Leading medical devices maker C. R. Bard’s (BCR) second-quarter fiscal 2011 adjusted earnings per share of $1.57 matched the Zacks Consensus Estimate and exceeded the year-ago earnings of $1.39. The results meet the top end of the company’s guidance of $1.53 to $1.57.
Adjusted earnings exclude a lumpsum legal charge (of $195.5 million) associated with settlement of lawsuits related to the company’s hernia repair product. Patients across the U.S. sued the company accusing that its implanted hernia patches (Composix Kugel Mesh Hernia Patch) were defective and caused serious injuries such as intestinal blockages and bowel perforations. These patches were made by C.R. Bard’s subsidiary Davol Inc.
Factoring in such charges, the New Jersey-based company has reported a loss of $47.8 million (or 55 cents a share) in the second quarter versus a profit of $124.7 million (or $1.29 a share) a year ago. The company’s shares tanked $3.81 (or 3.38%) to $108.90 in after-hours trading on July 21.
Revenues
Revenues climbed 7.6% year over year to $725 million, yet shy of the Zacks Consensus Estimate of $728 million. Sales were boosted by growth across the board with the company’s Vascular business leading from the front.
Geographically, U.S. sales rose just 3% to $479.9 million. U.S. revenues were cramped by softness across several product lines. International revenues cruised 17% (up 10% in constant currency) to $245.1 million strongly backed by the emerging markets, which have registered a 43% growth in the quarter.
Segments Review
C.R. Bard’s core Vascular segment sales spiked 15% year over year (up 11% in constant currency) to $215.2 million. The division is benefiting from strong contributions of the SenoRx acquisition. However, the company faced softness across most of its vascular offerings in the U.S.
Within Vascular, endovascular (up 18%) and peripheral PTA (up 15%) businesses posted healthy growth in the quarter. Vena cava filter sales slid 27% while Electrophysiology (“EP”) revenues fell 1%. Endovascular sales were fueled by a 57% growth in biopsy products sales, strongly boosted by the SenoRx acquisition. Revenues from stent and stent graft business edged up 1% with LifeStent sales climbing 7%.
Oncology revenues jumped 8% (up 6% in constant currency) to $192.8 million. Peripherally inserted central catheters/PICC sales went up 9% while Port revenues rose 6%, driven by strong contributions from the emerging markets. Sales from vascular access ultrasound products edged up 2% while the dialysis catheter business climbed 6% in the quarter.
Urology sales inched up 2% (flat in constant currency) to $182.7 million. Basic drainage sales grew 3% while I.C. Foley products revenues inched down 2%. Revenues from continence products slipped 17% and while revenues from slings fell in the quarter given tough year over year comparison. With regard to some other sub-segments, urological specialties revenues rose 2%, while brachytherapy sales were stable year over year. Stand-alone sales of StatLock catheter stabilization line increased 3%.
Revenues from the Surgical Specialties business rose 4% (up 3% in constant currency) to $110.9 million. Soft tissue repair business grew 4%, driven by healthy growth in natural tissue products (up 27%). Hernia fixation business grew just 1% as strong international growth was eclipsed by a decline in the U.S. Synthetic hernia products declined 2%. Performance irrigation business was down 9% while the hemostasis business made a recovery from a soft first quarter posting an 11% growth.
Margin Analysis
Gross margin fell to 62% from 62.7% as higher revenues were offset by a rise in the cost of sales. Pricing pressure also hurt gross margin. Marketing, selling and administrative expenses as a percentage of sales declined to 27.1% from 28.1%. Research and development expenses (as a percentage of sales) fell to 6.5% from 6.7% a year ago. Operating margin plunged to 0.4% from 27.1% a year ago, hurt by legal expenses.
Financial Condition
C.R. Bard exited the quarter with cash and short-term investments of $911.9 million (up 22% sequentially) with total debt of $901.1 million, a modest sequential increase.
Guidance and Recommendation
Moving ahead, C.R. Bard envisions its third-quarter fiscal 2011 sales to grow 4%-6% in constant currency, assuming sustained weakness in the U.S. Adjusted earnings for the quarter are expected in the range of $1.57 to $1.61 a share, below the current Zacks Consensus Estimate of $1.62. For the fiscal, the company expected earnings of $6.38 a share versus the Zacks Consensus Estimate of $6.41.
C.R. Bard’s well-diversified end-markets and vast product portfolio insulate it from fluctuations in any single therapeutic category. The company faces a mix of competitors ranging from large manufacturers with multiple business lines like Boston Scientific (BSX) and Johnson & Johnson (JNJ) to smaller manufacturers that offer a limited selection of products like Angiodynamics (ANGO).
We expect new product flow to drive organic revenue growth and help C.R. Bard to meet its sales objective. Moreover, the company’s sustained investment in emerging markets should boost growth. However, heightened competition (especially in soft tissue repair) and pricing/volume pressure remain areas of concern. Currently, we have a Neutral recommendation on the stock, backed by a short-term Zacks #3 Rank (Hold).
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