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CR Bard (NYSE:BCR)

Q3 2012 Earnings Call

October 23, 2012 5:00 pm ET

Executives

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

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

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

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

Todd W. Garner - Vice President of Investor Relations

Analysts

David H. Roman - Goldman Sachs Group Inc., Research Division

Jonathan Demchick - Morgan Stanley, Research Division

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

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

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Anthony Petrone - Jefferies & Company, Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

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

Robert M. Goldman - CL King & Associates, Inc., Research Division

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to C. R. Bard Incorporated Third Quarter 2012 Earnings Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded and will be available for future on-demand replay through the Bard website.

Today's presentation will be hosted by Timothy M. Ring, Chairman and Chief Executive Officer; along with John H. Weiland, President and Chief Operating Officer; Christopher S. Holland, Senior Vice President and Chief Financial Officer; and John A. DeFord, Senior Vice President, Science, Technology and Clinical Affairs. Also in attendance today is Todd W. Garner, Vice President, Investor Relations.

Today, Bard's management will discuss some forward-looking statements, the accuracy of which are necessarily subject to risks and uncertainties. Please refer to the cautionary statement regarding forward-looking information in Bard's June 30, 2012, Form 10-Q and the information under the caption Risk Factors in Bard's 2011 10-K, including disclosures of the factors that could cause actual results to differ materially from those expressed or implied.

During the call, references will be made to certain non-GAAP measures, which management believes provide an additional and meaningful assessment of the core operating performance of the company and its individual product franchises. Reconciliations of 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 October 23, 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.

Timothy M. Ring

Thank you, Trish. Good afternoon, everybody. I'd like to welcome you to Bard's third 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 25 minutes or so. The agenda today will go as follows: I'll start with an overview of the results for the third quarter; John Weiland, our President and COO, will review our third quarter product line revenue; Chris Holland, our senior VP and CFO, will then review the third quarter income statement, balance sheet, as well as our expectations for Q4; and then John DeFord, our senior VP, Science, Technology and Clinical Affairs, will give you an update on our product development pipeline and then, finally, we'll close with Q&A.

Third quarter 2012 net sales totaled $722.9 million, that's up 1% over Q3 last year on an as-reported basis, and up 3% on a constant currency basis. The impact of currencies for the quarter versus Q3 of last year was unfavorable by about 230 basis points. Net income for the quarter was $129.3 million, and diluted earnings per share were $1.50. Excluding items that affected the comparability of results between periods, which Chris will discuss later, Q3 net income and diluted EPS were $141.4 million and $1.64, down 2% and up 1%, respectively.

Looking at the revenue growth geographically compared to Q3 of last year, third quarter revenue net sales in the U.S. were soft, declining 1%. In contrast, internationally, we grew 11% on a constant currency basis this quarter, with Europe growing 5%, Japan growing 15%, both on a constant currency basis. Our other international businesses grew 16% in constant currency, driven by 34% growth in our emerging markets which now, by the way, represent 6% of our total revenue, up from 2% just 4 years ago.

As you can see, our significant investments in the faster growing markets are producing strong returns as our international businesses grew double digits in aggregate this quarter, and now represent about 1/3 of our overall sales mix. We are focused on driving revenue growth and expect to continue to shift the mix of our portfolio to both faster growing geographic and product markets. We continue to seek product and platform opportunities through internal development and external acquisitions that will improve our growth profile over time. To that end, we're pleased to announce today the acquisition of Neomend, Inc., a leading developer of a proprietary absorbable hydrogel technology, with applications in surgical sealant and anti-adhesion products. Neomend currently markets the only FDA-approved product available for intraoperative sealing of air leaks following lung resection and has a robust pipeline of potential future clinical indications that are designed to reduce costly postoperative complications across a variety of surgical specialties. This product will fit nicely within our surgical business, and we expect to leverage our global infrastructure to drive synergies and grow this exciting platform over the long term. The initial revenue impact will be immaterial to our total sales, and we expect that the acquisition will be about $0.05 dilutive to our Q4 2012 EPS and up to $0.15 dilutive in 2013 and be accretive thereafter.

Looking at the contributions 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 Q3. Now for an update on the Gore litigation. The case is advancing on 2 fronts, as Gore filed its Petition for Cert with the U.S. Supreme Court on the infringement issue only, on October 12, and we have a scheduling conference with the District Court judge on the willfulness issue in mid-November. We expect that over the coming months, we should be able to provide some additional clarity related to the timing of the resolution of the case.

Before I turn the call over to John Weiland, we have an announcement I'm guessing that many of you will be happy about as you schedule your end of year plans. As you know, for the last several years, we've had our analyst meeting in late December, right before and occasionally conflicting with the holiday season. It seems that we're often the last meeting on the calendar before analysts and investors can get to their more important plans. We've decided to change this approach. Going forward, we will move our meeting to the middle of the year. So our next analyst day and product fair will be in June 2013. In connection with that change, we will now provide annual guidance for the following year on our Q4 Results Conference Call, which is consistent with the majority of others in our sector. Now let me turn you over to John Weiland for a review of our product line revenue.

John H. Weiland

Good afternoon, everyone, and 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 otherwise noted.

So let's begin with vascular. Growth in this category was 1% for the quarter. Total net sales were $202.5 million, down 3% over last year on an as-reported basis. Our U.S. business was down 5% for the quarter while internationally, we grew 11%. Our electrophysiology sales were down 4% for the quarter, with EP Lab systems down 8% and our disposable EP product lines were down 3%. Sales in our surgical graft category were down 6% in third quarter, within the range of recent experience. Our endovascular business increased 3% for the third quarter. Within endovascular, our biopsy products declined 1% this quarter, compared to Q3 of last year. As we said last quarter, the sales trajectory here has leveled off recently, with noticeable softness in the United States.

Sales in our peripheral PTA line increased 7%. In the third quarter, we launched the new CROSSER catheter for the treatment of chronic total occlusions, and late last month began the rollout of our 300-millimeter length ULTRAVERSE balloons. Looking forward, I'll remind you that we anniversary-ed the ClearStream acquisition this month, so these comps will get tougher in the fourth quarter.

Sales in our vena cava filter line were down 4% in Q3. Our stent business grew 5% in the third quarter, as the competitor with the quality issue in the first half of the year came back on the market at the beginning of the third quarter.

Let's now go to urology. Total net sales were $188.1 million, up 5% versus Q3 of last year on a constant currency basis, and up 3% on an as-reported basis. The United States business grew 3% while internationally, we grew 9%. Our new targeted temperature management products again accounted for about 600 basis points of the global growth for the total category.

Our basic drainage business was up 1% globally in Q3 and flat in the United States, which is consistent with the recent experience here. Our I.C. Foley business was flat globally and down 4% in the United States, also consistent with recent trends. Our incontinence business was flat in the third quarter after 10 straight quarters of decline. Our fecal management products grew double digits again, which helped partly offset continuing declines in our women's health products.

Sales in urological specialties were down 5% in the third quarter, as the largest product line in the category, our brachytherapy business, was down 14%. As you may know, the United States Preventive Services Task Force has recently recommended against PSA screenings. While many urologists and prostate cancer specialists disagree with this recommendation, it has led to fewer screenings, which leads to fewer treatments.

And finally, in this category, stand-alone sales of our STATLOCK catheter stabilization line, which represents about 15% of the total urology category, decreased 4% in the third quarter.

Let's now go to oncology. Total net sales in this category were $203.9 million, an increase of 4% in constant currency and 3% over Q3 last year on an as-reported basis. Geographically, net sales in the United States were up 1%. Internationally, sales were up 12%.

Our port business increased 2% over the third quarter of last year. Our PICC revenue was up 5% in the third quarter, impacted by the broad softness in volume we saw in the United States this quarter. Our Sherlock 3CG sales conversion rates continue at an exceptional level, and we're still in the early innings here, but we don't see anything slowing our progress.

In the third quarter, we launched the POWERGLIDE midline catheter. POWERGLIDE is a platform designed to address several of the complications associated with traditional PID catheters, particularly in difficult-to-access patients. This device incorporates an integrated safety needle and tethered guide wire system that can simplify placement and support a catheter dwell time of up to 29 days, all while retaining the basic technique of traditional, peripheral IV placement.

Our vascular access ultrasound product line was up 3% this quarter. In Q3, we began the launch of 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, without the application of ultrasound gel. And to close out this category, our dialysis access product line was up 3% this quarter.

Let's conclude our discussions this afternoon with our surgical specialties business. Total net sales in this category were $107.7 million, up 2% on a constant currency basis, and flat on an as-reported basis. U.S. sales were down 2% and international sales grew 13% this quarter. Our soft tissue repair business grew 2% in Q3, within the range of recent results. In ventral hernia repair, we launched, at the American College of Surgeons, several new sizes of the lightweight resorbable barrier, VENTRALIGHT ST product, available with or without the integrated ECHO PS laparoscopic mesh positioning system. We anticipate launching further extensions to these products later this quarter and into next year.

In biologics, the level sales trajectory we talked about for the last couple of quarters in our natural tissue products has continued, showing a decline of 1% this quarter when compared to the third quarter of 2011. Our hernia fixation business declined 19% this quarter, consistent with recent experience. In closing out the surgical category, in Q3, our performance irrigation business was down 1% and our hemostasis business grew 7%, compared to the prior year.

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

Christopher S. Holland

Thanks, John. Let's start with the items that affect the comparability of our results between periods. In Q3, we had acquisition-related items of about $4.5 million, and we also took a charge for an asset impairment of approximately $13.2 million, related to a non-focus product line. The P&L impact for these items is detailed in the notes to the financial statements, and the reconciliation accompanying our Q3 earnings release.

Now let's go through the statement of income for the quarter. Gross profit was $450.3 million or 62.3% of sales for Q3, up 50 basis points from the prior year quarter. New amortization of intangibles relating to transactions closed in the last 12 months cost us about 70 basis points year-over-year this quarter. Price was unfavorable at about 130 basis points on the revenue line, and approximately 50 basis points in gross profit, about in line with the last couple of quarters. So despite difficult headwinds, our strong manufacturing results drove good improvement to gross profit this quarter. We anticipated this, and we told you last quarter to expect some variability in our gross margin due to the timing of our cost-improvement projects and other factors.

In Q4, we do have certain timing issues that will moderate the gross margin percentage somewhat in the quarter, but we remain comfortable with our full year gross margin guidance, which was for a decrease of 20 to 50 basis points from 2011, when including the impact of 70 basis points in new amortization.

SG&A expenses were $196.9 million for the quarter, or 27.2% of sales. On an adjusted basis, SG&A as a percentage of net sales was 27.0% or 100 basis points higher than Q3 of 2011, with 80 basis points coming from the deals closed last year, consistent with our guidance and demonstrating our increased investment in emerging markets. For the full year, we are tracking to the SG&A guidance that we provided to you in December.

R&D expenditures totaled $52.2 million, or 7.2% of sales on a reported basis for the third quarter. On an adjusted basis, R&D was 6.9% of sales, which is up 40 basis points as a percent of sales from the prior year, reflecting investments in our Lutonix drug-coated balloon platform. We expect R&D expense, as a percentage of sales, to continue to increase somewhat. Interest expense was $9.7 million for the third quarter, up modestly from a year ago because of higher debt levels related to the acquisitions we completed at the end of 2011. Other income and expense was $13.6 million of expense for the third quarter as reported, and $0.6 million of income on an adjusted basis, driven mostly by foreign exchange gains. The effective tax rate for the quarter was 27.8%, as our full year effective tax rate moved up 10 basis points to 27.6%, consistent with our guidance for the year, which called for 50 to 70 basis points of improvement from our 2011 effective rate of 28.1%.

Diluted shares for the period were 84.6 million and we repurchased approximately 2 million shares during the third quarter. The net result is adjusted EPS of $1.64 at the top of the guidance range we provided to you for the quarter. The balance sheet as of September 30, 2012, reflects cash, restricted cash and short-term investments of $836.6 million, up from $769.4 million at June 30. For the quarter, accounts receivables days were down 2.2 days and inventory days were up 2 days, due primarily to currency. Capital expenditures totaled $13.2 million for the quarter.

On the liability side, total debt was $1.293 billion as of September 30 compared to $1.214 billion as of June 30. Debt to total cap at the end of the third quarter was about 41%, and total shareholder investment was $1.89 billion at September 30.

Moving to financial guidance. For Q4, we are expecting constant currency sales growth between 0% and 2%. Obviously, the sales environment is pretty challenging, particularly in the U.S. and we're trying to be appropriately cautious in this tough environment. Our Q4 sales expectations would put our full year constant currency sales growth between 3% and 4%.

From an EPS standpoint, excluding items affecting comparability, we see the fourth quarter in the range of $1.64 to $1.68, reflecting the $0.05 of dilution from Neomend that Tim mentioned. So with the deterioration in the U.S. market that we've seen during the year, we're now aiming at the low end of our original EPS growth target for the year, excluding the new dilution from the Neomend acquisition. As for the renewal of the R&D tax credit, we likely won't have clarity on that until the very end of the year. We still estimate that the credit is worth about $4 million, or just less than 1% of EPS.

Now let me turn you over to John DeFord.

John A. DeFord

Thanks, Chris. Before I get into the review of some projects in our portfolio, I'd like to take a moment and share a little of our emerging markets new product strategy. Over the last 2 to 3 years, we've made significant investments in our regulatory, clinical and marketing teams at our design centers and directly in the geographies, specifically to support the rapid introduction and launch of Bard products in these emerging markets. Those investments are beginning to pay off, and those teams are now supporting over 140 filings that will drive important launches in 2013 and beyond.

Now jumping into our pipeline, I'll just provide an update on a few key projects today. Anything I don't mention remains on track with our prior communications. I'll start with our ENCOMPASS atrial fibrillation ablation technology. We completed enrollment in the feasibility study early in the quarter, and we'll follow these patients for a year. We're compiling follow-up data to support filings for the CE mark next month. We also anticipate submission of the results to FDA after our 6-month follow-up visit, mid-next year, in support of our pivotal U.S. IDE. In stent grafts, enrollment continues in our 300-patient clinical study of the FLUENCY PLUS family for the AV access in stent restenosis indication. We're tracking to our plan of completing enrollment in the first half of 2013, and filing our clinical module with the PMA in the second half of the year with 6-month follow-up data. We anticipate launching in 2014 upon FDA approval.

Moving to filters, we're continuing to enroll in our next-generation DENALI vena cava filter clinical study. This 200-patient study is about 75% enrolled and at our current recruitment rate, we anticipate completing enrollment around the end of the year. We'll need follow-up for 6 months prior to submissions, so U.S. launch is expected late in 2013.

Turning to urology, we're making good progress toward the launch of the COMFORT GLIDE hydrophilic intermittent catheter, now anticipated in Q1 of 2013. COMFORT GLIDE will be manufactured with our new synthetic latex, providing superior material properties for patient comfort without the proteins that can cause natural rubber allergies. And in oncology and ports, we're building on our recently launched PowerPort Clearview ISP family of intermediate size, low artifact, MRI safe implants, a real mouthful. We're on track to launch the slim version this quarter and a dual version in the first half of next year. These ports offer the first platform to significantly reduce MR [ph] and TT [ph] imaging artifact, thereby reducing the effect of port placement on the interpretation of diagnostic scans. Moreover, the patented application of materials in this port also helps to reduce the attenuation of radiation delivered therapeutically in the treatment of underlying disease.

In the imaging, we're making steady progress on our Site-Rite 7 ultrasound platform, scheduled for launch late in Q4 in Europe and in Q1 next year in the U.S. And finally, our Fazer freehand stereotactic system is on schedule, and we anticipate a first launch in the first half of next year.

Moving to surgery. Building on the Q2 launch of our flat sheet, fully resorbable PHASIX mesh, we've completed development of the PHASIX plug configuration for inguinal hernia repair. The PHASIX platform is designed to provide the look, feel and function of our standard polypropylene-based products with equivalent strength during healing, then resorb, leaving the patient with no foreign material in the body after about a year. I'm pleased to announce that we just received 510(k) clearance, and we anticipate launching the PHASIX plug this quarter. I'll wrap up our pipeline discussions with a few more details on the Neomend technology.

As Tim stated, Neomend's Progel is the only product approved by the FDA as a sealant for air leaks incurred during the open resection of lung parenchyma. Progel's a 2-component single-use sealant provided in a kit containing albumin and functionalized PEG. The 2 components are provided in separate vials that are placed in a dual syringe to control their mixing at the point of delivery by the surgeon. The sealants can be applied in droplets, a stream or a spray that rapidly cross-links in about 10 seconds, adhering to tissue to provide a strong, yet very elastic seal that fully resorbs in vivo in about 30 days. We see the Neomend technology as a broad platform we can build upon for many applications, including video-assisted and robot-assisted thoracic surgery, use as a sealant in both vascular and cardiac surgeries and potentially as an adhesion barrier. Neomend has IDE approval to begin the study of Progel in video and robot-assisted thoracic surgery, and we anticipate commencing enrollment in 2013. We've also begun developing our plans for these other indications and international expansion, and I look forward to providing you more details as those plans progress.

Thanks for your attention this evening. Let me now turn you back to Tim.

Timothy M. Ring

Thanks, John. That does conclude the formal part of the presentation. I'll now turn the call back to our moderator to facilitate the Q&A. [Operator Instructions] Trish, go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from the line of David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

I just had one really quick clarification based on kind of [indiscernible], but has the Neomend deal actually closed, and if not, when is that expected to be completed?

Christopher S. Holland

David, it's Chris. It actually did close yesterday. So it's just hot off the press.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay, great. And then, maybe just looking strategically at the business. Tim, maybe you can comment, too. If you look across the revenue portfolio of the business, obviously, we saw continued weakness, perhaps slightly worse in the United States this quarter, but you continue to see strong growth in the emerging markets. Is the right way to think about the long-term outlook for Bard from here, that you're going to sort of nurture your U.S. businesses, acquire higher-growth assets in developed markets such as Lutonix, and the business side [ph] , that Neomend deal and then, really focus your internal resources on emerging markets, while managing Europe for cash. I mean, how do we think about the pieces here from a geographic perspective, and then maybe also from a technology perspective?

Timothy M. Ring

Yes, sure. I mean, frankly, it's even more fundamental than that. We're looking for growth, whether that be geographic or technology or product-wise, and that would include the U.S. I mean, some of the growth rates that we have in our current businesses that you see in other segments of the industry, there's still some significant potential there for good growth. So we're not limiting any one thing in or out, but clearly you go where the opportunity is, and geographically right now, that's not in the United States, it's in emerging markets and from a product point of view, it's kind of across the board, it's nuanced in every sector.

Operator

Our next question comes from the line of David Lewis with Morgan Stanley.

Jonathan Demchick - Morgan Stanley, Research Division

This is actually Jon Demchick in for David. I wanted to just discuss you guys thoughts further on M&A, on -- after the Neomend deal and also the previous Lutonix and Medivance deals. Should we continue to expect these $100 million to $200 million deals that are, I guess dilutive and in the relative early stage of their companies? Or is this more just as you believe, that the U.S. environment may not recover the way it maybe felt like kind of, before? And do you think this is the best way that you can have to accelerate your growth going forward?

Timothy M. Ring

Yes, again, this is Tim. We're looking for growth. And we don't target a size of a deal. We look at it first, strategically. We look at the growth rates, positioning in the market, all the factors we've looked at before, we haven't changed those, in terms of the fundamentals. But we don't bracket a size of deal to target.

Operator

And our next question is from the line of Larry Keusch with Raymond James.

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

Tim, this is -- the 1% growth in the U.S. is the first negative number in, gosh, 10, 12 quarters. So I guess, the question is, what did you see happen here in the third quarter? And then, as we think about that, I know you're not giving guidance on 2013, but can you just help us think about sort of the moving pieces as we sort of start to think ahead now for the next year?

Timothy M. Ring

Sure. I think the biggest change that we saw in the quarter was our growth rates in vascular, which dropped about 4 points, and that was -- in the United States, that was primarily focused on slower growth in our EP business and slower growth in our biopsy business. And the interesting part of looking at the biopsy business and you talk about utilization of healthcare in America, we have a relatively large business in biopsy and core biopsy, so it's not automated, not vacuum assisted, plain old core biopsies, an awful lot of which are used in prostate biopsy. And we saw a large step down in our growth rates in core biopsy in the United States, and with no competitive issues whatsoever, that's going on in that market in terms of new products or new entrants into the field. So it's really in that chunk of the business, we saw it primarily being a utilization issue for us. But overall, if you look at our -- the decrease or step down in growth rate in the United States, it was limited to those areas.

Operator

And our next question is from the line of Mike Weinstein with JPMorgan.

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

I have a couple of questions, I'm still kind of struggling with the last bit there, just on the step down in the, particularly the U.S. biopsy business. So that's -- it, you acquired SenoRx just 2 years ago, why do you think that end market in particular would've taken such a meaningful step down? And why do you think that maybe you're seeing it in your U.S. vascular business? The U.S. vascular's a broad definition, right, because it includes biopsy, you're including your EP business. Why is it you're seeing it in that business this quarter, more than you saw it in some of your other businesses?

Timothy M. Ring

Well I think the interesting side of it is, if you look at what's going on internationally, in those same businesses, we're seeing an increase in our growth rates, and all those same segments internationally, versus the growth rates in the United States. And I think because if you look at exactly -- the comments I gave you about biopsy, I mean, the reality of it is, there's -- nothing's changed in the market quarter-to-quarter, except for that growth rate. Now on the fringes, there is a small step down in the stent business growth rate in the United States versus what we had experienced, but by far, the majority would've been in EP, a chunk of that being capital, and we're seeing capital difficult to come by in U.S. hospitals today, and then secondly on the disposable side in biopsy, and then to a slight degree, in stents.

Operator

Our next question is from the line of Tom Gunderson with Piper Jaffray.

Daniel F. Garofalo - Piper Jaffray Companies, Research Division

It's Dan Garofalo on for Tom. On the Lutonix drug coated balloon launch in Europe, I believe you're 3 months in at this point. Qualitatively, any takeaways you can share with us, relative to what your expectations were for that at this stage?

John A. DeFord

Sure, John DeFord here. We're being very deliberate about the roll out. As you know, Europe is a very competitive space for drug-coated balloons, there's a number of different products on the market. We did just recently put forth our 2-year LEVANT 1 data, and we think that it's important for us to get out there. We've got a number studies going. We're working to start a registry study in Europe as well, for some broader indications and use of the product. And so we're just taking this in a very stepwise fashion. I'd say we're right where we expected to be at this point. The product is performing well, and we think that the real driver for Europe anyway is going to be getting a lot more data into that marketplace. So the LEVANT 2 data, as you know, we finished enrollment just in July. We think that's going to be a key driver once that becomes available next year.

Operator

And our next question comes from the line of Michael Matson from Mizuho Securities USA.

Michael Matson - Mizuho Securities USA Inc., Research Division

Yes, I was curious about your medical device tax. I'm coming up with an estimate of around $45 million for 2013. Number 1, does that seem reasonable? And #2, what line in your P&L are you expecting to be recording that in?

Christopher S. Holland

Mike, it's Chris. $45 million is a very good estimate, $45 million is a very good estimate of what we expect to see next year. In terms of the P&L geography, I'll put off that question. We actually haven't finalized exactly where we're going to record it. But as we do, and when we do, we'll certainly communicate that but we'll certainly continue to call it out and highlight it, but it'll either be a separate line item or, likely within SG&A, but we're still evaluating that.

Operator

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

Matthew J. Dodds - Citigroup Inc, Research Division

So a couple of questions. On Neuromend [ph], Tim, I think you said the revenue wasn't material, have they -- has that product been out now for a couple of years? And if so, what's been the reason why it hasn't gained traction if it's not material?

Timothy M. Ring

I'd say it's Neomend, and I'll let Chris handle the financial aspect of it.

Christopher S. Holland

Yes, sure, Matt, it -- they got approval in 2010. The product has been ramping very nicely, terrific growth rates. It's right now in the low $20 million range or so, and growing quite nicely. So obviously, less than 1% of sales for us, so not material in the grand scheme of things, but the product has significant traction in the marketplace that is continuing to grow at very attractive rates.

Operator

And our next question is from the line of Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I just wanted to go over the fourth quarter kind of sales guidance. Constant currency sales growth was 0 to 2%. Obviously, you have Neomend coming in, even if that's -- I want to make sure I understand, about 1%. I think you stalled Medivance as well, so does that basically imply, I just want to double-check that, the core organic business is expected to possibly be down to flat in the fourth quarter? And kind of what -- how do you see that kind of moving forward, I guess? What would be some of the drivers that give you confidence that you could actually return to, I guess, growth looking ahead?

Christopher S. Holland

Yes. I think, I mean, obviously, in Q3, that we just reported 3% constant currency growth and 200 basis points from the deal, so the organic growth in Q3 was about 1%. And as we lapped ClearStream in part of the quarter, Medivance et cetera, they have a pretty muted impact in Q4. And given that we just closed Neomend, that has a pretty muted impact from here to the end of the year as well. So it actually indicates organic growth of about what we're seeing right now. Obviously, as I've said in my prepared remarks, we're pretty darn cautious sitting here today, and so 0% to 2% we think is an appropriate way to think about the quarter and really reflects organic growth rates comparable to what we've been seeing.

Kristen M. Stewart - Deutsche Bank AG, Research Division

All right, and then I guess, just like looking ahead, I mean, what is your level of confidence, just kind of with what you're seeing in the United States that you guys can kind of turn that business around? Or are you just more of a victim of kind of the overall hospital environment and shift from inpatient to outpatient and whatnot?

Timothy M. Ring

Yes, this is Tim. Clearly, the environment's tough. I mean, it's kind of interesting as you sit here as a company and you report in a queue of other companies, you look and see what everybody else has reported, and I think there's actually been a note out [ph] or so on some of the revenue downturn for the quarter. We said at the beginning of the year, we didn't expect any turnaround in the market, specifically in the U.S. for this year. It's turned out, it's actually going a little bit the other way. I don't think we're the only one experiencing that. As it relates to next year, we'll see if the election changes anything at all. I don't know. Certainly, nothing in the environment that we see has changed course at all. So we'll give you guidance during our fourth quarter call, but there's nothing that we've seen in the environment that would indicate it'll turnaround anytime soon.

Operator

And our next question is from the line of Matthew O'Brien with William Blair.

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

I was just hoping to follow up a little bit on John's comment about the stent weakness. In vascular this quarter, you've got the Abbott resorbable stent coming out relatively soon, [indiscernible] on the market, and then SMART stent's supply issue's been resolved at this point. How should we think about your stent business going forward? Is it an area where you can grow at or above market rates, given all those headwinds? Or is it an area where we should expect a meaningful deceleration from here?

Timothy M. Ring

No. Our intention is to be able to grow above the market rates. We think the data that we have on, in particular on LifeStent and the broad portfolio of products that we have in LifeStent will be important to us. We may have a hiccup there as our competitor comes back on the market, in particular in Japan where we were pretty successful in taking a chunk of their business, and now that they're back in the market, there's a more competitive dynamic going on in Japan. But our vantage point, and our perspective is that, with the solid aspects of LifeStent and the rest of our portfolio in stents, that we'll be able to grow above the market rate.

Christopher S. Holland

Yes, I would only add that the -- most of the impact wasn't exactly in the LifeStent segment of the business. It was in the other stent segment of our business.

Operator

And our next question comes from the line of Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So 2 quick things. First, Tim, obviously, your stock traded at a premium to a lot of the names in med tech, primarily because people are expecting that the Gore money comes through, and that you're able to do some good things with that, capital and flexibility, and so I appreciate the update that you gave on Gore, the 2 things you mentioned. But I was wondering if you'd just give any other qualitative feedback on what's your best estimate at this point as to when you think the best case scenario would be on this money starting to flow, and you being able to put actions in place? I was just wondering for any more color on the things you disclosed in this call relative to Gore, any overview thoughts there?

Christopher S. Holland

Sure. I mean, look, it all depends on what happens at some of these hearings. But certainly, it looks like, right now, we would expect to see it sometime in '13, and hopefully in the first half of 2013. But again, a lot of these things we can't control. So I can tell you that in terms of the planning phase of what to do with that investment, that's been well underway. We've had several internal reviews with the senior management team, along with our divisions, our international geographies, which you would expect would be a significant portion of that, and with our board. So when the appropriate time comes, we'll tell you exactly what all those things are, but rest assured that it's certainly been well underway in the planning segment for a long period of time now.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then at the Aviva [ph] meeting this year, I'm curious as to whether you guys learned anything new about Gore, and what they might be doing to try to either work around the patents or move manufacturing offshore. Do you have any creative visibility and what they might be up to, to try to soften the blow, if you will?

John A. DeFord

Yes, Bob, John DeFord here. We really don't have any more insight into that, nothing that we can detect at this point.

Operator

And our next question is from line of Jonathan Palmer with CLSA.

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

Tim, high-level strategic one here. As you really continue be impacted from this softer macro environment, particularly in the U.S., could you maybe just quantify what you're doing or what leverage you have available to still get leverage in the operating margins here?

Christopher S. Holland

Sure. I don't want to get into a lot of detail for competitive purposes because I think the selling dynamic in the United States is undergoing some significant change and we kind of view some of the things that we've got underway as a competitive advantage for us. So I think, as we've been doing over the last several years, you've seen us reallocate expense from the slower growth areas, both in Europe to start with, and more recently in other areas, to the faster growing areas. That's both from a product line point of view, and from a geographic point of view, and we'll continue to do that. I mean, you feed the beast kind of thing as it relates to what's going fast and you take it away, your expenses away from the things that aren't, and it's really that simple.

Timothy M. Ring

Yes, I'd add on the other side of it, the strength of our worldwide operations teams, and what they're delivering quarter in and quarter out, in terms of significant cost savings and leverage in our plants, really is a positive competitive dynamic for us and that is, you can see in our results, probably in the more -- most difficult pricing environment that we've seen historically within Bard, we've been able to really manage our overall gross margins extremely well. So I think that would be the other half of the perspective that we would have.

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

Then maybe just as a follow-up quickly, outside of the Gore opportunity, is there an opportunity -- can you accelerate that investment in these emerging geographies faster than you've been doing so far?

Timothy M. Ring

We have in our base plans, as we stand here today, a continued acceleration or continued investment into the emerging markets, and further geographical expansion into those markets. And I'd say we also have the ability, potentially downstream, if we're successful under Gore to escalate our strategic plans within those markets on a more rapid basis.

Operator

Our next question is from the line of Anthony Petrone with the Jefferies Group.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Just want a clarification on Neomend. Tim, you mentioned $0.15 dilution next year. I just want make sure that includes integration expenses, and is that before any potential synergies?

Christopher S. Holland

Yes. That's the operating dilution and, obviously, we haven't completed the purchase accounting. So we'll fine tune that number in advance of January, and that is the -- that's the number that'll impact the full year. Obviously, the global expansion of the product will take a little bit of time. Obviously, there's significant clinical spend around pursuing these additional indications that John highlighted, and so those will impact the business in the little bit longer time frame, but up to $0.15 is the right number to think about, from an operating standpoint in '13.

Anthony Petrone - Jefferies & Company, Inc., Research Division

And just one quick follow up, just on looking at next year and this goes back to Lutonix, you mentioned, on prior calls, $0.25 of annual dilution there. I'm just wondering, does that only encompass LEVANT studies for peripheral applications? Or does that also encompass the launch of a larger scale coronary study for the product? And if it does, would you expect to sort of curtail that in the face of Neomend and the med tech tax?

Christopher S. Holland

No, that fully funds the programs that we're pursuing, and we're certainly not going to dial back a penny of spend on Lutonix, given the opportunity we see there on that platform.

Operator

And our next question is from line of Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to follow-up on Bob's question and your comments before. Can you go through the decision trees for the Supreme Court and for the district court in terms of what your expectations are for how those different procedures could go? And then you called out 2013 and first half, so what do you think -- see is most likely track for the legal proceedings at this stage?

Timothy M. Ring

Todd, you want to take it? Go ahead.

Todd W. Garner

Yes, I think, as we said, right, Gore filed their Cert on October 12 with the Supreme Court. We would anticipate a decision from the court during January, the first half of January or so, vis-à-vis whether or not they're going to hear that appeal. And obviously, we have our view as to the likelihood of that happening. So that's with respect to that road for the litigation. And the other, as we said, we have a hearing scheduled in mid-November at the district level, and I think we need to get to that hearing and get through that hearing and that'll, we think, provide additional clarity on how the willfulness piece of the leg will proceed. But it's hard to be more definitive until we get through that hearing.

Matthew Taylor - Barclays Capital, Research Division

Okay, and just one follow-up on the acquisition, could you talk about the relative margins there and how you view it as the strategic focus? You call that robotic surgery, and that's something that you haven't really talked much about before. So any color there would be helpful.

Christopher S. Holland

I'm going to take that. The gross margins are very attractive, and certainly, relative to our overall gross margin, they're accretive. I'll look to John DeFord to maybe provide a little more color on the robotic question.

John A. DeFord

Sure. So thoracic surgery, both video-assisted and robotic-assisted -- robot-assisted surgeries are, certainly, we think an important market and a logical expansion of the Progel technology. So right now, it's used in open surgery. We think it's an obvious expansion into video-assisted and robot-assisted. So those are clinical trials that we'll be starting next year. And I think those are just the logical extensions, and we talked about potential use in cardiac surgery and vascular surgery, as well as the potential, a little bit longer term, to think about the use of the material and a lot more study to be done around using it as an adhesion barrier.

Operator

[Operator Instructions] And we'll go to the line of Josh Jennings with Cowen.

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

Just Tim, in last quarter on the Q2 call, you called out Europe as being incrementally weak, and I think it was part of the reason that you guys guided down to the lower end of the annual guidance range at that point. This quarter, you seemed to have a rather solid quarter in -- or performance in Europe, 5% constant currency growth, a lot of med tech players have had actually done the same that you did in Q2 and called out Europe as an incremental headwind from a utilization standpoint. Can you just talk about what's changed in Q3, and then what you have baked in to your assumptions for Q4 guidance for Europe?

Timothy M. Ring

Well, I'd say that we don't look at that as being a significant departure in the main markets in Europe. We saw our growth rates in the main markets in Europe to be very similar to what we have on a year-to-date basis. Although we worked hard in making investments in emerging markets in Europe, including Middle East and Africa, including Russia, and we are starting to see the results of those investments that we've made over the last 2 years, emerging in terms of incremental growth rates in those markets. We like what we see there. We think that'll be a positive for us as we move downstream.

Operator

And we'll open the line of Robert Goldman with CL King.

Robert M. Goldman - CL King & Associates, Inc., Research Division

Tim, I'm wondering if you could give us some additional sense of the board's interest in capital allocation, with respect to dividends, share buybacks, as well as the acquisition. It does seem like the dividend payout for Bard and the dividend yield is becoming an outlier on the low end. I'm hoping you could speak to that.

Timothy M. Ring

Sure. We -- it's a process that we do go through almost every board meeting, both within our committee structure, as well as with the full board. On a strategic level, that is the first use of cash. Growing the business, investing in the business through acquisitions would be first priority, share buyback, second, and dividend, third. We have paid a dividend, Bob, as you know for, I think 35, 36 years, something like that. Increased it every year. It is a low yield, but we're comfortable with where we are at the moment.

Christopher S. Holland

Yes, and Bob, I would just add, we've been a very consistent returner of cash to shareholders, and I think if you look over the last 5 years, we rank very well within the sector. So albeit less coming from dividend and more from buybacks, we think that's the right approach for us to maintain the kind of flexibility we think we need to make sure we're moving the business forward strategically. So I think given our size, the current approach and the current weighting is one that we in the board believe continues to make sense.

Timothy M. Ring

Yes. To that end, if you go from say the beginning of 2010 through the first quarter of 2012, which is last metric I have, we returned a little over 117% of free cash flow to shareholders.

Operator

And we have a follow-up from the line of Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Chris, just on the EPS guidance. I know you'd mentioned the lower end of the range. Could you just remind us exactly what the range, I guess is, for the full year? Because I know you usually, you talk with growth rates and does that still, I guess, exclude the R&D tax credit?

Christopher S. Holland

Yes. I think -- and so if you go back to what we originally guided, it was 3% to 4% growth off of the 2011, which was a $6.40 number. So again, pre -- so that's -- we're in the $6.58 to $6.59 range on the low-end, and pre the Neomend dilution, the full year guidance would be $6.56 to $6.60 pre-Neomend, and that's reduced by $0.05 now because of the dilution from Neomend. So at the high-end of what we're looking at now for Q4, we would be in the low-end of what the original guidance implied, coming into the year, and that does exclude, again $0.04 to $0.05 from the R&D tax credit that's not in any of our numbers, that we won't really know until the very end of the year, that if it did come to pass, which I think a lot of people think it will, that would essentially offset the impact of Q4 dilution from Neomend.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. So sorry, just to make sure I understood, the $6.50 to $6.59 was the original guidance, is that what you're saying?

Christopher S. Holland

I'm sorry, it's 3% or 4% growth off of $6.40, so the math is $6.59 to $6.65, call it.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Yes. Got you. And then, could you just walk through your gross margins? I know you mentioned that it was more from a manufacturing, I guess, benefit that, any other the things kind of affecting gross margins on the year-to-year, outside of just the incremental amortization, and then, manufacturing, any effects benefit? It was just a little bit higher than I would would've anticipated, given the performance of vascular and the surgical specialties business in the quarter?

Christopher S. Holland

Yes. And we certainly did try to guide towards that on the Q2 call. There was currency favorable benefit in the quarter of about 50 basis points related to the hedge contracts, which more than offset the impact on fundamental sales. So there was 50 favorable there, 70 unfavorable from the deal amort. Mix was about 10 negative, consistent with Q2, which is again, really the impact, primarily of the lower GP ClearStream products. Price was 50 negative as I said, and then again, a terrific performance by the ops teams delivered 130 basis points of cost improvements. So that gets you to the 50 favorable year-over-year. And now again, I'll just caution you that we anticipate some variability and probably a slight degradation sequentially in Q4 in the margin.

Operator

And our final question for the day comes from the line of Joanne Wuensch with BMO Capital Markets.

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

The 2% acquisition growth that you have in the quarter, is there a way to divide that between U.S. and o U.S.?

Timothy M. Ring

We're going through the numbers here, trying to pull it out. We aggregated here.

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

Okay. Can I ask a question while you're doing that?

Timothy M. Ring

Sure.

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

Incontinence, it was flat in the quarter, after 10 quarters of decline. Is there anything that we can assume that, that's starting the beginning of a new trend? I mean, that's quite nice.

Christopher S. Holland

Sure. Incontinence was starting a turnaround, really on the launch of the DIGNISHIELD product.

Timothy M. Ring

DIGNISHIELD and the ramp up of DIGNISHIELD, and the fact that now Contigen, the loss of Contigen is out of the base, which would give us -- had given us an unfavorable comps for quite a while.

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

Okay. And then similarly, hernia repair was down double-digit. Anything in particular there that we try to understand?

Timothy M. Ring

Hernia -- I don't understand your question about hernia repairs being down double digit.

John A. DeFord

Fixation.

Timothy M. Ring

Fixation was down 19%, which is very consistent with where we've been the last number of quarters, Joanne.

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

And on the first question?

Christopher S. Holland

Yes, it's 2% in the U.S., and I think just a little bit less than that x US but we'll follow up and confirm that number.

Operator

And at this time, there are no additional questions. That does conclude our Q&A session. I would now like to turn the conference back over to Bard's management for closing and additional comments.

Timothy M. Ring

Thanks very much. I'd like to thank all of you for taking the time to join us today for the call, and also to thank the Bard employees around the world as I always do for their commitment to excellence, and we will talk to you again in the next quarter.

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