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CR Bard Inc.’s (BCR - Analyst Report) second-quarter 2013 adjusted earnings of $1.42 per share beat the Zacks Consensus Estimate by 4 cents. Adjusted earnings exclude one-time items such as acquisition-related expenses ($1.9 million), asset impairment charges ($3.2 million), restructuring costs ($25.8 million) and litigation expenses ($292.4 million). Although adjusted earnings declined 12%, it exceeded the company’s previously announced guidance of $1.35–$1.39 a share.

In the quarter, net loss was $161.6 million (or a loss of $2.03 a share) compared with a net income of $133.9 million (or $1.54 per share). The decline was mainly due to the aforementioned legal charges related to product liability.

Revenue

Revenues increased 2% (3% at constant exchange rate or CER) on a year-over-year basis to $759.9 million. Revenues surpassed the Zacks Consensus Estimate of $751 million.

On a geographic basis, revenues in the U.S. were $497.6 million, up 2% year over year. International sales rose 4% both on a reported and CER basis to $262.3 million, led by healthy sales in emerging markets.

Segment Analysis

Revenues from the core Vascular segment decreased 4% year over year to $212.2 million. The business remains challenged by pricing pressure and increased competition.

Within Vascular, Electrophysiology (“EP”) revenues dropped 1%. EP Lab system sales increased 2%, while disposable EP sales declined 1%.  Surgical graft sales were down 4% due to sustained softness in OEM orders. Endovascular sales fell 5%, but surprisingly Biopsy product sales grew 5% in the quarter, reflecting competitive gains overseas. Revenues from the peripheral PTA line increased 8%. Vena Cava Filter sales were up 3% in the reported quarter. Revenues from the stent franchise dropped 23% year over year, as the Japanese competitor, which pulled back its product line last year, returned to the market.

Sales from the Urology division increased 2% to $191.7 million, on the back of double-digit growth in international markets. The company’s targeted temperature management offerings experienced a solid 20% increase, both in the U.S. as well as outside.

Within Urology, revenues from the basic drainage division were up 3% globally and 1% in the U.S. I.C. Foley sales dropped 4% and 1% in the U.S and international markets, respectively, as these segments faced continued pricing pressure. Sales for the Continence segment were down 17% in the reported quarter, reflecting sluggish women health procedures in the U.S. On an encouraging note, urological specialties sales were up 9% due to strong sales from the brachytherapy business. Revenues from the StatLock catheter stabilization line declined 8% in the quarter.

The company’s Oncology segment reported revenue growth of 8% year over year to $214.1 million. Sales of peripherally inserted central catheters (PICC) climbed 10%, and revenues from the Port franchise increased 4%. Revenues from the Vascular Access ultrasound products and dialysis catheter products line increased 12% and 5%, respectively, in the reported quarter.

Sales from the Surgical Specialties business were up 8% at $120.0 million, led by strong sales of surgical sealant offerings acquired from Neomend. Soft tissue repair business improved 4% in the quarter and natural tissue products were up 8% year over year. Revenues from the hernia fixation business were down 9% and that from the performance irrigation business fell 10%.

Sales from Other segment were flat year over year at $21.9 million in the reported quarter.

Margins

On an adjusted basis, gross margin was 61.1%, down 40 basis points (bps) from the prior-year quarter but up 70 bps sequentially. Adjusted marketing, selling, and administrative expenses increased 9.8% to $225.5 million. This was driven partly by the medical device excise tax, new deals and the rest because of increased spending on investment plans focused on emerging markets.

Adjusted research and development expenses increased 31.2% to $65.2 million, driven by investments in the emerging markets. Adjusted operating margin was 22.5%, down a massive 490 bps from the year-ago quarter.

Balance Sheet

CR Bard ended the second quarter of 2013 with cash, restricted cash and short-term investments of $868.3 million, down 4.1% on a sequential basis. Total debt sequentially increased 7.1% on a sequential basis to $1.5 billion. The company repurchased 1.7 million shares in the quarter.

Guidance

Moving ahead, C.R. Bard expects revenue growth at CER in the range of 1%–3%, excluding any royalties from the Gore litigation in the third quarter of 2013. On the earnings front, the company expects adjusted earnings in the range of $1.37 to $1.41 a share. The current Zacks Consensus Estimate of $1.62 per share lies beyond the guided range.

For 2013, sales growth remains pegged at nil to 3%. However, the company did not provide any bottom-line guidance due to the impending benefits from the Gore litigation. Management projects that the divestment of the EP business will dilute 2013 earnings by 5 cents.

Our View

Although CR Bard managed to beat Zacks Consensus Estimates this quarter, we remain concerned over the company’s increased expenses and declining margins. Moreover, significant pressure in some of Bard’s businesses, competition and low-single digit growth in international markets are matters of concern. We remain on the sidelines unless its recent investment strategies to increase profitability pay off. However, its recent announcement to divest the EP business along with initiatives to expand into emerging markets should boost growth in the long-term.

Further, the company’s claim that the Gore litigation is moving toward a positive direction and is about to complete, instills confidence. However, there is always a degree of uncertainty related to legal matters.

The stock carries a Zacks Rank #3 (Hold). Other medical stocks like Align Technology (ALGN - Analyst Report), The Cooper Companies Inc. (COO - Analyst Report) and Henry Schein (HSIC - Analyst Report) are expected to do well. All these stocks carry a Zacks Rank #2 (Buy).
 

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