百特醫療 (BAX) 2002 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Baxter 1Q conference call. At this time all participants are in a listen-only mode, later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like introduce your host for today's conference, Mr Neville Jeharajah. Mr Jeharajah, you may begin.

Thanks Sam! Good Morning everybody! By now I am sure you have seen copy of our press release of 1Q02. As the press release indicates, comments regarding the outlook contain forward statements and of course actual results could differ materially* from our current expectations. Please refer to our most recent 10Q report for more details. Now let me introduce Harry Kraemer - Chairman & CEO of Baxter International.

Thanks Neville! Good Morning everyone! Joining me today are David F. Drohan, Brian P. Anderson, Steven J. Meyer, Doug and today we will provide you with a total company and business highlights for the 1Q02. Dave will provide an overview of the Medication Delivery business and BRYAN will surmise our financial performance. I will conclude the call with Baxter's outlook for full year 2002 and then open it up for any questions anyone of you may have.

First let me begin by saying that I believe we had an excellent 1Q02.This continues the momentum we have demonstrated over the last eight years. I believe these results positions us extremely well for 2002, 2003, and beyond. Basically in the quarter we continued to do exactly what we told you we would do. Specific recent highlights include the completion of our pivotal Phase III clinical trial for our protein-free manufactured recombinant factor VIII and the announcement of a fifth production suite in Neuchatel . Also signing of the NeisVac-C vaccine contract with the Ministry of Health for Netherlands, also approval for the influenza vaccine in the Netherlands and the announcement of two new vaccine facilities in the Czech Republic and Austria. Also the initiation of a pivotal Phase III clinical trial for the INTERCEPT red blood system and also the announcement several new alliances including one with Epic Therapeutics which Dave will provide additional details as well as the acquisition of Fusion Medical, which will further expand our growing leadership position in biosurgery.

In terms of sales growth Baxter's overall 1Q02 sales increased 11%. Excluding the impact of foreign currency, sales growth was 14%, that is foreign exchange impacted sales growth by 3 percentage* points. In terms of operating margin, for 1Q02 the operating margin was 19.0%. This compares to an operating margin of 17.8% in 1Q01. Net income grew 18% in the quarter and EPS of $0.41 grew 17% compared to $0.35 in 1Q01.

Now as always, let us go through the overview of sales both for the company and then each of the businesses. Sales in 1Q for the total company totaled $1.950b and were up 11%. Total US sales of $959m increased by 12% in the quarter and international sales of $991m represented an increase of 10% at actual rates. Foreign currency had a five full percentage point impact on total International sales. In other words, International sales growth excluding the impact of currency was 15%.

Now let us go business by business. First in terms of Renal. Sales for the renal business in 1Q02 totaled $465m, which was a 2% increase over 1Q of last year. 1Q02 sales growth for renal excluding the impact of foreign currency was 7%. US sales of $129m increased 4%. International sales, up $336m were up 1% and excluding the impact of foreign currency, 1Q02 International sales were up 8%. Always remember that Renal business is the largest business we have in Japan, and obviously given the issue of Yen, it hurts us on the sales line but not in terms of earnings. At constant rates, PD growth was in the high single digits, HD sales growth including the impact of the dialyzer recall was flat the prior year. Sales from the service businesses, both RTS and RMS totaled approximately $100m in the quarter with sales growth in the high single digits. Al and the entire renal team remain focused on implementing growth initiatives to accelerate the renal sales growth rate over time as discussed at annual growth conference last month. These growth drivers include implementing the integrated care strategy. This will significantly expand our market opportunity by focus on and then providing products and services for patients over the course of their therapy lifetime. The Watson and PrisMedical technology deals that we announced this quarter also support this strategy. Also continue to increase PD usage globally. The PD growth continues to be in the high single digits. We expect this growth rate to accelerate in the future as we introduce new products in 2002 to the market place include in the United States. Also new clinical data becoming available which supports that more patients can benefit from PD without sacrificing patient outcomes and we continue to educate patients about their treatment options. Also we are significantly improving HD position with several new product launches in 2002 including our first synthetic dialyzer - the , our accurate instrument for the acute care setting* and the Aurora haemodialysis machine for the self-care and markets. In terms of expectations, I expect the product businesses, PD and HD, to continue to grow in the high single-digits throughout 2002. I stated last quarter we will only acquire RHES* centers where it makes strategic and economic sense. Given economic conditions in several countries Latin America such as Argentina we have significantly reduced the rate of acquisition in these markets. Therefore I expect our service businesses to grow now in the 10% range versus the historical growth rate of more than 20%. However as we stated last quarter, I continue to expect total renal sales growth at constant rates for full-year 2002 to be similar to the 1Q02 as it has been in the high single-digits despite the fact that we are reducing the growth rate for the service businesses.

Now turning to Bioscience.1Q02 sales for the total BioScience segment totaled $746m and was up 18% at actual rates. Foreign currency had a 3percenatge point impact on total BioScience sales growth, that is, sales growth excluding the impact of foreign currency was a very robust 21% in the 1Q02. US sales in 1Q02 was $382m, representing an increase of 24%. 1Q02 International sales of $364m were up 13%. Excluding the impact of foreign currency, 1Q02 International sales for total BioScience were up 17%. At constant rates, 1Q02 Fenwal sales were up in the low double digits and the rest of the BioScience business was up more than 20% in 1Q02.

Now let us talk a little more related to Fenwal. Fenwal sales growth for the 1Q02 at constant rates increased in the low double digits. Sales growth rate in 1Q02 was primarily driven by sales in our business and continued interest in Leuko Reduction. Leuko Reduction sales growth in 1Q02 at constant rates was up more than 25% with sales in the quarter totaling approximately . I mentioned last quarter we recently submitted our file to the FDA for for approval of , our new (indiscernible) system that combines collecting of whole blood and separation into components into one automated process. It allows for maximization of component output per donor. This fast and efficient new system would enable certain donors to give two units of red blood cells vs. one unit in the current manual process. We expect US approval of this product in 2H02 and expect to begin European clinical trials by the end of 2002. In addition, we continued to make excellent progress with our partner Cerus Corporation in development of INTERCEPT blood systems for pathogen of blood components intended for transfusion. We are currently awaiting European regulatory approval of the INTERCEPT platelet system, and as we discussed at our annual growth conference, we continue to be confident in a successful launch of this product in 2H02. We also continue the process of filing in the marginal regulatory submission of the for the INTERCEPT Platelet System. In fact we completed the filing of the largest , the clinical in 1Q. We remain on tract to submit our files in the US and Europe for the INTERCEPT Plasma System in 2002. Overall I am very pleased with the progress that the Baxter & Cerus teams are making in our partnership to bring INTERCEPT Blood Systems to transfusion patients worldwide. As you know the INTERCEPT products represent a significant growth opportunity for both Baxter and Cerus and I give a lot of credit to Steve , his team, as well as Greg and the Baxter Fenwal team. As mentioned earlier BioScience sales growth in 1Q was up over 20% at constant rates. This sales growth was driven by very strong growth of Factor VIII, both recombinant and plasma-derived as well as by vaccine and other plasma products. Recombinant Factor VIII sales were up over 25% in the quarter and plasma-derived Factor VIII sales exceeded 10%. As you know one of the key growth drivers for Baxter's BioScience continues to be Factor VIII. As you may recall, there are estimated 300,000 individuals worldwide affected with hemophilia and only 20% of the population is being treated today. In addition, only 15% of this population uses Factor VIII for prevention, mainly due to product availability. Given the supply shortages and increased demand for Factor VIII, we continue to sell everything we can make and do everything we can to provide as much product to the market place as possible. As we discussed at the annual growth conference last month, we expect the market continue to expand due to several factors; current treatment levels, increasing the use of (indiscernible) products to prevent bleeding rather than treating after a bleed, the aging of the adolescent patients who typically gain weight with age and as a result to require higher qualities of Factor VIII, filling in the channels and increase in supply to product shortages, improving access to quality hemophilia care in the developing world by identifying new patients and converting basic treatment methods to Factor VIII concentrates, and determining the optimal hemophilia treatment regimens in regard to prophylactic treatment, an increase in dosing to treat . Given these factors, we expect the total Factor VIII market to grow in the low-double digit range over the next several years with the recombinant market growing in excess of 20%. While the total market will expand, I believe Baxter is very uniquely positioned in the market as a result of several factors; strong customer relationships driven by our broad product portfolio and services, which provides patients with different products and technology choices, extensive capabilities in both plasma and recombinant manufacturing with reliable product availability, global presence in developing markets, where we can continue to drive the adoption and utilization of our products, our leadership in continuing to bring innovated new products to the market including being the first company expected to introduce a totally protein-free Factor VIII.

In terms of the next generation recombinant Factor VIII, we met a significant milestone in 1Q with the completion of the pivotal Phase III clinical trial for our next generation recombinant Factor VIII. As you know, this product is the only one of its kind and excludes any added proteins or raw materials derived from human or animal sources in the manufacture, purification, and formulation of the final product. We remain on track to file our US regulatory submission for our protein-free product and first manufacturing suites at Neuchatel, Switzerland in the 2Q and to file our European regulatory submission for our protein-free product and the first and second manufacturing suite in Neuchatel in 3Q. We continue to produce products in the first two suites at Neuchatel and expect to have an excess of 200m units available by the end of this year.

Let me provide you with some details regarding our manufacturing capacity and expansion since I know at some point this can be a little confusing to people. SO I will take you through this step by step. Our original expectation was to build eight suites. Four suites in Thousand Oaks, and four suites in Neuchatel, Switzerland that will provide us with more than 2b activity units. Given the significant increase in demand of recombinant proteins, as we mentioned at the annual growth conference, we now expect to have a total of nine suites, four in Thousand Oaks and five in Neuchatel, Switzerland. In addition, given the significant yield improvements that the BioScience team has been able to generate, we now expect to produce more than 2.5b activity units by 2005 in just six suites. So that is really 25% more product in only six of the eight suites, four in Thousand Oaks and two in Neuchatel. The last three suites in Neuchatel will be 5000-liter reactors. That is twice the size of our current reactors and will be state-of-the-art multipurpose suites. In fact the first two suites in Neuchatel as well as the four suites in Thousand Oaks will all be more multipurpose suites. This will give us the flexibility to manufacture additional recombinant Factor VIII if the demand continues to increase or to be able to manufacture other recombinant proteins such as Alpha-1 antitrypsin, BPI/Neuprex, Epo Omega, and several other recombinant products in our pipeline and in discovery.

I am very pleased to report that we are making excellent progress in the manufacture of the smallpox vaccine and given the fact that the yield are as they are, we are also in discussion with several governments for additional smallpox vaccine agreements. As you know, the smallpox vaccine is manufactured using our unique and proprietary vero cell technology. This technology provides significantly higher yields and a faster production cycle compared to more traditional methods. In addition, we recently signed a contract with the Dutch Ministry of Health for more than 2.5m doses of our NeisVac-C vaccine. As you know our NeisVac-C vaccine is already licensed in Europe, UK, Canada, Argentina, Brazil, and India and in 1Q we submitted an in the US for our vaccine. We expect to initiate Phase II and III clinicals in the US in 2H02. As we previously communicated our Influenza vaccine recently received approval from the Netherlands. This vaccine is also produced using our proprietary vero cell technology. We expect to have a limited launch of the influenza vaccine in Europe in 2003 and full launch in 2004 after finalizing the construction and licensure of the new production facility in plan. We expect to have additional doses available after the facility licensure in in 2005. We are also expanding Biosurgery product portfolio with the acquisition of Fusion Medical Technologies. Fusion's primary commercial product 'flow is very effective in controlling severe after bleeding. It is very complimentary to , which is more affective as a sealant for slower bleeding. Fusion brings a proprietary technology platform and expertise in collagen that is a compliment to Biosurgery's fiber based technologies. I am very optimistic about the future of Baxter's growing Biosurgery business and we expect to close the acquisition of Fusion Medical in the 2Q. In terms of 2002 milestones, we continue to make significant progress with our milestones for 2002 and we are on track to do several things; submit the for the new recombinant Factor VIII in 2Q and European file in 3Q, initiate Phase III clinicals in mid 2002 of our next generation , which is a 10% liquid formulation product with significantly higher yields, which is obviously very important given the significant demand for , initiate the Phase I clinicals for Alpha-1 antitrypsin, initiate Phase I and II clinicals in the United States for the influenza vaccine and complete Phase II and III clinicals in Germany for vaccine which is the tick-borne encephalitis in 2002.

I expect the strong recombinant Factor VIII growth to continue and our outlook is to have sales growth to be in excess of 20% FY02. As I had previously stated given the strong sales of Factor VIII, vaccines, biosurgery and LeukoReduction, I expect the Bioscience business to deliver sales growth for full year 2002, at least in the mid teens.

Now at this point we would like to return it over to our Senior Vice President and Corporate President of our Medication Delivery and also the Big , Dave Drohan.

Thanks Harry! Good Morning everyone! I would like to end with an overview of 1Q sales.

1Q sales for Medication Delivery totaled $739m. Sales growth in the quarter was 10% at actual rates. Excluding foreign currency, total medication delivery sales were up 12% for the quarter. Sales growth excluding acquisition was in the mid single digits, at constant rates. US sales at $448m grew 6% in 1Q and international sales of $291m were up 18% of actual rates. Foreign currency had 4-percentage point impact on 1Q international sales. That is international sales growth in 1Q, excluding currency was 22%. Medication Delivery sales growth for the quarter was driven by sales growth in the drug delivery business of more than 20%. Tis Growth continues to be driven primarily by sales of frozen in the US and continued expansion of Liquid internationally.

Highlights for the medication delivery business for 1Q02 include the ongoing integration of oncology, pharmaceuticals, and self-care solutions and the addition of several new alliances. The Oncology acquisition provides us with significant growth opportunities in the oncology marketplace while leveraging our core competencies in the recombinant technology, vaccines, and drug delivery systems. The pharmaceutical acquisition has broadened the range of drug delivery products and services we can now offer to our global pharmaceutical partners. The additional (indiscernible) and prefill syringe capabilities along without existing line of prefilled and reconstitution technology has enhanced our positions as a full line drug delivery service provider. Also we recently acquired health-care solution, a leading developer of automated patient information and medication management systems. The technology combined with our presence at the bedside with our colleague in Fusion pumps is providing the foundation for we are growing our comprehensive medication delivery systems. The system is designed to reduce medication errs.

At the end of growth conference in March I provided with details about our agreement with RTP , now known as Sky to collaborate on the use of their insoluble drug formulation technology to develop injectable formulations for insoluble medications. To date we have reached agreement for four feasibility studies using the RTP Pharma's proprietary technology. In addition during 1Q, we negotiated an alliance with Therapeutics, a privately held advanced drug delivery company located in Boston. Therapeutics has developed a proprietary process performing* drug molecule protein into microspheres for sustained release through various routes of administration including inhalation and . Therapeutics and Baxter's BioSciences business recently initiated a research collaboration to explore the feasibility of applying technology for microsphere technology to narrow ways of delivering proteins.

For 2002, the Medication Delivery business was focused on several growth initiatives. These include continued replacements of our pump. As you know, since the introduction of the in 1997, channel placements up 230,000 units. We once again expect to place better than 50,000 channels in 2002. Remember always the number of channels we place drives the sales of the disposable and in general more than 10 sets are used per month per channel. Continued international expansion of our higher margin specialty products, which differentiates us, form the market and creates a competitive advantage for our business. In fact international sales growth of these specialty products continues to be very strong with growth up in the mid teens this quarter.

The third point is our continued focus on geographic expansion with the goal being to provide access to our complete portfolio of medication delivery products and drugs to more patients worldwide. For this will continue to broaden our portfolio by extending a scope of the products and entering new market segments, for example expanding drug delivery platforms and extending the anesthesia into the broader critical care markets. As always, as I said at the growth conference, we will continue improving operational excellence through cost reductions. We continue to target an annual 3% reduction from manufacturing cost and are very active in pursuing an integrated supply chain initiative to maximize our asset turnover and better leverage our operating expenses. Given these growth initiatives, our focus on geographic expansion as the base business and our specialty franchises in oncology, I expect medication delivery sales will accelerate over the next couple of quarters and grow in mid teens at constant rates for FY02.

Now I would like to turn it over to our Chief Financial Officer Brian Anderson. Brian?

Thanks Dave and Good Morning everybody!

If you turn to page seven and eight of the press release, I will walk you through the details of the P&L for the 1Q02. As Harry mentioned, total sales growth in 1Q was 11%, and excluding the impact of foreign currencies, the sales growth was 14%. This is the sixth consecutive quarter in which Baxter generated the sales growth rates in the low teens before foreign exchange. Our gross margin rates in 1Q of this year was 45.4% compared to 43.9% in last year's 1Q. This 1.5 percentage point margin improvement was primarily driven by the very strong sales of our BioScience business. The SG&A ratio in 1Q was 20.5% and increased 17% over 1Q01. As I mentioned in our last conference call, we are increasing investments in sales and marketing programs to fuel continued top line growth for the initiatives many you of saw at our annual growth conference a few weeks ago. R&D spending in 1Q was $115m compared to $103m in 1Q01, and $115m for 4Q01. This is an increase of 12% over 1Q01, and this growth is primarily related to our continued investments in the biopharmaceutical and vaccines businesses. The R&D growth rate over the course of 2002 will continue to accelerate as we continue to make progress with many of the key strategic milestones in our R&D pipeline. Operating margins are in the quarter once again. We improved our operating margin to 19% or a full 1.2 percentage points over last year. Our improved gross margin this quarter enhanced our flexibility to make the incremental investments in R&D and marketing programs to fuel our top line growth to the long term and it is very consistent with the message I delivered at the growth conference. I am very confident that our operating margin for the full year 2002 will definitely exceed 20%. Net income in the quarter increased 18% over Q01 and our diluted shares outstanding in 1Q were $622m, I think consistent with the guidance we had given previously. Earnings per share in 1Q was $0.41 or a 17% increase over 2001.

Now if you turn to page 9 of the press release, I will just go through the summary of operational cash flow. Operational cash flow in 1Q was an outflow of $217m, compared to an outflow in 1Q01 of $111m. Day's receivable outstanding was approximately 59 days at the end of 1Q, similar to the DSO of 60 days from 1Q01. Inventory turns of 2.7 turns this year compared to 2.9 turns in 1Q01, and obviously continuing to improve the velocity of inventory and working capital is a very high priority of mine. Capital expenditures for the quarter was a $139m compared to $131m last year and a significant portion of this investment continues to be in the BioScience segment. In total, while I expect capital expenditures for the full year to be approximately $900m, I expect this year to be just like the last several years and we do have plans in place to ensure that we deliver for a $500m operational cash flow commitment for the full year.

Now I would like to turn it back to Harry for his summary and outlook before we move to take your questions.

Thanks a lot Brian!

Overall Baxter's balance portfolio and strong operational performance as well as the positive momentum we have generated over the last years positions us extremely well, I believe, for 2002, 2003, and beyond. As we discussed at the annual growth conference, Baxter's vision is to become the leading global provider of critical therapies for individuals with life threatening conditions with the result being recognized as one of the most admired companies in the world. As we also discussed at the annual growth conference, we will continue to operationalize this vision by focusing on four key goals; becoming the best team, the best partner, the best investment, as well as the best citizen. During the last 8 years we have focused on significantly improving our consistency and credibility and now going forward we are continuing to focus to build on the momentum we have generated with continued discipline and focus on operational excellence while at the same time significantly increasing our growth rate. That is, growth that is profitable, sustainable and capital efficient. In order to achieve these goals, we will continue to increase our investments in global marketing programs, research and development, as well as capital expenditures. As a result, our long-term objectives are the following; consistently grow sales in the mid teens, continue to increase our level of gross margin, continue to leverage overtime, our SG&A, continue to grow R&D in excess of our sales growth, continue to improve our operating margin to the mid 20% range, continue to consistently grow our net earnings and EPS and move that overtime from the mid teens to the high teens, and finally to generate cash flow from operations before capital expenditures, in excess of $1.7b per year, and in excess of $700m per year after capital expenditures.

Now let me be more specific about the outlook for FY02. As we previously stated on prior call as well as at the annual growth conference four weeks ago, at current rates we expect our 2002 sales to grow in the low teens. At constant rates I expect the following: Renal sales growth to be in high single digits, medication delivery sales growth to be in the mid teens, and BioScience sales growth to be at least in the mid teens. Operating Margin: While we will continue to increase our gross as well as continue to increase investments in R&D and select marketing programs, I expect to once again, as Brian stated earlier, to improve our operating income ratio. We expect our operating profit margin in 2002 for the first time for the full year to exceed 20%. In terms of earnings given this leverage, I expect our growth in pre-tax and net earnings after-tax to be in the high teens. In terms of Earnings per share with the increased share count resulting from acquisitions made in 2001, I expect the diluted share count, as Brian mentioned earlier, to be in the $625-630m range for 2002, resulting in 2002 EPS growth in the mid teens as we had indicated earlier. In terms of cash flow, we expect operational cash flow before capital expenditures to be approximately $1.4b in 2002 compared to $1.3b in 2001. With growth opportunities especially in the BioScience business and given our manufacturing expansions, we expect our capital expenditures for FY02 to be approximately $900m representing a 15% increase. Even after this increase in capital expenditures, we expect once again to generate for FY02, an excess of $500m in operational cash flow, after-tax, after working capital, after capital expenditures.

So in summary I believe we are extremely well positioned for the remaining three quarters of 2002, 2003, and beyond and at this time Brian, Dave and the rest of the team and I will be more than happy to take any questions on any topics you may have.

Thank You! And ladies and gentlemen, as reminder, if you have a question at this time, please press the number one key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. Once again if you have a question, please press the number one.

Our first question is from Ted Huber of Banc of America Securities.

Great! Thank you! Harry will you answer a question down in the BioScience business, the 25% growth in the recombinant Factor VIII. Can you talk about what portion of that's coming from, inventory liquidation or price vs. the portion that's actually coming from yield in cycle time improvements in Thousand Oaks and of course behind that is do you have the production capability to sustain it up at that level for the balance of the year?

Well thanks Ted! Without breaking it out, I mean just competitively that becomes a little bit of an issue. I would tell you this Ted, we talked about the fact and I think Norbert Riedel our Chief Scientific Officer and Thomas Glanzmann mentioned this, we are very fortunate, given the investments we have made to continue to increase the yield. So, I would expect to see that type of yield improvement to continue to occur. So, I really believe that puts us in a very, very strong position. But when you talk about being able to have sales growth in this area in excess of 20% for the year quarter by quarter. I think that's a very reasonable assumption, Ted, particularly due to the yield.

Ok great! And this a quick follow-up on the plasma fractionation side. Did the Factor VIII plasma product decelerated the growth a little bit there? Have you shifted your mix in terms of your or are you growing some of the businesses more rapidly, or was there just less process in the quarter?

I think overall Ted, as we continue to improve the yield on the plasma side, and if you remember the comments Norbert and Thomas made, we expect to increase the total number of available and fractionate it from currently 4m to close to 6m over the next couple of years. So, we would see continued growth as we increase that yield, as well as the additional units. We would expect to see strong growth outside of United States and Europe for the plasma Factor VIII product as well as for particular IV-IG.

But if we look at shorter term Harry, I mean, was there anything about this 1Q that represented a slowdown in the plasma growth. Are you going accelerate in the back half of the year?

No. I would say for you to see plasma growth in the, let's call it, 10-15% range, I think is helpful, particularly if we add capacity. In the quarter, we were pretty capacity constrained. So, I would think that you would see some of the uplift as you go up for the following three quarters. So, said in another way to complete the puzzle for you, for recombinant I will be surprised if you didn't see at least 20% growth on the recombinant quarter by quarter and see IG-IV on the 15-20% range, quarter by quarter.

Ok, great! That is very helpful. Thanks!

Thank You! Our next question is from Dan Lemaitre of Merrill Lynch.

Hi everybody!

Hi Dan!

Just couple of quick questions here then. First off on the recombinant side, Harry, I just wanted to make sure that the math kind of works out, because while I focused hearing you talked about the fact that you are going to produce 2.5b activity units by 2005 and I think if you just do the math in terms where you were last year, that works out to an over 25% growth rate and given your comment that you thought that the recombinant market will grow over 20%, it doesn't seem to leave a lot of wiggle for some share loss, which I think most people would assume will happen when buyers comes back and up. So, could it be that you are just under estimating the growth rate of the recombinant market overall by saying it's going to grow at 20? I'm just having a hard time reconciling all this.

Yeah Dan! One thing that I think is fair is, I really continue to believe that the market will grow. I really believe that you take a look at everything we have seen and you have written a lot about this already, Dan. We continue to believe that the demand when you take a look at worldwide prophylactic treatment and everything else, all I'm giving you, Dan I think, is the conservative side as to what we think is going to occur. Personally, I believe the market is going to be much larger, but at this point in time I don't think we need to talk about it being much larger to meet the commitments we have made. But your math, I think is right. Could the numbers be significantly higher? Yes, they could. Are we preparing ourselves that it could be larger? That is exactly the reason why we are now making this last three 5000 leader bioreactors. So, we think we are in great shape there and again, Dan, I know we talked a lot about it. Then again I think its your guys job to challenge this but if at sometime in time, 2005, 2006, or whatever, if in fact, in some time all the rest of these guys really do deliver what they say they are going deliver and as you well know for the last 15 years that's never happened. But if at some point it really does and all of a sudden this becomes a marketing game, we actually believe, given the fact that we are slightly biased to believe, that the number one issue for a patient is a consistency of supply, which we are the only company never to be operating under a consent decree and number two, remember we will be the only company with 100% protein-free product. We are going to start cranking up the market. The reality being is, as a former finance guy, why spend a whole lot of time on marketing when we can sell every unit we can make.

Right. Just one quick followup. On the BioScience for the year at least mid teens would seem up pretty conservative in the light of what's going on vaccines. I know you don't want to get specific about some of these contracts, specifically the smallpox and what the Netherlands contract may mean. But in the aggregate, should we be thinking about a total vaccine number this year of about $200m still?

I would say probably closer to $150m, Dan. But again lets be pretty precise. Do we think that the growth opportunity for BioScience could be higher? Yes. You know mathematically to be higher? Yes. Are we feeling pretty good about the ability to generate that growth? You know something tells me, Dan, with the disappointment/discipline* we have had over the last eight years, if SG&A is growing in the quarter 17%, we are probably feeling pretty good about what the growth potential looks like.

Ok. Fair enough. Thanks.

Thank You! Our next question is from Glenn Navaro of Credit Suisse First Boston, Inc.

Hi Guys! Good quarter again.

Hi Glenn!

Just a followup on the smallpox vaccine. One, in this current quarter did you book any revenues for smallpox vaccine and then second you mentioned you are in talks with other countries to develop other contracts to deliver to other countries. Should we assume when we start seeing those contracts executed and rolling across the tape that you will, like you are with these current contracts, spend it away?

Spend it away, Glenn, has a negative connotation to it. It is just we are not, you know, focused and focused and discipline and consistent and credible. I know you don't mean it in that way, Glenn.

Reinvested, I meant. Reinvestment.

I am Glenn! Here is the way I would say it. Ok? And obviously my only sensitivity is what we promised to Secretary Thomson and the Government working with the to what we would say and not say, given the fact that is a publicly traded company. If anything, I know you guys give us a little bit of credit for being sensitive, but if it relates to a Cambus or or , we are really sensitive in impacting public trading companies. Let me put it, I think precisely this way for you Glenn, number one, when we told you that with the that we will deliver 100% of what the Government required by the end of the year. Let's just say Glenn, we are feeling very good about our ability to do that and given the fact that we committed our word that we would make that happen, something tells me we would not be running around meeting with this many different Governments as we are, if we didn't think we had a very high probability that we meet our requirement with the US Government. So, one, we are on track to do exactly what we and said we would do related to the US Government. What is getting booked when, what's getting shipped when, all I will tell you for the full year, we will do exactly what we said we will and this whole vero cell technology, Glenn in terms of the improvement of what that really is over the procedure is one that the yield's better, the cost is going to be better, and we are hoping that we get some of these other contracts with these other countries. Now, once again and not to be mysterious, you know, we are prohibited of saying what we are doing with what country, does not want us to talk about that, but when the Government says we can talk about it, we will talk about it. Now, you sat there, you know what happened at the growth conference. We have got a lot of things we would like to invest in. That is why we have had SG&A growth. That's why we are grew our R&D faster than our growth in sales. So, when we take a look at the overall pattern for the year, that is one of the reasons when Dan says do you think the BioScience sales growth could be closer to the high teens and the mid teens. You know, obviously, there is a reasonable chance of that happening, given the trend that we have got whether it is smallpox, whether it is recombinant, whether it is IG-IV, whether it is the higher yield etc.

Ok, great guys! Thanks.

Thank You! Our next question is from Ben Andrew of William Blair & Co.

Good Morning!

Hey Ben!

Just wanted to ask about Renal. Continues to struggle just a little bit relative to our estimates. Talking about your expectations PD and why are you confident that you can deliver accelerating growth here and may be as they relate to timing of , how significant that would be on the approval in the US?

Good, good Ben! Let us walk back now to what I know, Al talked a little about it at the conference but let us get into a little bit of detail because, Ben, I think this is important. One of things that Al is obviously in the process of doing, as I try to keep it very simple, is getting TD turned around in terms of starting increased penetration and he talked about that quite a bit at the growth conference. Obviously, some of these recent studies would point to the ability to move in that direction. I think it is going to revolve in terms of extra approval. That will help us get PD growth much closer to 10% than the mid single digits. HD, obviously had stumbled as a result of the whole issue, which by the way we think we have under control. You heard the comments that Al had made. I think that is behind us as we move forward. Al clearly is very focused on increasing the renal format area and given what he has done so far and given what he has got in the queue, I think we are starting to feel more optimistic about that happening and one area that you know is well enough to know the discipline piece. If we really wanted to have renal sales growth in excess of 10%, that obviously we could have done as a result of continuing to add sales in the service side particularly in the RTS outside the States. But again, you know, we are absolutely not interested in generating sales that overall will not increase our operating margin and that's why we put the brakes on that. So, I would say overall, when you look at the pipeline, you look at the new products that we have got, both the extra piece as well as the new HD products, and the other ones that I had mentioned, I think Al has a pretty high level of confidence that we will do the things that we have said. We will do it profitably then and really the question I think now is going to be, is it going to make economic sense for us to continue to accelerate the service business particularly the centers outside the United States or not. That will always have a 2 or 3 percentage point impact on the sales growth rate. Obviously not profitability but definitely of the overall sales growth.

Is there a risk, Harry, that you slow that down even further than 10% and then following up can you out for us the impact on HD, if I recall specifically you talked generally about that.

I would say, Ben honestly, there is a chance that we could slow the centers down even little bit more. I think maintaining a sales growth in the current range though is durable because I do believe we will see enough uptake on PD brand* (indiscernible) up end. In terms of HD, I think Al would say that the impact on HD is actually behind us. The overall impact that we are going to quantify for you, Ben, I would say it is probably in the $25-$30m range.

That is in this quarter or total?

That's total.

Thank you.

Thank you! Our next question is from Rick Wise of Bear Stearns & Co. Inc.

Harry, Good morning Harry!

Good morning Rick!

Rick we can barely hear you. Rick, you have to get closer to the mike buddy. I cannot hear a word.

I am sorry. Our next question we will move on to is from Sheryl Zimmer of Deutsche Banc Alex. Brown Inc.

Ok! Rick if you can get to a better phone, why don't you call us, because I know Drohan is waiting for some questions from you on Medication Delivery so he is going to be very disappointed if you do not get back in the queue Rick.

Sheryl?

Hey there! Well I actually have two questions for Dave.

Perfect!

The first is, I was just wondering if you can talk about the proforma growth for (indiscernible) in the quarter and then any updates that you are willing to give on the existing products and then any newly licensed products. Then the second separate question is on anesthesia. My understanding is that the business grew in the low single digits. Is that correct and if it is, I guess it will be just as bit slower than it had been in the past and I was wondering if you could give us your thoughts on that business. What we should look for the balance of the year?

Sure. Thanks Sheryl. Let me begin with the second question with the anesthesia. In anesthesia, we are very comfortable that we are going to see the kind of growth that we predicted for anesthesia for the year. In 1Q, we saw some of the US products beginning to mature. Some of our proprietary drugs, which we expected to happen, are beginning to level off in terms of growth. However, we continue to feel good about throughout the year, we think we will grow about 10%. Global growth is where we have made some focus in anesthesia and made some investments. Our growth in Europe is in excess of 20%. Our growth in Intercontinental area, although of a very small base, is looking very well and I think that the investments that we are making in growing outside the US are good. If you really look at the history of anesthesia, we started that business in 1996 at about $70m. It is in excess of $550m in 2001 and as I have talked about it in a couple of growth conferences, we have grown that by internal growth and mainly by acquisition and alliance. We will continue to do so. We have got an internal pipeline that looks good and a strong PD pipeline. So, I feel pretty good that we will see the number we need to see this year on anesthesia, which will be in mid-single digit growth. But I am very confident we will see that get our billion-dollar goal by 2005. The other question you asked is how doing? Athana is meeting our expectations. We have integrated it. The integration is done. We feel real good strategically about giving us the foundation to enter the oncology business. As you know Sheryl, we probably saw somewhere in the range of $200m in the corporation for patients who have cancer. gives us a focus and a foundation to continue to grow those on a product line and in addition provide in license opportunity, acquisition opportunities. The integration is going well. We have got very good people, good manufacturing capabilities. So we are comfortable with what is happening with .

That is of great interest. On , still no new competition?

Nothing as we speak. No, I have not seen any yet. We are forecasting we are going to do well with . It is interesting. We are beginning to see better compliance in our GPO contract with and obviously our pricing will be so that the competition does not enter. So, we still feel pretty good about

Ok. Thank you so much

Sure

Thank you! Our next question is from Rick Wise of Bear Stearns & Co. Inc.

All right Rick!

Hey Harry, I do not what happened. Couple of quick ones and then I do indeed have some questions for Dave as well.

Good.

First briefly, on Brian. is usually in that +10, -10 band, this time it was . Just curious to hear your perspective on that.

For Dave specifically, just remind us why the US medication delivery was little weaker? You had a tough competition quarter for sure. I think I understand why things as you go through the rest of the year? Second one for Dave, the placement of 50,000 channels a year, this is in place, or you just gain share? Are you gaining share and what is share and against whom? Just if you could give us some perspective there.

Ok Rick I will just deal with the Sundry quickly so that Dave can get to the more substantive issues. The Sundry line is nothing unusual in terms of the content. It continues to be minority interest and foreign exchange. While it is a tad over the +10, -10, guidance that we gave, I don't spend a lot of time worrying about it particularly in light of the very strong quarter that we posted.

Dave?

Yeah Rick. This is Dave. Let me see if I can answer both of your questions beginning with the pump placements. When we placed 50,000 channels, we don't try to measure hardware growth by measuring YtoY sales. The real key to hardware growth is we growing our install base or, as you talked about, our share. Now because the key to that (indiscernible) is that we drive 10 sets per months per channel through it and we do see substantial share growth or substantial install base growth in our hardware every year and the point of that is that we try and reduce the amount of share we lose at the bottom of the , while continuing to fill the top. A portion of it competitive share and a portion of it is replacement. We are comfortable that we are doing well on the growth on the hardware side and in fact we have a leading position in North America now, rapidly approaching the leading position in Europe. So we feel pretty good about, that In terms of medication delivery in the US. First let me say that the full year performance on the full year performance, I am confident it will grow our existing business in the high-single digits and if you couple that with growth from our acquisitions, I am comfortable that we will achieve our mid-teen growth over the year. Specifically in 1Q, we saw a little slowdown in growth in some of our mature anesthesia products, but as we go through the year, we expect to accelerate the growth. First, we have an opportunity to increase our manufacturing capacity in Penicillin. You know there are some vial shortages and we think we are going to benefit by that. We have made the investment and we are going to increase that capacity. We will increase the availability of the critical job for the customers in the second half. On next, we launched some products late in the year last year. One I am real excited about is (indiscernible) which is a high-end pump that exceeded our expectations and as the sales cycle begins to hit and as you know long sales cycle, we will see that accelerate in the back end of the year and our that adds to our will also accelerate in the back end. So I feel pretty good that we will hit our high-single digit growth on our existing business and (indiscernible) growth when I combine with the acquisitions.

Thanks very much!

Thank you! Our next question is from Glenn Reicin of Morgan Stanley Dean Witter.

Good Morning folks!

Good Morning Glenn!

Couple of financial questions for I think Brian, which is why I want all off so you can answer them at once. Firstly on the P & L, gross margins improved a lot more rapidly than my expectations and SG&A also grew a lot more rapidly. Do you expect that pattern to persist for the remainder of the year? That is question number one. Can you talk a little bit about the cash flows? That is specifically, I was wondering why the non-cash charges went down so dramatically from 2001 to 2002? Then may be you can walk through some of the other issues with respect to some other items that led to the large decrease?

Ok First on the gross margin, we are very pleased with the gross margin performance which is largely due to the product mix with BioScience growing so fast and when you couple with that with the after acquisition, which has a much richer margin mix than the overall company average, that was also a factor. Then the third piece, as Harry mentioned, the slowdown in and service revenue within Renal, which tends to be lower gross margin but good operating margin. All of those together really drive the improvement in the margins. Over the course of the rest of year, I think you are correct. We traditionally have margins improved, slightly sequentially as we go through the year. I would expect similar performance this year as well with the full year average margin over 45%, at 45% to 46% range on for the full year. On SG&A, pretty much as I stated, given the strong margin performance, we definitely have the flexibility to insure that we don't under invest in a lot of the product launches and growth initiatives from a marketing standpoint, that we talked about at the growth conference. So, there will probably be a little less SG&A leverage this year than you have seen in the past. But obviously, we won't spend a dime extra on SG&A, than we have to. When you put that all together, I feel very good about the operating margin performance that we are striving to achieve to, not just this year, but as we setup the future to drive the operating margin from the 20% range to 25% over the forecast period. In terms of cash flow, the non-cash charges on the cash flow statement that is larger just the timing of deferred taxes and the interplay between deferred taxes and current tax liabilities. The major factor driving the overall reduction in cash flow is the build up in receivables and that was largely due to the fact that in this year's 1Q, we had doubled the international growth than we did in the 4Q and I think if you know, our collection period outside the US are a little longer than in the US. So, I think we definitely see the DFO's fall back in line. We will aggressively manage our inventories and I am very comfortable that even after funding the increases in the capital expenditures, we will once again hit our $500m target for the full year.

Great. Just make sure those guys overseas pay up.

Oh yeah

Thank you! Our next question is from Lawrence Keusch of Goldman, Sachs and Co.

Larry?

Yeah Hi! Just two questions, one following on for Brian, just relative to the cash flow, should we expect any real difference in this, sort seasonal pattern that you guys have been having as you move to that $500m operating cash flow number? And then the other questions, perhaps for Harry, I am not sure how much you will be able to add on it, but just sort of thinking about your discussions with the other countries, you know Europe etc, for smallpox and just trying to get a play on how interest are they, you know with their price sensitivity issue out there? Is this one of the issues where it became one or all other will probably jump on the bandwagon. So with that sort of specifics I am just trying to get a flavor for what re the hot buttons.

Let me just take the first one. You will see a similar pattern with, you know, much stronger net cash flow generation in the back half, as you have seen in the prior years.

On the smallpox one Larry, in terms of what I could tell you and it is really a little hard to generalize but I think there are several things that are going on. Clearly, there is interest, but country by country, I think there is a lot of discussion of, are they going to do it. They have done in United States and really be able to protect the entire population. Are they just talking about small segments of their population, the military, the government, whatever. So you have got a lot of inferable going on depending on the country you are talking about. That is number one. Number two, there is some pricing sensitivity particularly given the fact as every country in the world is trying to figure out to deliver the healthcare at a reasonable cost. So that is an issue. I think we are very fortunate to have this vero cell technology where we have a significant advantage, we believe which was the whole reason we beat nine other big (indiscernible) in the United States. But another one that is clearly out there Larry is, the what I call National Interest and let us face it, in some of these countries if there is somebody locally, nationally, or in their continent that can do it, you know there is a little national pride that goes on as opposed to depending on a company based in the United States but net at the end of the day I would not get carried away but I do believe we will pick up several of these countries and I think it is something that will be helpful to us.

Okay. Terrific, thank you.

Sure

Thank you! Our next question is from Scott Davidson of US Bancorp Piper Jaffray

Scott?

Hi Good Morning! Harry can you just may be push one step further on the renal services issue. You mentioned a slowing down of growth. Calibrate us as to the possibility that this could be a first step toward re-evaluation. Whether do you want to stay in that business long term?

Ok it is a fair question Scott and if Al was here you would have probably got a little more detail with you. This one I would put under the category of, we are looking at this pretty much the same way we have for the last 7-8 years and here is how that works, Scott. If, and I stress if, we can acquire centers and run centers on an economic basis, clearly it makes sense because by being in the center business it helps out the overall strategy of the integrated care approach and that is really helpful. I did not want to give you the impression, that is why this Q&A is always helpful because it gives us chance to clarify so there is no confusion. There is no slowdown in the actual growth of the specific centers. In fact the same store growth within the centers is actually very attractive, if any thing that is fully it is up a bit. That is where the reasons why it is interesting to see that the growth within the 10% range and they are no acquisitions. So the key question, Scott, is do you or do you not acquire ? And as we all know without mentioning the name of companies, some companies get so fascinated by what their sales growth is that they buy things and then it turns around that they don't generate any earnings. So when we try to look at this, the old rule we have had of are we going to be able to generate a 20% cash on cash after tax internal rate of return. And right now in looking at the these centers particularly in some of the countries that I talked about before in the Latin American with currency risk, it just does not look like it makes a lot of sense particularly given the fact the expectation of these folks in these countries since they are living in these countries hasn't changed. So, the probability of us acquiring a lot of centers right now, I would argue is pretty small. But, this is clearly a benefit outside of the United States of running these centers.

Thanks and then just one followup. Can you talk a little about what you are seeing in the market for plasma fraction and if you could speak a little bit may be beyond some of the higher price fractions that we focused on, but some of them were mundane fractions? What are you seeing there and then Harry what might happen as you and others ramp up fractionation as we going forward?

Fair question Scott. I mean, if you think about this and again, now I am just talking financially. Obviously there is an enormous amount of human aspects to all of this. If you are thinking about this financially, I almost view it as sort of one of those old petroleum kind of problems, where you have got all these different fractions and you trying to figure out the overall costs based on that. At the end of the day, given what happens, whether it is particularly Factor VIII or IG-IV, Factor IX, the ability of that portion to cover the cost, particularly if you notice, since we are vertically integrating, a higher and higher percentage of the raw material is going to be supplied through our own centers. So very simply if, that is the key word, if we can continue to reduce the overall cost and leverage of those additional fractions economically it makes quite a bit of sense. If we were only in any one of those fractions, it will be a bigger deal. Clearly, we don't see a lot of opportunity for place in something like , but if you look at IG-IV, you look at the additional applications, we talk about seeing that business continue to grow in excess of 15% to 20%. Economically that makes a lot of sense. We actually believe Scott, given the quality that we have in place, given our manufacturing expertise and the cost position we have, we actually believe that the total plasma economics remain very attractive and that is the reason why over the next couple of years, Scott, we are going to be going from 4m leaders processed to more than 6m leaders processed. So if you take into account more leaders at a higher yield and in the case of IG-IV, we are actually selling once again everything we make and we expect that to continue.

Thanks very much

Why don't we take one more question?

Thank you! Our final question is from Vikas and Mr Coolie would please state your company name for us?

I had couple of points. Just wanted a little more clarification on the operational cash flows. Just when I look at earnings up 18% and operational cash inflows down 10%. Do that mean the cash flows are getting more and more backend loaded? And my second question is, as the BioScience gets to be a larger larger percentage of business, would be able to expect long term reduction of your leverage?

You know a couple of things here. Let me mention it and Brian may want to add to this. But you are not familiar with it, there are couple of things that is probably worthwhile to know. Traditionally, if you look at us over the last 10-15 years, we always generate the vast majority of our cash flow in the last half of the year. Number one. Number two, when you take a look at operational cash inflow, and I think this is an important point that Glenn mentioned earlier, if you are page nine, when you see these other adjustments, primarily noncash, you have to look at that line in conjunction with what is happening with payables and accrued liabilities. When Brian made the comment to Glenn about the change with deferred taxes because there is no change in deferred taxes, you are adding back less non-cash items, but economically in cash flow wise, it really doesn't matter, because the actual reduction in liabilities offsets that. So in reality, we are very confident that our ability to continue to generate in excess of the half a billion dollars of cash flow is very high and again if you are not as familiar we are one of the few companies where we talk about cash flow, we are talking about the operational cash flow after capital expenditures. We actually compared this to most companies. This year, we will generate close to $1.4b to $1.5b in after-tax cash flow before capital expenditures. As our margins increase, I mean remember rather than some of these traditional companies, I know there has been a lot of written about these guys, even in today's paper (indiscernible) was talking about it. Rather than these guys that are starting off with a 75% gross margin and trying to figure out where they grow from here, Baxter that has got a 45% gross margin. Everything we have talked about over last hour and half has a gross margin higher than our average. So unlike the typical pharma companies that they have got a margin that is so high, hard to replicate, products coming off patent, placing issues where they are getting 4% points for pricing a year and our average price increase on an annual basis is close to zero. We think we have got the ability to ramp up our gross margin, Brian quoted, in excess of 50%. We will leverage our expense base over time. So, if think about being able to grow sales in the low teens significantly improve our operating margins for less than 20% to 25%, we are going to generate a lot of cash. We don't have to worry about patent expirations effecting blockbusters, because the great majority of what we do in terms of our complimentary portfolio is something that crosses and everything else. So we do not have the downside. I would be very surprised if we are not able to significantly grow earnings faster than sales growth and generating a lot of cash flow. Does that make sense?

Yes. And then about the leverage for long-term, whether it will start looking like some of the lower leverage Bio Pharma Companies out there?

Yes. We definitely will have the flexibility and operate at a lower level of leverage, but quite frankly as we stand today, we are very comfortable just in terms of economic efficiency to operate with a leverage of 35% to 40% range for our debt capital which result in a lower overall weighted average cost of capital. But certainly this incremental cash flow overtime will give us a lot of flexibility to either temporarily lower leverage that gives us much more capacity to fund growth in other ways either through acquisitions or incremental R&D program as we go forward.

Ok. Sounds good.

Great. Well listen I appreciate everybody taking the time to call in for the call and we will continue to give you updates as the year develops. Thanks everybody.

Ladies and gentlemen this concludes today's conference call. Thank you for your participation and may disconnect at this time. Have pleasant day.