, so geez, I wonder if they're going to have enough ideas. There was enough ideas to spend all of it. So we had some really good choices that we could make going forward. And going back to an earlier question, if the money is delayed even further, some of those I'm sure are going to get integrated in our normal budget process going forward. We're not going to just put that list aside and wait. So it's a dynamic list that moves forward. We've gone through a very disciplined, diligent process. We will review and have preliminarily reviewed that with our board. So they're in sync with us. And then when and if that all transpires, we'll tell you exactly how we plan on doing that.

Joanne K. Wuensch - BMO Capital Markets U.S.

So I take it that hurdling the med tech tax next year will be pretty easy for you guys if all works out?

Timothy M. Ring

Nothing is ever easy these days, Joanne.

Operator

And our final question today will come from the line of Josh Jennings with Cowen and Company.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Just first on Europe, seem to be the real territory where you suffered a sequential downtick in growth. Can you parse out for us -- John, I think you said that each country, each region was down kind of across the board. But can you parse out for us what you're seeing in Europe in terms of whether that growth is being stunted by price versus utilization and procedure volumes?

John H. Weiland

No. We've been very positive in that the impact of price in Europe has really not been significant at all as consistent with what we said in the first quarter. Really, what we saw in the second quarter was just really volume related, and it was across the board in every country. And quite frankly, there wasn't a significant degradation in revenue growth in some of the southern region countries that you would expect it versus the northern region countries. So that's what led us to believe it was just really -- it was really volume utilization based on differentials and days.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

And just last question, in terms of your guidance here for the rest of the year, what have you baked in, in terms of your assumptions for utilization in the U.S. and in Europe?

Timothy M. Ring

I guess you would say we basically lowered our revenue guidance for the third quarter. So you would say by definition, we would expect that to have a little more headwind primarily in Europe and the U.S. at least for the next quarter. Our assumption going to the year was no improvement in the environment. I think what we're kind of sensing here is we might be getting a little more negative than that, at least in those big geographies, U.S. and Europe.

Operator

And that concludes the Q&A session. I would now like to turn the call back over to Bard's management for any closing comments.

Timothy M. Ring

Great. Thanks, and I'd like to thank everybody for taking the time to spend with us today and your questions. And I'd also like to close by thanking Bard employees around the world for their commitment to excellence. And again, thanks everybody for joining us, and we'll talk to you next quarter.

Operator

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

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