We reiterate our AGGRESSIVE BUY (1) rating on C.R. Bard, and our mid-2006 price target of $85. We believe BCR may weaken today based on disappointing 3Q05 sales; however, we believe the disappointment relates to one BCR product line, and a new BCR product (which the company announced yesterday would be introduced in 1Q06) should stimulate sales growth relative to the problematic product of 3Q05. BCR reported 3Q05 EPS last evening of $0.77 (up 20%), which was $0.02 above our projection and $0.03 above consensus. Operating profits rose by 22%, which was well above our 16% projection. Sales, however, disappointed, rising in organic terms by 9% compared to our projection of 10-11%, company guidance of 10-11%, and a consensus projection of about 11%. Sales weakness, relative to expectations, resulted solely from lower than trend line sales growth, relative to hernia repair products, which climbed by only about 5% and is well under recent quarterly trend line growth of about 20%. We believe BCR has recently lost share in the hernia repair market to LifeCell Technologies (LIFC). LIFC is making inroads into the high risk segment of the ventral hernia repair market ($30 million-$50 million annual market) as LIFC's cadaver-based mesh is viewed by some as less likely to result in tissue adhesion as compared to BCR's synthetic mesh. BCR, for the first time on its teleconference yesterday, announced its intent to enter the high risk ventral hernia repair market in 1Q06 with a porcine-based collagen repair matrix. This product is manufactured by C.R. Bard and will be a 510k regulatory submission. We believe a porcine-based collagen mesh will help BCR gain a significant share in the high-risk ventral hernia repair market. We continue to believe BCR can report organic sales growth of about 10% in 2006 and higher in 2007. 2007 sales growth gains will result, in our judgment, from new products projected to reach the U.S. market in 2007, including BCR's AF Ablation Mesh, AV Access Stent Graft and Infection-Control Coated Endotracheal Tube. The 2007 projected U.S. introduction for BCR's AV Access Stent Graft represents a six-month delay from the company's prior guidance, as BCR is altering the stent design. We are intrigued by Bard's entry to the collagen-based hernia repair market. Bard has a core competency in the manufacture of collagen-based products, and such products could provide C.R. bard avenues for additional future growth beyond our current projections. Potential arenas include devices for the treatment of incontinence, vaginal herniation, and dura mater. Bard would not suggest what additional avenues it might pursue, but suggested it might at the analyst meeting scheduled for December 15 in New York.
Our $85 price target is based on a P/E premium to the S&P 500 of 40%, based on forward 12-month EPS. This approximates the 50% premium enjoyed by medical device stocks broadly over the past 10 years.
Primary risks that could impede the stock from reaching our price target center around product development. In order for BCR to maintain its P/E, the Company will need to successfully move forward the development projects noted above. This is a generic risk for all medical technology companies; nevertheless, many of the products noted above are of a technology and regulatory intensity in excess of those products now marketed by BCR. The development risks are thus higher, as would be the commiserate rewards should the products reach market.