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CR Bard Inc (NYSE:BCR)

Q2 FY08 Earnings Call

July 23, 2008 05:00 PM ET

Executives

Timothy M. Ring - Chairman and CEO

John Weiland - President and COO

Todd C. Schermerhorn - Sr. VP and CFO

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

Eric J. Shick - VP, IR

Analysts

Rick Wise - Leerink Swann

Matthew Dodds - Citigroup

Joanne Wuensch - BMO Capital Markets

Mimi Pham - JMP Securities

Taylor Harris - JPMorgan

Kristen Stewart - Credit Suisse

Robert Hopkins - Banc of America

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CR Bard Incorporated second quarter 2008 earnings results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions to be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for future on demand replay through the Bard website.

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

Today's Bard 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, 2008, 10-Q and the information under the caption Risk Factors in the company's 2007 10-K, including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

During the call, references will be made to certain non-GAAP measure which management believes provide an additional and meaningful assessment of the core operating performance of the company and its individual product franchises. Reconciliations of non-GAAP measures to the most comparable GAAP measures are provided in Bard's earnings release and on the company's website at www.crbard.com.

All information that is not historical is given only as of July 23, 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, then, I will turn the conference call over to Timothy Ring. Please go ahead, sir.

Timothy M. Ring - Chairman and Chief Executive Officer

Thanks, Todd. I would like to welcome everybody to Bard's Q2 '08 earnings call. Thanks for attending today. We're expecting the presentation portion of this call to last about 25 minutes. I just -- before I go through the agenda I want to give everybody a head's up. We're in the middle of lightning storm here. And if we do get disconnected for whatever reason we are going to dial back in. Just so, do hang in there if that happens.

The agenda today, I will go through the -- an overview of the results for Q2. John Weiland, our President and COO will review second quarter product line revenues. Todd, our Senior VP and CFO will go through the second quarter income statement and balance sheet, as well as our expectations for Q3. And then as typical, John DeFord, our Senior VP of Science, Technology and Clinical Affairs will give you an update on our product development pipeline and then we will close with Q-and-A.

Second quarter '08 net sales totaled $617.1 million. This represents an increase over Q2 of '07 of 13% on an as reported basis and 10% on a constant currency basis. Currency's impact for the quarter versus Q2 of '07 was favorable by around 300 basis points. Net income for Q2 of '08 was $77.9 million and diluted EPS was $0.76. In conjunction with the previous synapse, discontinuation of our Salute II Hernia Fixation device, in Q2 we did incur a pretax charge of $40.5 million relating to the disposition of assets specific to that product line.

When you exclude this item, second quarter '08 net income and diluted EPS, were $112.8 million and $1.10, up 14% and 18% respectively over the prior year period. Again, for your reference, the adjustments to our results are detailed and reconciled to the GAAP results in the tables and notes to the financial statements both in the press release and on our website as well.

Taking a look at revenue growth on a geographic basis, again constant currency, Q2 net sales in the US increased by 8%, Europe grew at 16%, Japan increased 7% and our other international businesses grew at 8%. As previously announced, in business develop we closed the SHPI transaction in early June.

Again, this acquisition brings us market leading Safety-Winged Infusion Sets used to deliver therapeutic agents through our vascular access port line. Infusion sets are an important component of our port franchise. And these products strengthen our offering of these devices specific to port based therapies. SHPI reported at '07 sales of about $20 million, with roughly 20% of those sales coming to us as an OEM customer. Beyond SHPI, in Q2 we completed another small technology transaction in the cardio materials area.

When you look at our second quarter overall, in my assessment, I would say it was a very solid one. Despite zero growth in our surgical business, we managed to grow total revenue in double digits, not a small accomplishment, and again, a clear testament to the strength of our diversification.

Couple of items to note. Our vascular business achieved its best growth quarter in four years. Urology continued to deliver solid and reliable performance and our oncology results remain strong despite the challenging economy. While some investors might understandably focus on the downsides of the challenges we have been facing in the surgical business, we are frankly quite excited about the prospects of building on a base of 10% revenue growth as we look towards improvement in our surgical performance.

Consistent with the way we have always managed the business, bottom line results continue to run strong. And we are confident in delivering a minimum of 14% adjusted EPS growth for the year. We continue to remain focused on the long term investing in our pipeline where we continue to be pleased with the productivity of both our product development and business development activities. Let me turn you over to John Weiland for a review of our product line revenues.

John H. Weiland - President and Chief Operating Officer C. R. Bard, Inc.

Good afternoon, ladies and gentlemen. Before I begin 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 second quarter in this category were $163.6 million which increased 14% over last year and 20% on an as reported basis. The United States business, which represented 51% of global revenue, grew 12% and internationally we were up 17%.

Our EP business grew 12% for the quarter. Our steerable diagnostic catheter line had another health quarter growing 25%. We've been gaining share in the global steerable's market which is estimated to be growing in the mid teens. Our performance here is driven by strong products for mapping both sides of the heart. On the left side, the primary arrhythmia analysis is rate fit but also includes other left side conduction evaluations. In the right atrium and VENTRICLE our products are used for analysis of the entire cardiac conduction system.

John DeFord will update you on our continued progress with the HD MESH ablation catheter for the treatment atrial fibrillation in Europe, when he discusses our progress toward approval in the United States.

Grant product sales were down 5% this quarter, primarily due to a decline in OEM sales within the category. Endovascular, which represents 64% of the vascular category, grew 21% in the second quarter. Its best performance since the breakout year in 2004. Within endovascular, our biopsy product line continued its healthy trend going 21%. The VACORA vacuum-assisted device was up 26% and has grown 20% or better in all but one quarter since we launched it in 2004.

The U.S. vacuum assisted biopsy market is estimated to be growing at around -- at about 9% overall. We continue to gain share in this market, particularly in the ultrasound segment where VACORA fits best. Our UltraClip breast biopsy marker also contributed nicely to growth in the overall biopsy business in the second quarter. We acquired this product in late Q2 last year. And have seen very good sequential growth each quarter since the acquisition. The market for breast biopsy markers is estimated to be growing at 10%. With the ultrasound segment which is the sweet spot for us, growing the fastest.

Our peripheral PTA line was up 28%. The new DORATO catheter continues to receive very positive clinical feedback and has accelerated this line which was already a consistent growth driver for us. DOROTO was our first five print standard PTA catheter to utilize our proprietary high pressure balloon technology which has very accurate size compliance at full pressure enabling precise dilation.

Our VENA CAVA filter line was up 14% versus the strong prior year quarter driven by 20% sales growth in our removable G2 filter. The Stent business grew 24% in Q2. Adjusting for the timing of the close of the LifeStent acquisition in Q1, we saw a good sequential sales growth in Q2, putting us nicely ahead of our original 2008 expectations.

Edwards announced in late may, that they had received a second rounds of questions from the FDA on their PMA submission, for an SFA indication for LifeStent. We had anticipated this round of questions from our early assessment of the regulatory time line and included it in the assumptions underlying our previously committed… communicated expectation for Q4 approval. Edwards is finalizing their response and continues an ongoing dialogue with the FDA to facilitate PMA approval. At this point we continue to believe that approval can occur by year end. But even if it doesn't occur until later date, LifeStent is gathering sales momentum, particularly in Europe where it already has an SFA indication. So, we really see little commercial risk for 2008.

I will remind you that by year end we anticipate receiving PMA approval for our Flair AV Access stent graph and an Iliac indication for our EluminX stent. As we've highlighted before these approvals would give us one of the broadest and best position peripheral vascular stenting lines in the United States.

Let's turn to urology. Total net sales for the second quarter of 2008, were $176.4 million an increase of 8% over the second quarter 2007. This increase was 10% on an as reported basis. The United States business grew 7%. Internationally, we grew 10%. Stand alone sales of our StatLock catheter stabilization line increased 23%.

Here again, clinical acceptance continues to grow nicely. We see this as a meaningful ongoing growth opportunity for Bard, giving our strong IP position, and only about 10% unit penetration in the United States, plus a relatively untapped outside of the United States market, and finally, the addition of 24 dedicated StatLock field sales resources, 17 of which are outside of the United States.

Our basic drainage business grew 9% in the second quarter. The driver here again was our Bard XIC infection control catheter line which was up 16% in the United States. We have now had three quarters of high single digit growth in basic drainage after years of growth that was typically in the mid single digits. We attribute this to the heightened focus on preventing hospital acquired infections, including urinary tract infections, with the pending discontinuation of urinary tract infection reimbursement by CMS in October.

Our overall Continence business was up 12% in the second quarter. The new aligned sling had a very strong quarter driving growth of 35% within our surgical Sling line. Within the pelvic floor repair line, the Avaulta family of products continued to grow nicely at 35% in Q2. Second quarter growth in our overall continence business was impacted by a 6% decline in sales, of Contigen, the injectable bulking agent and Avaulta's continued cannibalization of our older flagship pelvic floor products.

Sales in your Urological specialties which were 18% at the Urology category were down 6% versus 2007. Brachytherapy, which is about half the business in this category, was down 11% as the brachy market continues to lose case volume to competitive therapies and being up against difficult comps in the prior year.

Turning to Agento I.C., as we noted on our last earnings call, the sales cycle is rather lengthy and we don't expect the revenue impact to be noticeable until late in the year. Due to the potential publication of the clinical trial results in a major peer review journal, we continue to market the device utilizing the limited clinical data that the FDA published in its press release on Agento's approval. We're being patient here. Because we're very optimistic about Agento's long term potential, especially given the possible inclusion of ventilator associated pneumonia on CMS's list of non reimbursed hospital-acquired infections.

Turning to oncology. Total net sales in this category were $163.7 million, an increase of 13% over the second quarter of 2007, 15% on an as reported basis. Geographically, net sales in the United States, which represented 74% of total oncology revenue, were up 12%. Outside of the United States, we grew at 14%. Implanted ports grew 12% for the quarter. We continue the expansion of the PowerPort line, with the late May launch of the new MRI-ISP PowerPort. This configuration was already the largest selling most popular standard port on the market. By providing full power injection capabilities in this small non-metallic platform, we expect it to generate good growth going forward.

Also, as Tim noted we closed the SHPI transaction in June. Infusion sets comprise an important component of our port line making it a nice addition that we expect will be a good growth contributor. Growth in our PICC and Midline products was 18% in the second quarter. As we discussed, in our Q2 call last year, we had about a $4 million boost in PICC sales that quarter, due to a back order release. On an advance basis, PICC sales grew in the mid-20% range right on trend in reflecting the ongoing success of the line, particularly Power PICC Solo, and our SHERLOCK Tip Locator System.

The vascular access ultrasound product line had another good quarter growing 14%. The growth driver here continues to be the Site~Rite* 6, which launched in June of last year. As the leader and innovator in this emerging market, we're pleased with the clinical impact our products are having. John DeFord will discuss some exciting new technology for pursuing in this area.

And finally, our surgical specialties business. Global net sales were flat in the second quarter at $88.9 million, up 3% on an as reported basis. Sales in the United States were down 1% for the quarter, internationally we were up 3%. Our soft tissue repair business was down 3% for the quarter. Natural tissue devices were up 16%. We have seen considerable improvement in supply in our AlloMax human tissue device and it is being well received in the market place for complex hernias.

The synthetic hernia category was down 5%. Within this category, Sepramesh is gathering momentum generating nice sequential growth this quarter. Despite the discontinuation of salute II, fixation was only down 3% due to a modest comp in the prior year and an uptick in the sales of the PermAsorb resorbable fixation device in the second quarter.

Going forward, we look to an improving soft tissue repair business in the second half of the year. We believe that the hernia repair market is right for new technology that better answers the challenge of complex hernias and addresses unmet clinical needs like post-op pain. Our development pipeline is focused on new products that build our many strengths and soft tissue repair, in order to capitalize on this opportunity. So, from our perspective we continue to see the hernia business as a good growth opportunity for Bard.

Closing the surgical category, our performance irrigation business was up 18%. As you may recall this line was down over 10% in Q1, due in part to a small back order that was resolved early in the second quarter. In addition, we're benefiting from supply challenges affecting the irrigation line of one of our competitors.

And finally, our hemostasis business which represented 6% of the surgical category in Q2, was up 1%. This concludes our product line revenue discussion. I will now turn you over to Todd Schermerhorn.

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

Thanks, John. Let's start with the income statement for the quarter. Gross profit was 60.5%. That figure includes $3.7 million associated with the salute asset disposition. So on an adjusted basis gross profit was 61.1%. Consistent with our guidance of improvement over the last years… full year gross profit of 60.7%.

New amortization of intangibles relating to transactions closed in the last 12 months totals about 40 basis points this period and that would be 60 basis points if you included amortization of inventory step up. So net of amortization and net of charges we continue to see good improvement in gross profits. At this point we would anticipate that Q3 would look fairly similar to this quarter. And then we hope to see further improvement in Q4.

SG & A were $180.8 million for the quarter, 29.3% of sales reflecting 10 basis points improvement over the prior year quarter and 20 basis points of improvement year to date. R&D expenditures total $38.2 million for the quarter up 14% over the prior year adjusted for purchased R&D and up 17% year-to-date on that same basis. So clearly we continue to be in an investment mode in product development.

Interest expense was $3 million for the second quarter, flat with the prior year. Other income expense was $32.6 million of expense for the quarter which includes $36.8 million of the asset disposition charge. So on an adjusted basis, other income and expense was $4.2 million of income down $4.6 million from the prior year. Primarily due to a reduction in interest income as a result of A, lower interest rates; and B, the significant stock buyback activity over the last year.

Tax rate recorded for the quarter was 34.5%, on an adjusted basis. That is excluding the salute charge, the rate was 29.2 point in line with our 2008 guidance. The balance sheet at June 30, shows cash and short term investments of $434.3 million versus. $414.7 at March 31. For the quarter, accounts receivable days were up 1.2 days and inventory was up 1.9 days. Both effected by currency and inventory affected by new products.

Capital expenditures total $13.6 million for the quarter, within our guidance for the year. On the liability side, total debt was $149.8 million as of June 30, with no change from March 31st. Debt to total cap at the end of the second quarter was about 7%. And total shareholder investment was $1.891 billion at June 30. We repurchased the 125,000 shares of our stock this quarter. We'll continue to be buyers of our stock as our cash balances and market conditions permit.

Moving to financial guidance, we are anticipating top line growth in double digits, once again for the third quarter and constant currency. From an earnings perspective, for those of you who fall at us plenty period of time, you know we issued our equity comp in the third quarter each year and those costs typically weigh us down by a few pennies. So, we're anticipating EPS again in the 107… $7 to $8 range for Q3 excluding items which affect comparable if any.

As is typically for we then expect the healthy sequential increase in the fourth quarter. At this point it seems likely we will outperform our full year, 14% EPS growth guidance. By a few pennies or possibly slightly more. Of course we'll talk more about that in next quarter's call.

I will now turn you over to John DeFord.

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

Well, good afternoon everyone. Let start with our atrial fibrillation activities and specifically the HD Mesh Ablation product. The biggest news is the U.S. pivotal study. We have 21 sites qualified and are poised to enroll our first patient any day. The two-armed study is designed to enroll roughly 280 patients in a two to one randomization of ablation to antiarrhythmic drugs.

And in Europe, we continue to gain experience and diligently build momentum. European commercialization efforts continue to serve as our proving ground for the refinement of our training and marketing approaches. As our clinical experiences progressed, the number of podium presentations and publications has expanded, including four presentations last month at Cardiostim and a June publication in PACE.

These reports continue to validate a significant decrease in overall procedure time and excellent short and long term effectiveness measures, including over 90% of acute success and 80% long term success which is defined as freedom from AF with follow-up now beyond six months. Our product safety record continues with no cases of pulmonary vein stenosis, chronic nerve injury or esophageal fistulas.

And turning to stents, we received concurrence in Q2 on our E-Luminexx Biliary Stent and launched the product in the U.S.. On the Iliac front, we filed our final module of the PMA for the E-Luminexx Iliac stent with the FDA in Q1, and received a few questions from FDA in late June. We're responding to those questions, and anticipate gaining this vascular indication in Q4, with launch immediately following the approval. And as John discussed, the FDA asks additional questions on the PMA submission for the life stent. Edwards continues to work with the FDA to gain approval and once approved, Edwards will transfer ownership of the PMA and then will start a post-approval clinical study this main continuum.

On the carotid front, as we presented previously, we completed enrollment late last year, Q4 for our pivotal study occurring in the U.S. and continue to follow our patients. However, this product opportunity has been under internal review over the last few months, in light of the changes in growth of the U.S. carotid stent market and the FDA requirement for a significant post market study. These changes have definitely altered the economic viability of the opportunity in the U.S. market. And therefore, we have made the decision to go ahead and complete the study, but we don't currently expect to launch the product in the U.S.. This decision will avoid the significant expense of a large post-market study, but preserves the opportunity to re-enter the space as changes in market dynamics warrant.

In stent grafts, as discussed last quarter, we completed enrollment, follow-up and submitted our PMA supplement to FDA in Q1 for the Flair AV Access Stent Graft, including an improved delivery system. We anticipate approval and launch of this stent graft for the treatment of stenosis in AV access grafts in the second half of this year. And additionally, we're on track for the second half '09 launch in Europe of our next generation self expanding ePTFE covered stent product and plan to begin a U.S. clinical at about the same time. This new product is lower in profile, highly flexible and fracture resistant which are key areas where clinicians are looking for improvement in stent graft products today.

And in PTA, we continue to advance on schedule and anticipate the launch of extensions to our Conquest line of high pressure balloon catheters in the back half of the year. Improvements to our Atlas line of large diameter catheters are progressing well and are anticipated for launch in the first half of '09. And development work in our vena cava filter line is also advancing. As discussed last quarter, we submitted our 510(k) for our G2 Express filter designed for retrieval with either a recovery retrieval cone or a vascular snare and anticipate concurrence and launch before the end of the year.

Turning to urology, we're building on the successful Align sling introduction with excellent progress toward the launch of our new less invasive sling, again anticipated before the end of the year. This new sling will provide fixation with a new tissue anchor and utilize a low profile MESH designed to be placed through a single very small anterior vaginal incision that will eliminate the deep needle passes required for traditional sling procedures.

And as we mentioned last quarter, we continue to introduce multiple new StatLock devices. This year we're on track to launch at least 37 new product codes across the peripheral IV and Foley catheter lines. We continue to place emphasis particularly on products developed for the international markets.

Moving to our oncology business, our very proliferate R&D organization continues to expand upon our market leading position in valve technology, power injection and tip location. As an example, we're expanding the Groshong biotechnology to our full line of PowerPorts over the remainder of the year, thereby creating the first power injectable ports that don't require monthly flush it -- flushing when not in use. And as John noted in Q2, we launched the intermediate sized MRI PowerPort, and late this quarter, we expect to launch the PowerPort Duo. This will be a duo looming PowerPort for use in patients that require simultaneous injection of incompatible drugs.

And also in vascular access, in the ultrasound area, we have acquired some additional new enabling technology as well as augmenting our own to develop a new Site~Rite platform that has the potential to significantly advance insertion, tracking and confirmation of bed side PICC placement. With the potential of this new technology, we have focused our resources on accelerating internal development in preparation for the commencement of a clinical study next year to evaluate this new concept. As a result of this change in focus, we've adjusted the development time line of the Site~Rite* 7 spectrum to accommodate these technologies and now plan these launches in the second half of '09. And as we progress toward the clinical study in the coming quarter we will provide you some more details.

And moving to our surgical business we're focusing our efforts in several important areas. First, we're working to integrate the Sepra coating technology to support internal manufacture of the Sepramesh IP composite and later expand this technology to a host of our other proprietary hernia products.. We're also completing development efforts surrounding a new family of proprietary resorbable ring ventral hernia products to replace Composix Kugel.

We anticipate launching the first product in this family in Q4. And our customer feedbacks on the benefits of self expanding ventral products continues to validate these efforts. In a recent publication Dr. David Ianetti a thought leader in this field published a multi center study of 455 ventral hernia cases in the January 2008 journal of the American college of surgeons. This study demonstrated a short hospital stay, moderate complication rate, low infection rate and low recurrence, when using self expanding Compsix MESH device. We're also planning to study our new device in a post launch clinical trial beginning next year.

And in our biological products offering, we remain on schedule to launch the new CollaMendproduct around the end of the year. We're also, working towards the launch of a third generation fixation product that we plan to sell in permanent and resorbable versions. This device has the potential to provide significant device construct and delivery enhancements over existing products on the market. We anticipate launching the resorbable version around the end of Q1 of next year.

Additionally, though I don't want to give too many specifics right now we're developing multiple new MESH products and configurations that utilize our growing biomaterials and coating technology expertise combined with our core technologies in synthetic materials.

And now finally moving to our obesity therapy project we began patient enrollment in Q2 for trim. Our study of the RS2 next generation endoscopic Suturing device in the primary treatment of obesity. We have already enrolled seven patients in this 20 patient feasibility study. And though we hope to keep a low profile the Boston Globe highlighted the RS2 in an article on obesity therapy just a couple weeks ago.

Now I wish to caution you that we're very early in the product development process. With RS2 we're developing a new device. We're pioneering a new procedure and breaking ground in clinical study design. Trim incorporates two clinical sites and 20 patients in its feasibility portion with 6 month follow-up. So, we expect enrollment to conclude around Q4 and follow-up through Q2 of next year. And then we plan to start a pivotal study for primary weight loss toward the end of next year. As we discussed in September, this timetable has us anticipating launch in 2010. So thanks for your attention. Let me now turn you back to Tim Ring.

Timothy M. Ring - Chairman and Chief Executive Officer

Thanks John. That concludes the formal part of the presentation. Let me now turn the call back to the moderator to facilitate the Q&A.

Question and Answer

Operator

And ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions]. And we have a question from Rick Wise with Leerink Swann. Please go ahead.

Rick Wise - Leerink Swann

Good afternoon. Can you hear me.

Timothy M. Ring - Chairman and Chief Executive Officer

Hi, Rick.

Rick Wise - Leerink Swann

Thanks a lot. First question, just struck to me in looking at your U.S… OUS split and looking back over the last five or six quarters that we're seeing, if I am looking at it correctly a steady acceleration sort of mid-single digits, in many of the '07 quarters. Now 11% growth in the first quarter. 13% OUS if I see it correctly organically in the second quarter. Maybe just give us some perspective on the drivers. This is a weak dollar, is this… you're expanding distribution and sort of where do we go from here?

Timothy M. Ring - Chairman and Chief Executive Officer

Sure. I think there is a number of issues going on. I would say that the issue on the top of the list would be that our success with the LifeStent in Europe, where we do have an SFA indication for the product, so we're able to detail that product and talk about the significant clinical results as shown in the original clinical trial of LifeStent. I think that would be Number 1 on the hit parade list. Number 2 we're investing in sales forces around the world. We will add a 100 territories before the end of the year. We've completed 75% of those territories. The majority of those are outside of the United States. While early, I think that's also having an impact on us as we move downstream. And I think across the board we're seeing pretty good solid growth in the majority of our major business segments in Europe.

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

And Rick, we obviously put that in constant currency. So, there is no affect of the dollar there necessarily.

Rick Wise - Leerink Swann

That's what I assumed Todd. But again, it maybe… it is not unreasonable to think that it can continue to grow in the low teens and maybe to follow-up, Tim, you said something in your opening remarks about you believe you can build on your 10% growth base. I would like you to just elaborate on that if you would and is this growing international opportunity or growth part of that confidence?

Timothy M. Ring - Chairman and Chief Executive Officer

Well, let me -- let me back up and answer more retrospectively. We have always for the last several years had a goal, an internal goal to grow our international businesses faster than the U.S. businesses. The problem is we just haven't. So, we -- we've made a lot of management changes, we have talked about that before in several countries trying to get more sales focused individuals. We have -- we went through an expansion last year in Asia.

So the impact of these sales people hitting their stride after their learning curve getting relationships in place, in training on the products is certainly going to help. We took three small markets direct from distributor businesses, towards the beginning of this year. That's not a big significant number but bodes well for the future. So, and couple of our bigger businesses, oncology if you go through the results John gave, I think that splits U.S. to international. Although, it's been improving with the international piece growing, it is now 75-25.

Still a lot of runway left in that business and some of the new products. StatLock being another one. So there is a lot of potential -- internationally and in the U.S. for us. And the other part of the second half of the year is we had a kind of a second half heavier with new product launches than we had in the first half. So it is a combination of all those things.

Rick Wise - Leerink Swann

And just, I will sneak one last one in. It -- I hear you -- when you're talking about the gradual roll-out and the long timeframe for building the Agento. Can you quantify second quarter Agento sales, if you would like and maybe help us think about the second half. We're assuming you can turn in something in the low single digit millions? Is that the right way to think about it? Thanks a lot.

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

It is not material at this point in time. We have had a number of conversions of hospitals but that is starting to build in. The sales process is relatively -- a relatively long one on Agento. I would think we will see in the low single digits before the end of the year. That's our expectation.

Rick Wise - Leerink Swann

Thank you, so much.

Operator

And we have a question from Matthew Dodds with Citigroup. Please go ahead.

Matthew Dodds - Citigroup

Hi. Thank you. Just a couple of questions. First, on the hernia synthetics, the down 5% organic. That was a little more than last quarter. And I am just wondering if you look at the trend, is that still mostly occurring in Ventral or are you also seeing declines in the Inguinal space? That is question one. And then second, when we look at the two new indications for your peripheral stents the Iliac with E-Luminexxand the SFA life stent, can you compare and contrast through the differences in the trials. Is the Iliac for E-Luminexxas big a hurdle as SFA for life stent, when we look at these potential approvals coming in the next few months.

Timothy M. Ring - Chairman and Chief Executive Officer

All right. John DeFord, why don't you take the second part first.

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

Okay. All right. So when we talk about the Iliac, so the E-Luminexx for Iliac versus the life stent for SFA, certainly the trials are very different. The SFA study with life stent is ground-breaking. It's the first of its kind. So naturally, you would expect FDA to, maybe, have a little more scrutiny and a little more question around that, just because it's a brand new indication and there is no other product -- there is no product currently approved in the U.S..

On the Iliac side, obviously the E-Luminexx is not the first Iliac stent product that will be entering the market. There is a number of products out there. So the study design for Iliac is very straightforward. Although, it was abasian statistic and abasian analysis study, still something very common to the FDA. So I think when you look at those two, you definitely would say that the life stent would be a little more complex. The study was larger, and looked a lot of other aspects than you would see in the Iliac.

Matthew Dodds - Citigroup

Hernia?

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

And as we look at the hernia business, the -- we were just about flat in ventral for the quarter. We saw a little bit of a decline in our groin hernia repair. Quite frankly, we had a little bit tougher comp in groin hernia in the quarter than what we had in maybe some of the other businesses. But that is the bigger -- that was the bigger decrease in that line.

John Weiland - President and Chief Operating Officer

Now, Matt, Sepramesh is reported in ventral as well. So we're flat in ventral but that has got the new Sepramesh in it.

Matthew Dodds - Citigroup

All right. Thanks John, John, and Todd.

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

You're welcome, Matt.

Operator

And next we have a question from Joanne Wuensch with BMO Capital Markets. Please go ahead.

Joanne Wuensch - BMO Capital Markets

Thank you very much. If I heard you right, you're not going to have your next generation fixation products for hernia repair on the market until the beginning of '09. I think you said by the end of the first quarter of '09.

John Weiland - President and Chief Operating Officer

That's right, that's correct.

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

Yes.

Joanne Wuensch - BMO Capital Markets

And what -- when I think about this and I look at your numbers and I look at some of your competitors' numbers, it's pretty clear that you're losing some hernia repair fixation sales to the competition. How is this product different and what is the game plan to get those sales back?

John Weiland - President and Chief Operating Officer

You're talking specifically about fixation?

Joanne Wuensch - BMO Capital Markets

Yes.

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

Did you want to know the difference in the products.

John Weiland - President and Chief Operating Officer

I will start off, I will let -- ask John to chime in. I think that by far, in the resorbable market, when our first entry -- new entry will be a new resorbable product. The key to that is being -- is really the holding power, and the penetration power. And the configuration that engineering-wise, that we developed in this new product, we believe, will give us the most robust combination of the both. Really meeting what the clinician's key needs are in this segment. John, will you look that one?

Joanne Wuensch - BMO Capital Markets

Will that make the share back that you lost.

John Weiland - President and Chief Operating Officer

We will certainly be out there competing vigorously, that's for sure.

Joanne Wuensch - BMO Capital Markets

Okay. I understand that you're being patient with the Agento publication, but what's holding it up?

Timothy M. Ring - Chairman and Chief Executive Officer

Well, the nature of these publications is that a commercial firm like ourselves, we are blinded to what is going on with these publications. I mean typically, they go through their process of evaluating the manuscript, making decision whether to publish or not. And we don't know until they finally make the decision and say, here is when it's going to be published. So, they keep that blind by design. I think it's the right thing to do in terms of keeping a commercial nature out of a scientific publication. And when're they are finished their review on it and make their decision, we'll know.

John Weiland - President and Chief Operating Officer

And I think the other point just to throw in there, Joanne, is that by the nature of these types of journals, we're really not at liberty to talk about what's going on, because it has to remain confidential. So, we can't really -- there is just no ability to provide any detail in what's happening.

Joanne Wuensch - BMO Capital Markets

Okay. At the end of last year, you pulled back on your gross margins for the first couple of quarters of '07, and then we went back up, stepped up to the 61% level. If I am looking forward, are we heading towards 62% gross margins over time?

Timothy M. Ring - Chairman and Chief Executive Officer

Well, I'd certainly hope so, Joanne. It's just a question of the timeframe. I think we have said we think probably Q3 will be kind of similar to this, and -- but Q4, it looks like it might step up a little bit right now.

Joanne Wuensch - BMO Capital Markets

Okay. Thank you very much.

Timothy M. Ring - Chairman and Chief Executive Officer

Okay.

Operator

We have a question from Mimi Pham with JMP Securities. Please go ahead.

Mimi Pham - JMP Securities

Hi and good afternoon.

Timothy M. Ring - Chairman and Chief Executive Officer

Hi, Mimi.

John Weiland - President and Chief Operating Officer

Hi, Mimi.

Mimi Pham - JMP Securities

You reiterated your minimum 14% EPS growth for the full year. Can you clarify if you're sticking to your minimum 10% for the topline growth constant currency for full year?

Timothy M. Ring - Chairman and Chief Executive Officer

We are.

Mimi Pham - JMP Securities

Okay. And then for urology, the first half grew somewhere between 7 to 8% versus your 8% or 10% guidance. But it seems like Bard IX Sling PowerPort line is going on -- takes on doing well. I mean were you expecting more from any Agento or any other products from the first half of this year to get you closer to that top end of the range you gave for growth?

Timothy M. Ring - Chairman and Chief Executive Officer

No, we had been gauging Agento quite frankly, primarily based on when the publication would happen and how quickly we would ramp that up. I think if there was any surprise in it, it was probably brachytherapy was a little weaker than we had expected, and I think that was due primarily to losing some surgeries to other modalities during the first half of the year. And I'd say, also, a pretty tough comp that we had in the second quarter on brachy, which is our toughest comp by far for the whole year.

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

You know, Mimi, we guided about 8 to 10, and we're 7.5 for the first half of the year. So, it's a little hard for us to get any closer than that. I mean it's not as easy as it looks.

Mimi Pham - JMP Securities

Okay. And then just your comments about Agento you made that, is that also something about that's not being reimbursed by CMS also and… in addition to UTI?

Timothy M. Ring - Chairman and Chief Executive Officer

CMS has published the fact that they would expect not to compensate hospitals on hospital-acquired ventilator-associated pneumonia. Now, they have published that -- and they will make a ruling probably sometime in the month of August whether it will be included in October's cuts or it will be at a later date than the October, October '08 cuts. So all we know is that it has been proposed to not provide reimbursement. The exact date when that will go into effect still is a little bit up for grabs right now.

Mimi Pham - JMP Securities

Okay. So, that's separate from the timeline for the UTIs?

Timothy M. Ring - Chairman and Chief Executive Officer

That's exactly correct. They published it to be October '08, but it's not definite, because there is still -- they are just finishing a comment period where individual hospitals and groups can comment on that proposal.

Mimi Pham - JMP Securities

Okay. And then just last on Agento, do you get a sense if any change to the pricing could help the uptick there?

Timothy M. Ring - Chairman and Chief Executive Officer

No, we like where we're at. The breakeven, if you consider that each case of VAP costs the hospital a minimum of $16,500, based on the 7.5% incidence rate that we saw in the clinical trial, the breakeven point is $450 per unit for a hospital. So, we like where we're at pricing-wise, and we're looking forward to the publication.

Mimi Pham - JMP Securities

Okay. Thank you.

Operator

And our next question is from Taylor Harris with JPMorgan. Please go ahead.

Taylor Harris - JPMorgan

Thanks a lot. On LifeStent, just wondering is there any update past when Edwards made its most recent disclosure on the back and forth with the FDA?

Timothy M. Ring - Chairman and Chief Executive Officer

No, there has been no update since then.

Taylor Harris - JPMorgan

Okay. So, really the state of questions from the FDA on LifeStent is still just preclinical bench testing, not clinical in nature?

John Weiland - President and Chief Operating Officer

Yeah, I think you could characterize that the questions that FDA has asked are more technical bench testing in nature, not focused on the clinical at all.

Taylor Harris - JPMorgan

Okay. So, is there a theme at all to the questions or the timeline the FDA has with LifeStent and E.LUMINEXX just broadly in the peripheral stent space are these are two separate sets of issues?

John Weiland - President and Chief Operating Officer

Yeah, they are very separate issues. First off, the E.LUMINEXX, again, it's a Iliac stent and pretty straight forward. As far as history with FDA and the FDA's understanding, the LifeStent, again, breaking some new ground there. And again, I just want to reiterate that Edwards is working very closely on the life stent PMA -- it really is their responsibility. We don't have a lot of input into that process. And so, we know a little bit but just as we said, the questions seem to be focused on the technical side and they are working with FDA to resolve it.

Taylor Harris - JPMorgan

Okay, great. And just so we're all clear, right now in the U.S., you're essentially not marketing your peripheral stent line. As I understand. I want to make sure that's right. Because I would assume that that explains why the market and maybe your business, if we exclude life stent isn't really -- doesn't seem to be growing now. Is that is --?

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

Well, the life stent only has a biliary indication in the United States and is only marketed under a biliary indication. There is -- there are no marketing efforts in the United States for the vascular SFA indication.

Taylor Harris - JPMorgan

And do you think broadly across the, market the peripheral stent market is just in a period of time where it can't grow now until companies such as you are able to get indications out there?

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

I think the key is indications in the United States. That's the only way that you can really develop a product line in terms of being able to sell to clinicians on the benefits that it has in that specific area of indication.

Taylor Harris - JPMorgan

Okay, great. Todd, one last question for you. Can you quantify at all for us your exposure to raw material inputs on the cost of goods line?

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

Well, it is extremely difficult for us, Taylor. I think oil-based resins are an issue for us, have been kind of a head wind for us now for three or four years. We have tried to calculate it. It's a thousand different raw materials in our case. What we think that -- put some constraints around it somewhere between 2 and $300,000 a year per barrel of oil. That's what it has cost us over time. Now, it comes per dollar, increase in oil, yes. Sorry.

Now those increases, those changes come in at obviously with a thousand different raw materials they come in at all different times. So it has become very difficult to track. We do think that it has been meaningful, but can't give you a number, quarter-to-quarter as to what that's costing.

Taylor Harris - JPMorgan

Okay. And our medical grade resins or that category of input really the primary one that would affect you or are there others.

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

Well, resins and plastic components and packaging components that are made out of those resins.

Taylor Harris - JPMorgan

Yes, sure, okay. So have you -- with the -- just the increase in oil over the last year, would you say that's already started to flow through the P&L for the most part, or is that still on the come?

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

Well, as I said it is hard to say. Certainly some of it is in the P&L right now but it's just -- because of the number of products and suppliers, Taylor. We're not a full product company. So it is next to impossible to do those calculations. So I would argue that a fair amount of that is in, but -- trying to give you any clearer guidance on that, I would be misleading you.

Taylor Harris - JPMorgan

Okay, great, thank you very much.

Operator

And we have a question from Kristen Stewart with Credit Suisse. Please go ahead.

Kristen Stewart - Credit Suisse

Hi. I was just wondering if you could address the other parts line. It just came in a little bit higher than what I was looking for. What was kind of in there, driving --?

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

Yes. That's a good question. It's a good pick up, Kristen. We had a some wound drainage sales. We had a competitor, that was having supply issues and so, we had a little pop-up in wound drainage. But -- that's a good catch.

Kristen Stewart - Credit Suisse

That's kind of just transitory, I guess in --?

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

Yeah not really a focus and probably not something that, maybe it will get a little more in the third quarter but not something we think that will last over the long run.

Kristen Stewart - Credit Suisse

Okay and then I guess secondly any updates on the FDA issues, the Davol warning letter or the 43 observation in Puerto Rico?

Timothy M. Ring - Chairman and Chief Executive Officer

The only update as we continue to work through the issues and communicating with the FDA, we have got teams laid out to address each of the various issues. I think we're making good progress and in doing that both up at Davol and in Puerto Rico. John?

John Weiland - President and Chief Operating Officer

I want to add that we notified the agency at least as far as the Davol facility is concerned that we are… we have completed our remedial actions we're ready for an inspection. That will probably happen before the end of the year and I wouldn't be a bit surprised if we also reinspected down at our facility in Puerto Rico before the end of the year but we have been working diligently on both fronts to improve our performance there.

Kristen Stewart - Credit Suisse

And then, would you guys be willing to quantify I guess what the impact of acquisition activities was in the quarter with respect to your underlying growth rate near a 10% kind of constant currency but it looks like maybe excluding acquisitions it was probably closer to 8, that is fair?

Timothy M. Ring - Chairman and Chief Executive Officer

I'll give you the same answer I gave you last quarter, Kristen.

Kristen Stewart - Credit Suisse

Keep trying.

Timothy M. Ring - Chairman and Chief Executive Officer

These are competitive spaces. We're careful not to provide road maps.

Kristen Stewart - Credit Suisse

Okay.

Timothy M. Ring - Chairman and Chief Executive Officer

To our competitors relative to those issues. So, we would prefer not to get into that if you don't mind.

Kristen Stewart - Credit Suisse

All right no problem. Thanks a lot.

Timothy M. Ring - Chairman and Chief Executive Officer

Okay.

Operator

And our next question is from Bob Hopkins with Banc of America. Please go ahead.

Robert Hopkins - Banc of America

Thank you. John, I was just curious, back to LifeStent. How often do you get updates from Edwards on the progress of the PMA. Is that a weekly or monthly or quarterly, could you just give us a sense of at least on that part of the process the PMA, how frequently they are talking to you?

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

Well, Bob, we've got ongoing interaction with them. I mean obviously we own the biliary product and so… and there are manufacturer for that. So. we're in very close communication with them.

Timothy M. Ring - Chairman and Chief Executive Officer

I think what John not to put words in your mouth. We don't control that process but we have plenty of input into it, Bob, over this time period.

Robert Hopkins - Banc of America

Okay so it just points… you guys don't think that there is a possibility at this point that you might need more data whether it is bench shop or human or you don't think that is a likelihood at this point.

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

As Edwards said and we reiterate that, the questions that FDA has asked are really on the bench and technical side. So on the clinical side, I mean, you've seen the results. We think that the results will support approval. So, you know that's not where we have a concern.

Robert Hopkins - Banc of America

Okay. And then on the hernia side, will the Kugel… the next juniors Kugel will be out early in the fourth quarter or early enough to have an impact on the fourth quarter or is that later in the fourth quarter and therefore more of an '09 impact?

John Weiland - President and Chief Operating Officer

We think we will have some selling time in the fourth quarter, once we launch that. So it will be early in the fourth quarter in our minds.

Robert Hopkins - Banc of America

Okay. And then for Tim, obviously you have had maybe 18 months of turmoil in hernia. And obviously we can see the numbers that are being reported here but on more of a qualitative sense would you consider the hernia franchise stable at this point in terms of the sales force and management and how you think about the business?

Timothy M. Ring - Chairman and Chief Executive Officer

Well, our management… from the management point of view, we did make a change, earlier in the year, we have upgraded some of the technical talent there. All-in-all I think we've done a pretty good job of keeping the sales force in tact there. I still view and I… we still view, especially as you get into biologics.

With most of these products being 510(k), a lot of data you don't get until after the product is launched. So, we like our pipeline. We like the various categories where we have ongoing product activity. And, they are hitting -- at least their schedules it looks to me like they are doing what they told us they were going to do earlier in this year which was -- which is an improvement. So I'm optimistic about -- about them -- ramping this thing back up to growth again.

Robert Hopkins - Banc of America

And then can you give us an update on, what is the time line for having a more competitive complex repair product in the market place?

John Weiland - President and Chief Operating Officer

Well, we have a lot of different products in the pipeline. We talked about additional CollaMend kind of product coming out in the fourth quarter and then we have a lot other things in the pipeline. So, I think that -- I think there is a change going on in the technology space. Tim mentioned that we made an additional acquisition over the quarter where we have brought in some additional material, expertise and technology. So, we continue to grow in that space and see that as an important long-term growth driver for us. So what you're seeing us -- on the market with today and launching in the near future are really the tip of the iceberg of the pipeline.

Timothy M. Ring - Chairman and Chief Executive Officer

And I think that's the key, Bob. I mean, the key for us is going to be consistent launches of new products that we have in the pipeline. We like what -- we like what we have in the pipeline. Our -- our first launch of significant consequence is going to be on the resorbable ring for ventrals and then we will go to the biologics from there.

Robert Hopkins - Banc of America

And we're done with the recalls?

Timothy M. Ring - Chairman and Chief Executive Officer

Certainly hope so. From your lips to God's ears, I mean, we certainly don't plan on any of those, that's for sure.

Robert Hopkins - Banc of America

Thanks, guys.

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

Thanks, Bob.

Operator

[Operator Instructions] Our next question is from Jayson Bedford with Raymond James. Please go ahead.

Unidentified Analyst

Hi, this is Stephanie, rolling in for Jason. We just had a question about the life stent acquisition. If you felt that that is cannibalizing existing peripheral stent sales? Or if that's opening up new accounts.

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

I think the answer is opening new accounts. I mean, our focus and we can really only talk tangibly about what we're doing in Europe because we're not detailing that product for vascular indication in the United States. But we're squarely out focused on taking market share, and with the SFA indication in Europe. We think clinically it's the best product in the market. We're detailing what we believe are the features and benefits and the clinical positives associated with that product in Europe and it is squarely focused on taking market share.

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

Yeah, I would add, our Luminex line is actually doing better in Europe where we do have the indication than it's doing in the United States. So we're clearly not cannibalizing the Luminex business in Europe.

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

Well, and just to bring up, we just launched this last quarter the E-Luminexx here in the U.S.. Before that we had an older generation product and that is just for biliary indication.

Unidentified Analyst

Okay, yes. And then as a second question. Is there anything left to integrate with the SHPI acquisition? Or could you give us an update onto the progress of that.

Timothy M. Ring - Chairman and Chief Executive Officer

No, in fact, we're fully integrated on the SHPI acquisition at this point in time. We had our teams, we had plenty of time to prepare for it. We had our integration manager who is one of our most experienced individuals in the field heading it up for us and I would -- and I can say very happily we have completed that integration.

Unidentified Analyst

Okay, that's all, thank you.

Operator

At this time, we have a follow-up question from Kristen Stewart with Credit Suisse. Please go ahead.

Kristen Stewart - Credit Suisse

Hi, Tom. I was just wondering if there is any way to quantify what the FX impact might have been. I know you have some hedging, but I am not sure how that blows through the P&L that's recorded within cost of goods sold or I think it's in other income maybe if you just kind of walk through that first and if it does hit that EPS line.

Timothy M. Ring - Chairman and Chief Executive Officer

Not too much passes through, Kristen. It is a little bit of health now. Let me just give you kind of the metrics around it. We have about 500 million or so in Euro basket sort of dollar equivalent sales. Between 60% and 65% of that is naturally hedged. That is our commercial infrastructure and our European plants. And then we hedge about 50% of that remainder. So at the end of the day there is only 10% or 15% of that pool that is kind of left to impact the P&L.

Kristen Stewart - Credit Suisse

Very helpful, thank you.

Timothy M. Ring - Chairman and Chief Executive Officer

You're welcome.

Operator

There are no additional questions. This includes our Q&A session. I would now like to turn the call back over to Bard's management for closing or additional comments.

John Weiland - President and Chief Operating Officer

Okay, thanks.

Timothy M. Ring - Chairman and Chief Executive Officer

I would like to thank all of you for attending this evening. And again I would like to thank Bard employee's world wide for another strong quarter. And we look forward to speaking to all of you at the end of Q3. Thanks.

Operator

And ladies and gentlemen that does conclude our conference call for this afternoon. Thank you for your participation. You may now disconnect.

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Source: C.R. Bard, Inc. Q2 2008 Earnings Call Transcript
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