百特醫療 (BAX) 2002 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to Baxter International's third quarter cash flow and earnings conference call. Your lines will remain in a listen-only mode until the question and answer segment of today's call. At that time if you have a question you will need to press star then the number one on your touch tone phone. The call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcasted without Baxter's permission. Any objections please disconnect at this time. A replay of today's teleconference can be heard by dialed 1(800)654-1687 or (706)645-9291 and entering the pass code 5807417. This replay will be available following today's teleconference until October 27, 2002. I would now like to turn your call over to Mr. Neville Jeharajah, Vice President of Investor Relations, Baxter International. Mr. Jeharajah, you may begin.

Thank you very much. Good morning everybody. By now I'm sure you have seen a copy of our press release for the third quarter of this year. As the press release indicates comments containg outlook and forward-looking statements could differ materially from our current expectations. See oue SEC filings more details. Now let me introduce Harold Kraemer, chairman and CEO of Baxter International.

Thanks Neville. Good morning everyone. Joining me on today's call are Thomas Glanzmann, our Senior Vice President as well as President of Baxter BioScience, Brian Anderson, our Chief Financial Officer, Tommy Sabatino our Senior Vice President and General Counsel, Steve Myer, our Corporate Trasurer and Doug Shuma, our Corporate Controller. By now, most of you have seen a copy of our earnings press release and the press release from two weeks ago regarding our outlook for the remainder of 2002 as well as our outlook for full year 2003. Today, during the call, I would like to provide an explanation of what has changed and why we are very confident that we will deliver to our expectations for the rest of this year, 2003 and beyond. First, as we stated in our press release two weeks ago, we continue to expect mid teens growth in earnings per share for full year 2002 as well as full year 2003. However, we have lowered our sales guidance, specifically for full year 2002 we now expect sales growth to be in the low double-digits versus the low teens. This reduction is based on the sales growth of our BioScience business in a 10% range versus our original expectation of mid teens. This is due to the impact of a more competitive environment in select products within the plasma/protein business as well as the delay in new product launches within the [inaudible] business. As we look to Q4 and beyond, we will continue to focus on our consistency and credibility while we continue with our disciplined approach and focus on operational excellence. Given the number of new product introductions, we expect in the coming months we will continue to invest in sales and marketing programs that will position us for short term and long term growth. We will also continue to invest in R&D as well as acquisition and alliances that will result in accelerated growth in sales and earnings over time. As always, this growth will meet our three criteria of profitable, sustainable and capital efficient. In summary, the Baxter Team and I are very confident that we can take advantage of the significant growth opportunities we have and at the same time, deliver to our expectations. Now I will walk through our financial performance for the third quarter. Thomas Glanzmann will provide you with an overview of the BioScience business. Brian Anderson will cover our financial results. I'll conclude our call with an outlook for the remainder of 2002 as well as our outlook for full year 2003 and open it up for your questions. First, several recent highlights. The initiation of a phase 3 multi-center randomized trial in the US and Europe for a new liquid IGIV 10% solution for patients with primary immune deficiencies. Also, the submission of our regulatory files to the European and Canadian regulatory authorities for marketing approval of our next generation plasma albumin free method recombinant factor 8 product. Also, the US approval of the ALEX automated red blood cell collection system. Canadian clearance and European [inaudible] of the intercept platelet system. In terms of financial highlights our third quarter sales grew at 11%, our operating margin in the third quarter was 20.9% compared to the operating margin of 20.3 in Q3 last year, a six tenth of a point improvement year over year. Our net income in the quarter grew at a very strong 16% and our earnings per share were 51 cents, up 13% in the quarter. Now let's start with the Q3 2002 sales overview. Sales from the third quarter for total Baxter were $2,102,000,000, which was an increase as I mentioned of 11%. Foreign currency benefited sales growth by two full percentage points, that is excluding foreign currency sales growth in the third quarter was 9%. Total U.S. Sales were $1,017,000,000, which was an increase of 3% for the quarter, international sales were $1,085,000,000, which was an increase of 19% for the quarter. Foreign currency benefited international sales by four percentage points excluding foreign currency, international sales were up 15%. Year-to-date sales for the total company were $6,074,000,000, an increase of 10% and a constant rates our year-to-date sales growth is the same as within the quarter, 11%.

Now let me give you some details by business. First medication delivery. Q3 sales for medication delivery totaled 832 million. Sales growth in the quarter was 16% at actual rates. Year-to-date sales for medication delivery were $2,388,000,000 which was an increase of 14%. Foreign currency benefited total medication delivery sales in the quarter by 1% excluding foreign currency medication delivery sales were still up a very robust 15% for the quarter. Sales growth excluding acquisitions was in high single digits at constant rates. U.S. sales of 503 million grew 10% in the third quarter and international sales of 329 million were up 28% at actual rates. Foreign currency benefited international sales by five percentage points. That is, international sales growth in the third quarter excluding currency was 23%. Medication delivery sales growth for the quarter was driven by strong sales of our specialty products and strong sales growth of the drug delivery business in excess of 30%. In terms of the 2002 outlook given the strong sales performance to date I continue to expect medication delivery sales growth to be in the mid-teens for the full year 2002. This includes a modest benefit in Q4 from the acquisition of E.S.I. Lederle[ph] which we now expect to close before the end of the year. For full year 2003 Dave [Trohand] and the medication delivery business continued to focus on several growth initiatives. These include continued placements of our colleague, electronic infusion pump. We once again expect to place approximately 50,000 channels during 2003. Since the introduction of Colleague in 1997, channel placements today exceed 260,000. Continued international expansion of our higher margin specialty products will continue which differentiates us from the market and creates a competitive advantage for our business. Also, our continued focus on geographic expansion with the goal of providing access to our complete portfolio of medication delivery products and drugs to more patients worldwide. In addition, expanding our portfolio and entering new market segments, for example, expanding our line of drug delivery platforms and expanding the anesthesia business into the broader critical care markets. And finally continuing with our focus on providing operational excellence through continued cost reductions. As a result of these growth expectations and including the impact of the ESI Lederle-ph acquisition I expect the medication delivery business sales growth to once again be in the mid-teens for full year 2003, specifically by quarter for 2003 I expect the growth rate of medication delivery to be in the mid-teens in the first three quarters and to be in the mid-single digits in the fourth quarter when we anniversary the acquisition of ESI Lederle-ph.

Now let's move to renal business. Sales for renal in the third quarter totaled 494 million and sales declined 2% over Q3 last year. Year to date sales totaled $1,432,000,000 and are flat compared to the prior year. Q3 sales for renal excluding the impact of foreign currency declined by 1%. Year-to-date sales increased by 2%. At constant rates P.D. growth was in the high single digits and H.D. sales declined by approximately 10%. Sales from our service businesses totaled approximately $100,000,000, similar to last quarter and declined approximately 10% over prior year. U.S. Sales of $132,000,000 were down 10% in the quarter while U.S. Sales of P.D. and H.D. were up in the low single digits the service businesses were below prior year. International sales of $362 million were up 1% and excluding the impact of foreign currency Q3 international sales was 3%.

In terms of the 2002 outlook, as I stated last quarter I expect total real sales growth for full year 2002 to be in the low single digits at constant currency. Al Heller and the entire renal team are focused on improving the growth rate of this business by increasing P.D. usage globally through the introduction of new products to the marketplace including [externeal] in the United States, [physioneal] in Canada, and the [Q-connector] in Japan as well as improving our H.D. growth with several new product launches including the [sintra- plus] dialyzer, the Aurora Chemodialysis machines and the Acura instrument for the acute care setting. Given this, I expect renal sales growth at constant currency to be in the low single digits of each quarter of 2003 as well as for the full year 2003.

Now let's turn to BioScience. In terms of Q3 sales Q3 sales for the total BioScience segment totaled $776 million were up 14% at actual rates. Foreign currency benefited BioScience sales growth by 4 percentage points in the quarter, that is sales excluding foreign currency increased 10% in the quarter. Year-to-date sales for total BioScience were $2,254,000,000, an increase by 13%. U.S. Sales in Q3 were 382 million, an increase by 1%. Q3 international sales, up 394 million, increased 31%. Even excluding the impact of foreign currency Q3 international sales increased 22%. At constant rates, [[phenwal]] sales declined in mid single digits in the third quarter. This reduction is due to the decline in the growth rate of luco-ph reduction filters. While our sales of [Luco] reduction filters again totaled 40 million in the quarter sales growth was flat for the quarter. Q3 BioScience sales growth excluding [[phenwal]] was in the low teens at constant rates. This is a substantial improvement over Q2. We once again generated significant growth of recombinant Factor Eight in the third quarter, which was up 25% as well as strong sales of both vaccines and bio-surgery products, both of which grew in excess of 20%. However, IGIV and and plasma derived Factor Eight sales were flat Albumin-ph sales declined by 15%. Turning to the 2002 outlook I now expect total BioScience sales growth for full year 2002 to be in the 10% range, versus our original expectation of mid-teens. The primary reason for this is that full year [phenwal]-ph sales growth will be flat compared to prior years and sales growth for the rest of the BioScience business excluding [phenwal] will be in the low double digits. Specifically for Q4 2002 I expect [phenwal] sales to be below prior years due to the delay in new product launches as well as a significant sale to a large customer that occurred in the fourth quarter of last year. I expect sales growth for the rest of the BioScience business excluding [phenwal] to be in the 10% range in Q4. Now let me turn it over to Thomas Glanzmann. Thomas?

Thank you, Harry. Good morning everyone. Today I would like to take a few moments to provide you with some details on recent developments in the plasma protein market, the resulting short-term challenges and our growth rate strategies for the future. But first let me provide you with an update on the recombinant business. As you know we are the worldwide market leader for recombinant Factor Eight. We have been and are currently selling every unit we can produce and we having adding capacity, improving yield and cycle production to meet market demands. We remain on track for our approval of plasma albumin Factor Eight, the first of its kind and that will be introduced well ahead of our competition. We have completed our regulatory filings in Europe, Canada and the U.S. and in September the FDA completed its inspection of our facilities for our next generation products. As most of you know in addition to producing recombinant Factor Eights, [inaudible] we also received bulk recombinant from Wyeth, which we finish and fill in [inaudible]. These shipments represent approximately 15 to 20% of our annual total units. Wyeth has experienced lower manufacturing yields, which has resulted in lower bulk shipments than we had anticipated. By not having any new capacity to compensate we will manage our inventory level to insure stable and consistent supply to our patients. In addition, Wyeth is evaluating opportunities to provide additional [inaudible] for manufacturing of bulk recombinants. As a result I now expect Q4 2002 and Q1 2003 recombinant sales growth to be in the low single digits and full year 2002 and 2003 sales growth to be in excess of 20%. I am sure you realize that the growth rate of recombinant will be significantly higher after the approval of plasma albumin-free [inaudible]. There have been many questions regarding the increase in the industry supply of recombinant Factor Eight. Let me tell you while we continue to be very optimistic about the overall market opportunities and why Baxter is well positioned as the market leader. As we have previously stated the marketplace has been severely under supplied over the past several years and we are just now beginning to see industry inventory levels reach safe levels in which supply is stable and therapy and geographic expansion can be pursued. In fact, over the last several months inventory levels in the U.S. have increased from only two to four weeks of available supply from six to eight weeks of supply. Baxter's inventory levels have remained fairly stable over the same time period. As most of you know, the national hemophilia foundation in early September issued a presses release recommending that therapy providers of hemophilia treatment return to pre-shortage protocol. We very much welcomed this announcement and will work even more diligently to work with physicians to provide a higher level of care to hemophilia patients worldwide. As I covered with you at our conference call in June, we expect that the overall market demand for Factor Eight will grow from less than 3 billion units in 2001 to more than 5 billion units by 2005. Baxter's unique long-term competitive advantage distinguishes us from many of our competitors. This is a result of our continued innovation of products and services including our new state-of-the-art plasma albumin free Factor Eight. Our very strong global customer relationships our reliability and consistency of supply which has resulted in a great majority of our U.S. business being under long term supply agreements and finally our excellent track record as it relates to safety and efficacy of our products. In summary as I previously stated I expect sales growth for 2002 to be more than 20% for the full year. With the exciting launch of our next generation plasma albumin free Factor Eight sales growth for the full year will also be more than 20% in 2003. Now let me turn to the plasma protein business. First of all, Baxter is the global market leader in the plasma protein market with annual sales totaling approximately $1.2 billion. We have a broad portfolio product and the largest manufacturing and plasma sourcing capacity in the industry. As Harry mentioned earlier, the more competitive environment for select products within the plasma protein business has impacted our sales growth by more than we had previously expected. Many of you have questioned I. W. pricing, albumin pricing, volume levels, et cetera. These are all very good questions. The answers to all of these questions is related to your understanding of how much revenue we generate for each liter of plasma we fractionate, and how sustainable are the long term economics of our business. Let me start with a brief discussion of plasma economics. First, revenue per liter is the key. The components of maximizing our revenues per liter include first product press. Baxter produces in excess of 20 products from our plasma fractionation process versus most of our competitors who produce less than five. This allows us to maximize the revenue generated from each liter of fractionated plasma and reduces our relying on one or two specific products to drive favorable economics. Baxter produces IGIV[phonetic], albumin, plasma Factor Eight as well as several unique and proprietary products that other fractionators do not have including [sinsealin]and fiber-ph which is used as an inhibitor therapy. These two products alone will have a combined sale totaling more than $300 million in 2003. Second, production yields. By improving yields and cycle times we have the benefit of improving the revenue per liter as well as improving the overall cost per liter to enhance manufacturing efficiencies. And finally innovation and new product launches. By increasing or adding to the number of products we derive from a liter of plasma, our overall revenue and economics improve. cost per liter through enhanced manufacturing efficiencies. For example, with our recent C. protein launch earlier we achieved an increase in revenue. Let me now turn to cost per liter. Like an oil refinery the total cost of fractionation is primarily fixed and it's similar across the industry on a per liter basis. Therefore, yields are a key component of cost efficiencies. The other major cost component is raw material. That is plasma. Through internal growth, the acquisition of Seretek-ph and our continued efforts to improve our fixed costs infrastructure we are very well positioned to control both our plasma quality and costs going forward. In summary as you can see the revenue generated from each liter of plasma is extremely important in terms of the overall economics. Profitability of our business depends on maximizing the revenue per liter combined with reducing the cost per liter over time. In 2003 we expect our costs per liter to decline. And we expect the revenue generated per liter to increase by more than 10%, resulting in improved margins and overall profitability. Now, let me turn to tell you why we believe the issues we are facing in the U.S. market are short term and why I expect Baxter sales growth to accelerate in the future. First, the U.S. market for IGIV is has been growing very rapidly and demand for IGIV has exceeded supply over the last several years. However, as with hemophilia, utilization of plasma-derived proteins has been limited due to capacity constraints and supply interruption for and shortages in the industry, particularly related to IGIV. Therefore, decisions have become accustomed to limit product supply and have not used product in new or expanded indications. In addition, many physicians have restricted treatment regiments for existing patients. Secondly, over the last few months given the favorable economics in the U.S. compared to other markets we saw increased compositions. In addition many manufacturers who have experienced regulatory issues have reentered the U.S. market. Today in the U.S. available supply has increased to approximately six to eight weeks. Ideally inventory levels will need to be at least two months to truly build confidence in the medical community around product availability as well as continued growth in demand given therapy expansion for existing and additional indications. However, the short term increased level of IGIV particularly in the U.S. has resulted in increased pricing pressure. The pricing declines in the U.S. are definitely greater than we had anticipated. This is why we now expect IGIV sales growth for full year 2002 to be flat versus our original expectation of sales growth in the mid-teens. Given that the amount of plasma being fractionated globally has been only increasing modestly over the last year and U.S. plasma is in even higher demand given its safety profile as the market continues to grow and more IGIV is sold in the U.S. this will create additional opportunities through Europe and the rest of the world. Given this, let me tell you why I feel confident that our growth in IGIV will be in the mid-teens next year. First, given our significant capacity and yield improvements we expect to have more IGIV products available for sale. Second, we have been very successful at negotiating and maintaining long-standing supply agreements with major health care providers based on our consistent product availability, product quality and our service level. In fact, historically more than 60% of Baxter sales of IGIV have been in the U.S. where a significant portion of the IGIV business is under contract. During the third quarter with further expanded our portfolio and scope of long term supply agreements. Third, given our significant global presence and customer relationships we expect to mitigate the short term fluctuation in U.S. market dynamics by penetrating under developed and under served markets as well as new markets. We continue to work with physicians and government agencies to address the under served population. Given this, I expect IGIV sales growth in 2003 to be higher outside the U.S. than in the U.S. And finally we continue to invest significantly until sales and marketing programs to increase demand and drive the penetration of our plasma protein globally. In summary, although we have experienced an increase in the U.S. supply for IGIV as well as lower levels of pricing in the U.S. we remain very optimistic regarding the future growth prospects of the IGIV markets and our global franchise. In conclusion, given our very strong recombitant franchise, very strong favorable plasma economics, unique and preferred portfolio as well as strong customer relationships I believe we have a very compelling and sustainable competitive advantage. This gives us confidence for full year 2003 with the expected approval of our plasma albumin-free recombinant product and BioScience growth including [phenwal] to be in the mid-teens at constant currencies. Specifically by quarter I expect BioScience sales growth to be in the mid-single digits in the first quarter and to accelerate beyond that. I appreciate your attention and would now like to turn it over to Brian. Thank you.

Thank you very much, Thomas. And if you turn to page six of your press release I'd like to walk you through the details of P&L for the quarter. First, as Harry mentioned total Baxter sales growth in the third quarter was 11% and excluding the impact of foreign currency we had a sales growth of 9%. We expect sales in Q4 and in the full year 2002 to be in low double digits. The gross margin rate in the third quarter was 45%, the same as the third quarter of last year. Although our top line had a 2 advantage point benefit from foreign currency translations this did not result in improved gross margins because of the hedging of costs in our cost of sales. However, margins were 45% and the same as last year. SG&A ratio in Q3 was even 18.3% compared to 18.5% in Q3 of last year. SG&A increased 9% over Q3 of last year and we have and we will continue to make marketing investments that are necessary for all of our new product launches. R&D spending in the third quarter was $122,000,000 compared to $105,000,000 last year, and this was an increase of 16% over the third quarter of last year. This growth was primarily related to continued investments in our BioScience business. And we continue to make investments in both sales and marketing and R&D to fuel top line growth over the long term. Once again, we improved our operating margins to 20.9% of sales compared to 20.3% in Q3 of last year and 20.2% in this years second quarter's. Given this very strong performance to date I continue to expect our operating margins for full year 2002 to exceed 20%. Interest expense was 11 million in the quarter and relative to last quarter benefited from both lower overall debt levels and lower global interest rates. The tax rate in the quarter was similar to the second quarter and this tax rate is slightly below last years tax rate, primarily due to the significant sales and earnings growth internationally. And the higher mix of international earnings has a favorable impact on the companies overall effective tax rate. Net income to the third quarter increased 16%. The diluted shares outstanding for the quarter was $624 million, and diluted earning per share for the quarter was 51%, or a 13% increase. If you'll turn to page seven of the press release I'd like to go through a few details on operational cash flow. However, before going into the numbers I'd like to just make a few comments about our overall quarterly cash flow pattern. Typically we have an operational cash outflow in the first half of each year and we generate a significant amount of cash flow in the back half. This is driven by a number of factors. First, payment of year-end accruals for customer volume rebates, employee bonuses, taxes, et cetera, are typically higher in the first quarter of each year. Second, a significant portion of our total expenditures typically occurs in the fourth quarter of each year in conjunction with regularly scheduled planned shutdowns over the holidays and payments for most of these capital expenditures actually occur in the first quarter. Customer payment trends are more positive in the back half of the year given the payment cycles of many governments around the world who operate on their annual budgets. And finally, we have significant sales of hardware in the fourth quarter given that many of our hospital customers purchase these items under their capital budgets with a significant amount being spent toward the end of the year. Now to the numbers. Our operational cash in flow in the third quarter was $205 million, very similar to last years third quarter and this brings our year-to-date cash flow to a net outflow of $146 million this year compared to $81,000,000 net outflow last year. However, $146 million net outflow in 2002 includes incremental capital expenditures of $85 million and $65 million in payments related to the [inaudible] dialyzer issues that we discussed previously. Despite the fact that DSOs declined by three days from Q-2, our Q3 DSO is three days higher than the prior years and this is due also to the significant international sales growth during the third quarter and as you know DSOs are typically higher outside the United States. Our inventory turns of 2.5 turns was flat with Q2 and slightly slower than Q3 of last year and we have a very strong focus to reduce inventory levels in the fourth quarter. Given the plans that we have in place to reduce inventories and our typical pattern of generating significant cash flow in the quarter I expect our cash employee for the full year will be at least 500 million. Before turning it back to Harry I would like to just comment on a couple of additional items. First, on our assumptions related to pension expense for 2003 and second our exit strategy for equity forward agreements. With respect to our pension assumptions, the first thing I'm to note is that our plan is extremely well funded. In fact, under ERISA guidelines, with expect that cash contribution for the pension trust will not been required before the end of 2004. The rate of return assumption on our plan assets has been 11% historically which is consistent with the actual long-term returns that we've experienced in the trust for several years. We evaluate this assumption and all other assumptions related to the pension plan on an annual basis and for 2003 our assumptions for asset returns will be reduced by 100 basis points to 10% and the rate used to discount the pension liability will be reduced from 7.5% to 6.75%. The impact of these changes is approximately a hit to pretax earnings of $25 million and this has been reflected in the 2003 EPS guidance of mid-teens diluted EPS growths. Now, turning to equity forwards. You saw in our prison release a few weeks ago we said that we intends to settle these equity forward contracts over the next several months. The maturity of all of these contracts has been extended well into next year and all of these contracts are very flexible in the terms of the manner of settlement. We can settle these either for cash with a stock, additional stock or some combination of both. Baxter has the liquidity, the ready access to the capital market and the ready access to the capital markets to finance this strategy with no impact to the 2003 EPS guidance that I just mentioned and additionally this strategy will have no affect to our overall capital structure our the company's credit rating. We will absolutely keep you informed as we execute these plans. Now I'd like to turn it back to Harry for the 2002 and 2003 outlook before we take your questions. Harry.

Thanks, Brian. Now I'll be more specific about our outlook for full year 2002 as well as our outlook for full year 2003. The sales growth for 2002, I expect to be in the low double digits. At constant rates for each of the businesses I expect the renal sales growth to be in the low single digits, medication delivery sales growth to be in the mid-teens and BioScience sales growth to be in the 10% range consisting of [phenwal] growth being flat the prior year and the remainder of BioScience as Thomas Glanzmann stated, growing in the low double digits. In terms of operating margin I expect our operating profit margins for full year 2002 to exceed 20%, in terms of earning per share I expect the diluted share count to be approximately 620 to 630 million shares for 2002 resulting in 2002 EPS growth, excluding charges in the mid-teens. In terms of cash flow, I expect once again for total Baxter as Brian indicated earlier to generate 500 million in operational cash flow after tax and after capital expenditures. Now let me summarize our outlook for 2003.

Sales growth. At current rates, I expect our 2003 sales growth to be in the low double digits. As I stated earlier, this growth will be driven by the launch of several new products, including our next generation plasma albumin-free recombinant Factor Eight as well as [externeal PD] solution our [ red blood cell collection system, and intercept platelets in Europe as well as action six of ESI Lederle-ph. Specifically by business at constant rates I expect renal sales growth to be in the low single digits, medication delivery sales growth to be in the mid-teens and BioScience sales growth for 2003 to be in the mid-teens. Now, given the interest in and understanding a sense of what this looks like by quarter let's just sort of break out each of the businesses. For renal I expect 2003 sales growth for renal to be in the low single digits for each quarter of 2003 as well as for the full year. In terms of medication delivery I expect medication delivery sales growth to be in the mid-teens for full year 2003. This will be driven by continued strong growth in the base as well as specialty businesses, sales growth of more than 20% for the drug delivery business and annual sales of approximately 200 million related to the acquisition of ESI Lederle-ph. While sales growth will be in the mid-teens in Q1, Q2 and Q3 of 2003, we expect sales growth to be in the mid to high single digits in Q4 when we no longer have the year over year benefit of the ESI Lederle-ph acquisition. In terms of BioScience, given the topics that Thomas discussed earlier, I expect sales growth for total BioScience in the first quarter of 2003 to be in the mid-single digits and accelerate in Q2 and beyond generating a full year sales growth for BioScience in the mid-teens. In terms of operating margin for 2003, with improving gross margins and continued investments in R&D and sales and marketing programs we expect to leverage our operating profit margin once again in excess of 20% for full year. In terms of earnings per share I expect earnings per share growth to be in the mid-teens for full year 2003 with high single digits earnings growth per share in the first half and significantly stronger growth in the back half. In terms of cash flow, I once again expect our operational cash flow after tax and after capital expenditures to be exceeding 500 million. At this time, Brian Anderson, Thomas Glanzmann and I will be happy to take any questions on any topics. Operator?

Thank you. We will now begin the question and answer session. If you a very a question you will need to press star and the number one on would your touch-tone phone. You will hear an acknowledgment that you have been placed in queue. If your question has been answered and you wish to be removed from queue, please press star and the number two. If you are using a speakerphone please pick up the hand set before pressing the numbers. Once again, if there are any questions please press star and the number one on your touch-tone phone. One moment, please. Michael Weinstein from J.P. Morgan is on line with a question. Please state your question.

Can you hear me?

Sure can.

Okay.

We have obviously a to know of questions so we'll try to keep it short to cover a lot of ground.

What I'll try to do Michael is everyone asks one question and we'll cycle through a couple times.

Starting with the overall trends within buy sciences and if we look at the companies growth in the fourth quarter, in the third quarter most of that growth is coming from outside the U.S. and it appears the company is having to place a lot of its plasma product and as well as now the recombinant product outside the United States. The question I guess we have is within the 2003 assumptions what are you assuming on the shift and you realize pricing on most of these products as you are betting on [inaudible] to the degree comp meant Factor Eight you are placing most of the product in Europe and other geographies where the pricing is typically 15 to 20% and sometimes lower than what we get domestically. Thanks.

Thank you. Thomas here. First let's make sure we are all on the same page. Recombinant sales in North America in Q3 were very strong. So it was as comp meant continues to grow in all our regions. Second, with regard to the plasma proteins we did have a very strong quarter internationally and as we talked about here in my script IGIV and albumin clearly were impacted in the U.S. But as we moved forward with the supply agreement that we got in place with the investments we are making into sales and marketing we expect to continue to see growth in the U.S. market and that's actually going to be taken up here in the quarters to come, particularly starting in Q1 of 2003 and onward. So I think the perception that we are not growing in the U.S. market is not right. It's something that growth will be resuming here.

Okay. If I can just follow up I guess it would be helpful to follow up on your comments to clarify some of your comments on recombinant Factor Eight. The expectations for low single digit growth in the fourth quarter, that would seem to be more than just a decrease in shipments from Wyeth so maybe if you can just clarify that and maybe quantify how much of, or maybe just quantify how much Wyeth is down versus the third quarter or year over year.

As you recall in the year Q2 report, in the call Harry and Neville made the estimates that our growth for recombinant for this year would be 25%. Our growth now is going to be a little more than 20% so the difference is actually attributable to Wyeth.

Okay. Maybe you can then just clarify because I'm sure others are going to ask this question clarify maybe in the expectations for the fourth quarter which is a significant drop off how much of that is Wyeth because people are going to have this lingering question as to what's playing out right now in this recombinant Factor Eight market and we'd like to have some visibility.

You have to remember last quarter was a very, very strong quarter for recombinant so therefore growth rate in quarter 4 even within the 25% was going to be not as high as it had been in the previous quarters but the difference from where we are from the 25 to the 20% it is attributable to the reduced supply that we had received from Wyeth.

I'll letter others jump in. Thanks.

Thank you.

Dan Lemaitre from Merrill Lynch is on line with a question. Please state your question.

Good morning, everybody, just a question on the profit gross margin. Part of the ongoing mixed benefits that we've seen showing up in the gross margins for the past few quarters that's really been extraordinary with incremental gross margins if you look at gross profits year over year on a sales gains it's been closer to 60% and that really went away this quarter and I know Brian mentioned it might be currency impact in but I guess I'm having a hard time understanding why with didn't see more of a benefit given the mix shift to recombinant, vaccines and like. Maybe you could explain to us what happened this quarter and maybe more importantly if you could take a shot at, by giving us some guidance on what you think gross margins specifically the incremental gross margins would look like in the fourth quarter next year.

Dan, maybe Brian can jump in and give you a full explanation but just one thing Dan I think some people get confused about, think about this for a second. If you look at the impact of currency for the first half of the year we were seeing an adverse impact on sales due to currency. Now in the third quarter for the first time it's actually a very positive impact on sales given the stronger currency. But remember we are already fairly fully hedged so the way I think about it very simply is you've got a substantial change in sales, particularly when you look at the first half versus the third quarter and there is no impact on the gross margin dollars because it's already included. So you have a much larger denominator and the impact of currency doesn't touch the gross profit. That is one significant portion, which is almost one full percentage point.

That's entirely it, Dan. I feel very comfortable with the rate of margin performance in each of the businesses and we commented earlier about the moves that Al made for renal, it's significantly curtailed some of the service operations, particularly Latin America which helps the overall margins for renal. I think med delivery is doing extremely well and looking forward I would expect to see similarly slightly improved margins but it will get masked by the translation effect if we continue to get a lift from currency in the translation top line.

So this is not pricing pressure showing up in that gross margin.

There is something some of that but I think the overall rich mix of sales as you indicate really help compensate for the pricing pressure across the entire BioScience segment.

I think it's a fair question, I mean the way I look at it is that all the favorable mix things that you pointed out ending up getting impacted by some of the pricing but if it hadn't been for the foreign exchange the margin probably would have been a full percentage point higher. We live in the real world we are an international company half of our sales are outside the United States so it ends up being what it was.

Okay. I will stick to my one question, thanks.

Rick Wise from Bear Sterns is on line with a question. Please state your question.

Good morning. Several questions, to focus on the tax rate as well, first a multi-part question, first can you help us understand Thomas the Wyeth supply, is it 15 to 20% of units this year what are your assumptions next year and or when do you expect the supply shortage to end, just help us understand that. The second part is, help us understand just remind us again about your expected launch and approval rates for your third generation Factor Eight at [inaudible] and maybe perhaps what are you assuming or what these numbers are assuming for patient switching to the next generation product during 03, are you assuming patients also switch? Thank you.

I think I got all the questions. First of all obviously we are working very closely with Wyeth to look to see what we can do together here as I mentioned in my script and we are in discussions right now and I really can't go into the details about what those discussions are and until and so forth but we are trying to sort through that as we look at next year. Now, with regard to your second question on the supply shortage and the change within the marketplace. First of all as I said on many occasions, we believe that this market has had supply constraints for some time and we are actually pleased to see that the supply is increasing and we now will have the opportunity to see physicians move to prophylaxis, do all the type of things that they've wanted to do as well as for us to be able to take some products to markets that we've not been in. So we anticipate that demands would really pick up now that there is an inventory level, that physicians can rely on because as you know nobody is going to expanded any therapies or get into anything new unless they are absolutely sure that there is sufficient supply, that they can count on moving forward to switch the patients to prophylaxis and move things on. So we are very upbeat about this and corporate to be, that's why with continue to add the suites that we do and continue to expect that the market is going to grow to more than 5 billion by 2005 so we are very, very optimistic about the Factor Eight market and recombinant and obviously even more optimistic and it kind of gets into your last part about the fact that we are going to be launching next year the truly state-of-the-art products and as I mentioned we are going to be way ahead of our competition in launching this product so we are very, very upbeat about that. You asked about the launch date, as we said we usually don't comment on the launch date but we've now made all the commissions that we committed to that we said to you, the U.S. in June and Europe and Canada in September. So we had the inspection, we are very pleased with the inspection as well and now we are going to see what the regulators do. We are working with them to see what questions they have and we will see what the time clock will tell. But overall everything is really coming together very well for us on the recombinant side and although growth rates in Q4 and Q1 are going to be lower, the positive and optimism that we have about this business is just outstanding.

Just a BioScience follow up can you quantify what contribution if any on the small pox vaccine sales means in the third quarter want you expect in the fourth quarter you mentioned in the press release but you didn't really talk about the small pox vaccine? Is there anything factored into '03? Thank you very much.

Thank you. You're welcome, Rick. I will take this one. This is one, I think the easiest way to state it is it is fairly immaterial given the contracts with have with [inaudible] and the government it is not something that is easy to get into detail on. But on the face and everything we are looking at I wouldn't see it as something that would have a significant impact going forward.

Sheryl Zimmer from Deutsche Bank is on line with a question please state your question.

Hi, guys, a couple of questions, first if you could if you'd be willing to quantify the contribution from acquisitions in the quarter and then just Harry if you could comment on your outlook for share repurchase if the debt to cap does hover above the 40% level as you retire the equity forward, an update on your thinking on there and the final question if you would just be willing to talk about your long term strategy in the services business, do you just wait for the tough times to pass, is it still economical to be in that business is it possible at all that you start to rethink the strategy there at some point, thank you.

Sure, Cheryl, let me handle two of them and we will have Brian with the other one. In terms of acquisition, the impact of acquisitions was about $40 million in the quarter. In terms of the service strategy, Cheryl, I think, if you think about it the majority of that is within the renal business and as Al Heller talked last time that's completely dependent on what we think longer term will occur in the countries that we operate in and to the extent, Cheryl, that it makes sense and that type of growth really is profitable sustainable capital efficient we'll take a look at it really needs to meet that criteria. Remember all the decisions we had over the last five or six years is, would we get more involved in the [center] business in the states and we always said there's some interesting growth there but is it profitable sustainable, capital efficient, so I actually do that as definitely a lower priority compared to everything else that we're doing.

Harry, I'm sorry, just to interrupt you for a second, I'm talking about being less involved so maybe you can talk in those terms as well just based on how the business has been trending.

I would say we are definitely less involved by definition as you look at that business as a percentage of the sales of the total company it definitely becomes less significant and the overall and the overall earnings contribution is obviously lived considered to the total piece. So what happens in the future depends on whatever makes the most economic sense.

Okay.

Brian why don't you talk on the.

Yeah, just on the, debt to capital, Cheryl, our intent as we unwind these equities forward over the next several months as I said these forward contracts give us maximum flexibility on how we choose to unwind it and the intent is to stay within the overall invested capital guidelines that we've communicated previously in that target range of say 40% invested cap. It may move around a little bit but on a long-term basis the intent is to keep that capital structure consistent with what we've communicated earlier.

Okay. That's great. Thank you.

Matt Dodds from SG Cowen is on line with a question. Please state your question.

Hi. I want to talk about the IGIV market with Thomas. In terms of these contracts you have for next year one thing I wanted to notice is you are not going to be a liquid version for about three years. [buyer] has one, Alpha has one, you have a couple new competitors coming in next year with a liquid version on the product would this obviously have a an impact on you on your contracts as you move into 03.

Thank you for your question first of all Gamma guard is the majority of the product we sell in the U.S. is really a unique product and has been on the market for a long time it is really well tolerated and it is something that patients and physicians have been using for a long time and it's an excellent product and we really don't feel that Gamma guard is going to be substituted by a liquid. In fact, we feel that as more Gamma guard becomes available that we will continue to even take more call it share if you like to with that product because of its outstanding record and because of its outstanding benefits. So we are really not worried about the conversion to liquid. Now as you know we are working on our next generation Gamma guard which is going to be 10% liquid which will have a number of other benefits and features and I think the fact that this will be a next generation Gamma guard is obviously going to be a great benefit to us as you continue to increase and penetrate the market for IGIV, so we are very confident about Gamma guards position in the marketplace.

Can I ask one follow up on IGIV?

Sure.

Thanks. Contrary to new indications it looks like neurological uses is about half the market off label. Have you started any clinical trials to look at and I was wondering the neurological indications and if not why haven't you.

We are doing a lot of investigative trials right now in Europe and we are also doing looking at some clinical trials that we started and particularly in the areas that you point out. I think this is an area which has increased dramatically and right now what we are doing is up to this point we've been limited with product to really go into a lot of clinical trials as you know because there's been so much demands for our product so now we'll have more product available and as our capacity has increased you should be seeing an increase in activity in that area.

Thanks.

Ted Huber from Banc of America Securities is on line with a question. Please state your question.

Thanks, Thomas, can you comment on whether or not Thousand Oaks will be coming down for preventive maintenance in the third quarter or first quarter of '03 or the first quarter of '04 given that it hasn't been down for a year and I know you don't want to comment on the FDA but what is the [remodel] as to when you can begin to accelerate the recombinant Factor Eight sales in '03.

Great question. First of all the most important thing for us is always to make sure that we have the highest quality product and that none of our operations ever are impacted by compliance issues or other things. That is really at the forefront because the product that goes to our customer is really the key. Although we haven't had a shutdown this year as you know we continue to keep doing maintenance as we go along and we do this on an ongoing basis and we do it between fermentation runs and we really stay on top of it so there is right now nothing urgent that is forcing us to do a major shut down and actually we are not going to be planning to do anything at Thousand Oaks until we have received a license for our next generation product particularly as we've been building significant inventory in that area so that we can continue to supply all the patients on an ongoing basis. I think that is question number one. Question number two, where you said what is the built in [remodel], I really can't comment on it all I can tell me you is you can probably assume with a significant acceleration in the back half of next year for our recombinant franchise that that is going to have an impact. We obviously welcome any approval by F D. A., whatever stage it is, and but that is not something that we can predict and knowing how FDA operates they probably wouldn't be pleased if I were to give you a specific time line, if that came out. So we are, as I said we are very optimistic about two things, one that we've done everything we can to submit our files, to get our facilities ready for inspections and, second, we are very confident that our growth next year on the recombinant is going to be more than 20%.

Just pass a quick follow up on Thousand Oaks, Thomas, in your conversations with your production engineers, do they see any increased risk in '03 as you continue to move forward without any major preventive maintenance or do you feel fully comfortable with the plant in this case.

Well, I tell you absolutely because no matter what if there was any risk of any sort we would shut the facility down. I can tell you there is no doubt in anybody's mind and as us operating and dealing with lives of patients, so that's at the forefront of everything we do. And it goes with the code and conduct of how Baxter operates its business so if there was any risk associated with this we would stop immediately and as we don't see any of these risks that's why I can be confident and sit here and tell you we are not going to have a shut down until [TFM] gets launched. Otherwise I would be very upfront and tell you right now.

In fact I would just add to that, I mean we feel incredibly strongly about that. We are obviously very focused on making sure we get everything lined up for the long term here and if you think about the fact that Thomas has three of these suites now running with in excess of 300 million units coming out of each suite with the two new suites that Thomas has already stated will be in excess of 500 million units for each of those two suites, plus the fourth suite in Thousand Oaks that will come on ends of '04, beginning of '05 we are talking at that time about having 2.5 billion activity units of activity in a market that we think is going to be close to 5 billion. So to do something in any way short term that would impact a long-term positioning would just go against everything we do. So of all the issues, Ted that one I really wouldn't worry about. If we ever dreamed it was an issue you guys will hear about that one immediately.

That's great to hear, thanks, Harry.

Thanks, Ted.

Ben Andrew from William Blair is on line with a question. Please state your question.

Good morning. Question for Thomas, can you talk about whether your assumptions on factor eight include the announced increased capacity from your competitors and how you see that die in that dynamic playing out if you see any impact on pricing or how he see that playing out in the next couple of quarters.

Ben, thank you. I'd like to just come back to what I think I've said before and that is the market has been so severely under supplied and now that we are starting to see inventory and now that capacity is coming on stream, the growth that we've talked about for so long I mean it's going to happen and so why worry about competitive products coming to market, no, not really I think the market will grow, there is going to be a lot of room for growth and as I said to you, we have such a significant position in the marketplace that we expect our growth to be significant and launching a state-of-the-art product I want to remind you we are going to be ahead of the competition pretty significantly from a timing perspective I feel that we are extremely well-positioned to take advantage of this market growth that we expect will resume now that there's no product available.

Okay. So absolutely no concerns on pricing even though these guys have announced and whether or not they are actually going to deliver the capacity but you are assuming that capacity is coming and even with that you don't have concerns.

We don't have concerns. First of all, we will have a portfolio of recombinant products. You need to think through that one, too. We will have a next generation product, we will have our current recombinant. The market will be growing. We are service confident that we are extremely well positioned to continue to exhibit and be the market leader in this segment.

Okay. Thanks.

And Ben, I think it's a fair question because one of the things when we talk to shareholders I think people are always looking at this compared to a lot of other industries and when they see the fact that the supply could be three, four weeks and now it could be six weeks, or whatever, that's a real problem. Because this area is so different and as you well know because we've done for 20 years where the demand has always been higher than supply there is a lot of physicians that are really looking to understanding, is that supply really going to be consistently as a higher level before they start to put more people on. So as strange as it sounds the fact that the inventory levels are getting from six to eight weeks from our as you standpoint is very good news.

Great. Thanks.

Glenn Navaro from CFSB is on line with a question. Please state your question.

Hi, guys, two big picture questions for Harry, first, back in March at the growth conference you talked a lot about licensing opportunities, a lot about contract manufacturing with [inaudible] yet we haven't seen any deals announced since March. Is it that no one is calling or that you're just not getting good terms on any potential deals, that's question number one. Then in terms of the second question I'm wondering if you can let us in a little bit on your planning process, obviously the plan for this year didn't come out exactly as you like it, on the planning process in terms of what you give to Wall Street, do you give us your best case, your worse case, your base case, just trying to wonder how much wiggle room there is in the planning process just in case, for instance, pricing in IGIV gets a little worse or the recombinant Factor Eight. If you can comment a little bit about the planning process, as well.

Great question. Now I've been told I'm supposed to keep my answer short so I'm debating how best to do this since they are great questions let me give you a trial and if you have a follow up let me know. Tell me I will should have give you a short view. In terms of the licensing opportunities and Thomas can jump in hear, we are looking right now at a lot of things. Some of them are what I think you could call licensing opportunities, others are ventures with other people. Again, since a lot of this depends, Glenn, on the view one has as to how many of these suites will be needed for recombinant there is a question of how quickly we would want to take in other products. So the position that we've taken at this time is that we are going to walk away from anything that isn't really a very strong economic deal. Now, a fair comment, Glen, would be at some point in time maybe we are either two ambitious or maybe we are looking for two high a return but we are looking for something that really is both economic and strategic. So we are looking at a lot of things. We'll keep you guys informed. But we are not going to do something particularly when we are in a view now that we've got the capacity, recombinant seems to be a very logical piece. The good news, though, Glenn is if and I stress if, down the road the overall requirement isn't as high since most of these facilities now are multi source we could be using them for another product. But I'd say at this point in time just sort of keep posted. On the planning process question, you know, this is one, Glenn, and again you've been through this and seeing how we do this, I'll go back and take a look at what did we try to do consistently. We typically do and I will go back and think of each of the last nine-year we always going through a very thorough plan process to determine what is our reasonable expectations given everything we know about the businesses, the environment, competition, you know, the global nature, et cetera, and based on those expectations we put together a plan that typically we take you folks through in October. So, you know, the way I look at it is we go about it the same every time. The difference I think this year is that we had an expectation that we would grow in the low teens. And given the reasons that Thomas gave you at the end of the day the expectation needs to come down because the overall dynamics particularly in the plasma business have changed. Notice, of course, that even though we have reduced the sales guidance given what our now current expectation is we have enough, in your lingo, of flexibility that we remain comfortable, that we will achieve our earnings target for the year. So as we now go into 2003 given everything that we know about the businesses we believe a reasonable expectation, Glen, is for us to grow our sales in low double digits and to grow our EPS in the mid-teens. I think that is a reasonable expectation. And when you take a look at the individual businesses we could get into a long discussion of well, gee, couldn't the sales growth be higher, could it be lower. This is obviously a lot of moving pieces. I mean, try to estimate just alone when you think PFM is going to get approved, how many product are we going to get from GI and I could go through 15 or 20 of those. I think overall given everything we know today, a very reasonable expectation is the outlook that we set for 2003.

Harry, do you have the levers within the P&L just in case some of the top line issues, just in case the top line falls a little bit short? Do you have levers within SG&A you can pull, do you have any flexibility in the tax rate that you're not sharing with us that's kind of giving you the confidence for 2003?

You know, Glen, I don't think I could answer that question even if I could answer that question. I mean, in reality to me I always like to think, Glen, the best way to think of the future is to get an understanding of what's currently happening. We expected our sales growth this year to be in the low teens and it's actually coming in in low double digits. Obviously we are pretty proud of the way we manage our costs, the way we manufacture our manufacturing facilities, I give a tremendous amount of credit to Mike [Gandling] and [Carla Sullivan] and all the folks that are constantly focusing on improving our cost position. I don't think a lot of companies have the discipline we do in terms of managing our SG&A ratios and obviously since we've got a lot of new products that we're launching we obviously intends to have some growth within our sales and marketing. But do we have the flexibility? I mean, for example, Glenn, one of the things that we did this year is that when we took a look at the fact that our guidance now is lower in terms of the sales growth we've done a lot of work in terms of managing our travel expenses. So, you know, again I think overall we have a good set of expectations for the year as well as going into 2003.

Okay. Great. Thanks, Harry.

Bruce Crana from ABN Amro is on line with a question. Please go ahead with your question.

Good morning, everyone. Quick question, Harry, so it sounds like [Nesheral] is just broadly I guess the second half of '03, event, I won't push you more than that but can you tell us.

Bruce, Bruce, you said that, I didn't.

I understand.

Okay.

But can you tell us if, let's say that it sort of the second half of '03 in general or that's my supposition, do you factor a premium pricing from protein three from [Nesheral] into your assumptions concerning recombinant growth next year, the overall dollar growth.

I'm in the going to get into pricing per se. I think it would be a reasonable assumption that if we are the only company in the market with a third generation product that it would be reasonable to assume that just maybe there would be a premium involved.

So it may go into the 25% plus kind of sales number in the second half of the year.

I'm not commenting on that.

Okay. If BioScience, I am going to throw a number out there for next year, 15%, I know you said mid-teens, I'm just trying to reconcile recombinant growth at 20% that number with recombinant with 20% I think IG IV is 20%, what would be your guess or how should we think about albumin and plasma based factor eights.

Why don't we do this why don't you think of the plasma business as a whole I think that's what I tried to explain to you instead of just looking at the individual product, why don't you look at the overall business, why don't you assume that to be in the 10% range? Does that help you?

So the overall plasma piece is in the 10% range, recombinant is in the 20% range, would a reasonable average be somewhere in the mid-teens.

Absolutely.

Okay. Thank -- that's helpful. I guess lastly more from a broad perspective I think the commentary for Factor Eight market, let's say 3 billion to 5 billion by 05, and that was units, right.

Right.

Looking at that broadly, Harry, let's say that's up 60% during that time is it fair for us to be thinking of that increase in demands really coming overwhelmingly from prophylaxis versus other.

No, it's a mix of things and it's a mix of things with prophylaxis, it's aging of population, it's increases in international expansion, increases, there are a lot of different factors which we could spend some time on but I think we actually talked about it in June, I'll be more than happy to, Bruce, spend some more time with you and the team off-line. But obviously the numbers, the one factor is demand for adult patients.

Okay. Last question, on Luko company site, is that I guess a temporary lull there on do you think that market is kind of topped out.

I think the market is probably close to topping out, yes.

That's fair. That this.

Thank you, Bruce.

Scott Davidson from Piper Jaffrey is on line with a question. Please state your question.

Hi, good morning. Thomas, can you just briefly add dress the reimbursement side of Factor Eight, Factor Eight therapy and specifically as relates to the U.S. market, are you envisioning any changes there or are there any kind of ongoing discussions and then as you look internationally, anything that needs to come into place in U.S. that isn't in place currently that you rely on in terms of achieving your plans for next year.

First let me say I do know we don't sell directly to patients, in fact we sell to a provider that sells to a patient. Any discussions that are ongoing right now is something that would likely if it goes through could impact the providers. So it's not going to have an impact on us. The second thing which I think we said on the hemophilia side is more than 60% of our business with providers is tied up in multi year contracts so we don't see an impact this year or next year on some of the developments that could be taking place. I also want to say that there are ongoing developments in all points in time but we are working together with [NHF], providers are working together a lot of people are looking at this and particularly with the hemophilia patient grouping is such a strong group and strong advocates and such strong support, to get legislation or anything that will significantly impact their treatment regimen I think is not very likely and I look at that letter to the U.S. or international market I see it everywhere the same thing when patient groups are organized and they are as strong as they are it's very, very hard for legislation to be [inaudible]

Okay. Great, just relative to your Factor Eight guidance for next year, Thomas said maybe in the context of these contracts that you've talked about, can you just give us a little bit of visibility in terms of what you are assuming relative to the other companies that you are bringing capacity on line next year, just, are you planning to be first, second or third and does it matter.

First of all let me just step back. I'd love to come back to this because I think it's so important to tell you that there is going to be significant market growth going forward. I think we have to keep this in minds and there is going to be a lot of demand for product as there's more product available. Second of all, we've got such a significant position and we have long term agreements with these players so I really can't speculate on the competition, all I know is that we've got excellent relationships with patients groups, we have outstanding relationships with our providers, and we are very confident that we will continue to fulfill our role as a market leader in the markets that we serve and with the customers base that we're at and I think the other thing that I always love to come back to as well, one is the market growth that's there, the second thing if you look at our track record we are consistently increasing supply is always seen in the marketplace for people to rely on, I think that means a lot to the providers, it means a lot to the parents, too. So that's why I think we are where we are and I think that's why we believe we can continue to be very confident going forward.

Thanks very much.

Thank you.

Glen Reicin from Morgan Stanley is on line with a question. Please state your question.

Good morning, can you hear me?

We can hear you, Glen.

A couple questions follow up what are you assuming in terms of contribution for the fourth quarter and for the entire 2003.

Well, it completely depends, grin, on the timing of when you believe the ESI [Lederle] is going to close so I would estimate for the total company maybe 1%, in terms of next year, I don't know, Brian, what would be a reasonable.

200 million for [Lederle] and there isn't any significant acquisition that were we're depending on.

200 million, so roughly 2%, Glen.

Okay. On a different, topic here in terms of cash usage can you talk a little bit about your assumption growth in terms of cap eX. how you are dealing with the converts that are out there and some of the big cash uses that you anticipate.

This one is an interesting one, Glen because my boss and idea debate this one actively. I would say that it's going to be somewhere between eight and 900 million for capeX. and I will let you guess which of us is on each of those numbers.

I'd be surprised, Glen if it was more than 800 but most of the plan is locked up at this point we have a few pieces that are still moving.

As it relates to the convert, I do think we have the absolute flexibility to either refinance that debt or in fact on some of the existing convert holders might find it attractive to continue to hold that paper but in either scenario I think we'll be fine.

You factor that into your EPS estimates for next year.

Yes.

In general, working capital at what point does it become a source of cash rather than a contribution from cash, you've been building up inventory for quite awhile here.

I think definitely as we prepare for these product launches this year we've had more of an increase in inventory than we have traditionally. I do think that as we continue to grow, particularly with international growth there will be a significant demands for working capital. However, I would absolutely agree with you that we can and will do a much better job in managing the overall supply chain and continuing to improve working capital management. And I'm very confident that, you know, once again next year we'll generate more than 500 million in cash flow. But bear in mind, we are a growing business, we are pretty global and the overall supply chain dynamic, particularly in Thomas' business, is very, is really a long cycle business in terms of the overall production and finishing process.

Are you going to continue to factor receivables.

Modestly where it makes sense, definitely in certain markets like Japan, we'll keep doing it forever if the environment stays the way it is which is pretty attractive and a very low interest rate environment. And the other area that we factor fairly consistently is a high quality lease portfolio that we've got and we have facilities in place for both leases and other receivables around the world. If the economics are fine, we'll do it but I think over time if you look into next year on balance there will be less factoring next year as there has been this year.

Finally I am going to be a little bit provocative here so don't beat me up too badly.

Glen, we always like it when you're being provocative.

Yeah, thank you. You've been doing a lot of channel checks in the last three months and we are hearing in the last 60 days of significant decline in Factor Eight pricing and significant increases in inventory levels on the part of large home health care providers to the extent close to 100 days in many cases am I just getting a bad sampling or what are you seeing and at what point do you start changing your expectations regarding the overall growth in the Factor Eight market going forward? I think we sort of danced around this issue a couple times but I wanted to be a little more explicit here.

Thanks for the question it's actually an excellent question and clearly inventory has gone up as we talked about before it was very, very low before it has now increased and the other thing that happened it was not until the beginning of September NHF issued, they said go back to the regimen so what we will now see there is inventory available there is now the call to go back to your regimen and it obviously takes sometime to go from being very supply constraints to start the regimens up and particularly since most of the patients listen to what N. H. F says so I think we'll see the time lag and as we move forward hear I think the pick up in demand is going to be coming. That's the way we look at the market. That's the analysis that we do and that's really the read of the situation. So, you know, as we look forward here, we're continuing to feel very confident about what the market growth will be here over the next couple years.

And, Glen, again, you can be as provocative as you like that's not a problem I guess what I will add to that I tried to make this comments a little earlier I think there really is a difference between getting to what I would call adequate supply levels for the first time in a long time and over supply. I think they are two completely different things. Second, if you think about this, if you really believe we are going to get to a point where there is excess supply and if in fact we really need to begin to market the product aggressively I really believe the fact that we'll be the only company within a third generation product that if we need to compete on that basis that will give us a significant leg up but, again, the irony is you don't here us talking a lot about that because we've never been in the position to this point where we really had to do much marketing because we always had to be able to sell everything we make. But if, if you're right and if in fact you get to the point that it isn't just adequate supply, it's over supply then we are going to begin to market our brains out and I put our reputation, our quality, our track record, our sales force, against anybody. We can debate whether that's going to happen or not but I got to tell you we'll be ready for that inevitability.

That's obviously the central issue right now.

Right.

Just one last clarification question. For the fourth quarter what did you say about BioScience growth in total? Was it 10%.

We said in the 10% range.

10% range, thank you very much.

John Calganini from CIBC World markets is on line with a question. Please state your question.

I wondered, maybe Thomas you could answer this, I wondered what would be the lapse time at Thousand Oaks between inspection and the approval of your last suite that was approved there, that was my first question.

It was about a year, it was about 12 months -- oh, the inspection, I'm sorry, I thought you said the filing.

No, I meant inspection.

We had the inspection in June of that year and we had approval in October, early October.

Okay. And in [Nushetel] you had the inspection when.

We had the inspection in September, but, again, you can't draw a conclusion on that because as they look at this there are many components to look at, as FDA looks at this they look at the facility, they look at the clinical data, they look at the overall protocol so you should not draw the conclusion that if they inspected it in September means that it's going to be approved earlier. It would be wonderful, But, again, FDA has it's own track record. The great news I will say and this is actually a first for almost anybody in the industry is that this file was done by electronic filing in June which has been phenomonal which actually allows FDA to turns things around much quicker and corresponds with us so in addition as I said depending on time, having had the inspection, doing the electronic filing, all of this obviously great news. But I really don't want to start to draw parallels to Thousand Oaks in this. Listen, we remain optimistic about the approval of the trial.

I thought maybe they used similar processes so they might apply. But do you have, the other question I wanted to ask is would you be willing to tell us what your price change assumption is for recombinant in 2003, there's been these proposals under out-patient perspective pay and we were kind of surprised at how low the reimbursement rate was proposed at for recombinant seemed to show a lack of understanding of actual pricing because that is supposed to be a cost based system so can you give us any sense of where they got the 52-cent per activity unit level reimbursement level and where you think that's going to ends up.

John we really can't comment. Your comment is related to the fact that it lacks a little logic is true, we think that people will sort of understand that as they go through the process but to comment on pricing is obviously not something we'll do. I will come back to the one comment that Thomas made that I think actually will be helpful because I think you raised one good point. Clearly we are not going to comment on the approval, the FDA would not want us to comment on the approval and it will happen when it happens. However, with that said for people like you John that follow us for a long period of time when you go back in time when we were trying to get the first suite approved in Thousand Oaks and then the second suite approved and then the third suite approved, I mean, if anything if you look at this now we are actually getting reasonably good at this, the quality has been phenomenal, the process has been remarkable, we have one of the best manufacturing engineering regulatory teams in the universe, so do we have a reasonably good level of confidence that we've got our act together and this is going to happen? I think so. Does our level of confidence rise exponentially every time we get another one of these approvals? Yes. Do we know when it's going to get approved? Of course not. But again I would say versus the discussions we had in 2000 or '99, whatever, we have an expectation that we are in very good shape.

Okay. And you don't want to comment on sort of unit versus price growth next year?.

I really cannot comment, John. For you I'd love to do that.

How about for this past quarter, would you tell us what the growth was or decline in price this quarter.

I don't think I will ever talk about price specifically.

Okay. Thanks.

Okay.

Steve Slaughter from UBS Global Asset and Management is on line with a question. Could you state your question.

Can you hear me.

I can hear you Steve.

I was interested in that scenario you outlined a moment ago about having to go actually go out and promote recombinant Factor Eight, what does that due to our SG&A line and what if any consideration are taken in the '03 numbers for that scenario.

Actually, Steve, super question and it is one, we sort of try to keep these things internally pretty serious but occasionally try to have a little good active debate and I give Mr. Glanzmann here a lot of credit. My natural inclination being a little bias on the financial side would be it doesn't really matter what happens, we are going to leverage SG&A of every business every year now Thomas would say let's really think about that, there are things we really need to do. So we actually have built in to our operating plan, it's a great question, Steve, a fairly substantial increase in our sales and marketing expense in the year 2003. And in fact, since I know you listen to this pretty carefully I think Brian made the comment that we had we definitely expect our gross margins to increase I don't think for the first time in at least nine years I can think of we said we are going to be leveraging SG&A and if we are not leveraging SG&A but we are improving our operating margin and you are wondering what could be happening since we managed this SG&A pretty tight, just maybe we are putting a substantial amount of money into sales and marketing within BioScience to make sure that we have an unbelievable phenomonal launch with an additional billion activity units coming aboard.

That's helpful. To on earlier question Harry, you talked about the gross margin implication foreign exchange as kind of hitting in the third quarter is that a two quarter phenomenon or how long are we going to see kind of drag down the gross margin.

Trying to predict the exchange rate gets a little crazy, Steve. I would say you saw what happened in the third quarter it could be somewhat similar in the fourth quarter and assuming exchange rates stay where they are which is probably the best prediction of what could happen I would think you would see a reasonable improvement, very reasonable improvement in the gross margin which I think we would expect going into next year.

Great. A couple others real quickly the[Inaudible] buyout of your Japanese joints venture is there any impact on your '03 top line to that transaction.

None at all, Steve.

And lastly, Thomas, the GI product coming in on a going forward basis I think some of us had been led to believe that they had freed up some additional manufacturing capacity a year or so ago when we were back and forth with them due to a delay in the BMP launch, given that BMP has now launched is there a challenge in getting back to a more rational level of supply from GI given what appears to be a pretty positive launch from Metronics[ BMP].

We are working with them right now and they are actually looking at a lot of different things and I really can't comment on what they can do for us. I mean, I think if you were to ask them the question, you know, they've been, the relationship is great and we have a good dialogue going with them. We have this long partnership of many years and I have to say, you know, it's unfortunate that we are where we are and we are trying to finds ways to mitigation the situation.

But I would say and again I give Thomas credit, given the fact, Steve, we started working with these folks in 1984, we are approaching twenty-year relationship and I have to say in our discussions with Bob Esner and the senior team, they have been working with us very close to the make sure that we do the right thing. I think Esner and those folks are at least as concerned related to the patients that require this therapy as we are. So I'm actually optimistic that working together this will work out fine.

Fine. Great. Thanks for your help.

I will take two more questions.

Michael Weinstein from J. P. Morgan is on line with a question. Please state your question.

Great. First off, thank you Harry for sticking around and answering everyone's questions so late in the morning.

No problem.

First thing I want to give you the opportunity to clarify your response to the last question which is BioScience growth in the fourth quarter. I think he asked 10%, is that 10% given the guidance for recombinant Factor Eight in the low single digits I would assume 10% is really not that reasonable unless you have a huge small pox volume in the third quarter is 10% your guidance for Q4 or is that your guidance for the year?

[inaudible]

The question is your guidance for BioScience in the fourth quarter 10% revenue growth which I think your response to Glen that that would seem to be pretty aggressive to us and I want to make sure you get the chance to clarify and I want to ask a followup question.

Okay, and I do appreciate you doing that, Mike, because sometimes these terms get a little confused. If I look at BioScience in terms of what Thomas manages in terms of the [formal Highland] immuno businesses, all the theraputic proteins, vaccines, biosurgery, that group of businesses for the third quarter I think it's reasonable to assume will be in the let's call it 10% range. [phenwal] in the fourth quarter will actual will be down versus prior year.

Right.

So that means BioScience is.

So total BioScience including [phenwal] for the fourth quarter will be in the sort of mid-single digits.

That's what I thought. I wanted to clarify that.

Good.

And second, this is a big picture question and actually I would like both you and Brian to kind of chime in here.

Good.

Part of the lingering question over the last couple, few months has been that it's really been simply kind of how come management didn't do see of the deterioration of some of the businesses when obviously the Street was starting to see it and making negative calls and revisions on estimates and the stock was starting to reflect it but we actually didn't hear from the company until the end of the third quarter, and if we look at the numbers the way they are actually going to play out for 2002 really all three divisions will end up missing versus their forecast from a year ago, renal was supposed to do low double digits, it's going to do low single digits, BioScience is obviously going to do 10% when it was supposed to do mid-teens and immediate delivery is going to do the mid-teens but it's actually only going to do the mid-teens because of the acquisition of it appears we are the [Lederle] acquisition in the fourth quarter. So, I guess the question really is as much as anything is and during the year between the annual budget how is senior management collecting their information, why didn't some of these things get caught sooner and the big concern here and you hear you with so many different people's questions, Glen's question and next year and your ability to make the numbers how are we confident that you are reasonably forecasting next year and you're not being a little bit optimistic and we are not going to have the same call in three months? Thanks.

Okay. And Michael as always I give you a lot of credit for being able to put some of these things in perspective and really push to get us to quantify some of these things so let me give you my perspective on this and if you want to follow up feel free, I think this is important and I will give you my perspective which to a certain agree probably ought to be challenged because I guess I look at this slightly differently, okay. At net/net when you cut through it all, Michael, we expected, we expected for a whole lot of reasons we've gone through in a lot of detail that the sales growth would be in the low teens. Well, interestingly even and a half at the end of the day the sales growth will be in low double digits. I sort of view this as a former finance guy the difference between low teens and low double digits is two percentage points on $8 billion or roughly $160,000,000 in sales.

I am going to push back a little bit.

Let me finish the explanation and then push back, okay? So at the end of the day we expected our sales growth to be in low teens, it's coming in low double digits or roughly two percentage points. We also said that our net earnings would be in the EPS would be in the mid-teens and we still expect our EPS to be in the mid-teens. We said that our operational cash flow would be in excess of 500 million we expect it to be in excess of $500 million, in terms of the individual business achieved we said we expected medication delivery to be in the mid-teens. Medication delivery will be in the mid-teens regardless of whenever ESI [Lederle] closes so when I take a look at [Inaudible] medication delivery team those folks are having a phenomenal year across all portions of the business. Within the BioScience business clearly we reduced our guidance because of what we now realize is happening within the plasma business but if I look at the track record of what's happening within recombinant, vaccines, by surgery, several of those businesses are operating higher than we had expected and you know it's hiring than we expected because we've actually now given guidance for some of the pieces within recombinant higher than earlier. In the case of the renal business, we had a strong set of expectations based on what we thought would occur related to H.D. and the service business. And now that we've realized the currency issue it did not make sense for us to continue to grow the service business and we explained that when Al was on the quarter call last quarter and I think we argued the fact that even though the sales projection would come down and we lowered the guidance of that we said that the profitability of that area was low which would have virtually no impact on our ability to hit the earnings number. So at the end of the day it is very clear that the guidance we did in reduction is due to the fact as Thomas I think went through in detail to reduce expectations related to plasma. So as we now go into 2003 and again, Michael I know you are one of the few guys that's actually looking out the next four, five years given where medication delivery stands, given where the renal business stands and given where BioScience stands, is it reasonable to assume, is a reasonable outlook for the business that we should be able to grow sales in low double digits and grow our EPS in the mid-teens? I think that's reasonable. Is it possible that that growth rate could be higher? I think it's possible. But given what we know today and given the plant process that I articulated with Glen at this point in time I think a reasonable set of expectations, a reasonable outlook is the outlook we've given you not only for the total company but also by business and also within the quarter from each of the businesses.

Go ahead, Michael, push back on it.

That was a pretty exhaustive answer I am not going to push back on 2002, actually the spread is a little bit wider because of currency and acquisitions, but I guess what I'd really would like just maybe to understand intra quarter as business is progressing how you are getting information, whether you are getting a real time picture on the business and how it's progressing or is it just everything accumulated quarter end and then you get the picture and that's why we entered up hearing at the end of the quarter and not sooner? Thanks.

Michael, I guess my view of this and Brian may jump in, I actually think we have and I'm bias, I think we have a fantastic plan process as well as forecasting process and when I go back over the last now nine years and I think of our ability over each of the last nine years to give shareholders and analysts a pretty good specific picture of what outlook we expect for sales, earnings and cash flow in each of the last nine years, I guess my challenge would be, Michael, I don't know of many companies in this universe that have come closer to their expectations quarter by quarter and year by year than we have over the last nine years. But we receive information I would say on a weekly basis from the individual businesses, the sales force, the marketing folks, so our ability to keep track of what the trends are by business, by SBU and by country, I think are pretty extensive.

Again, thank you for the time taken on the call.

Last question.

Dan Lemaitre from Merrill Lynch is on line with a question. Please state your question.

Okay. Harry, I know you don't want to get too much into the small pox vaccine specific but any wondering if from a broad perspective if you could give us a rough idea of sense would have we are coming out for the full year in your total vaccine sales and more importantly what the pipe line looks like and what a decent number ought to be for next year?

My hesitation here is I don't know if in fact and I'm looking at Sabatino, can we state anything related to vaccines? Pardon me? Yeah, I guess I will break it into a couple pieces for you. Number one, I can't really talk about the total size, although in total it is not something that's material. However, when you talk about where we stand going forward I think it's fair to say that and, again, Mike, one of my many sensitivities, Dan as you know in the past is to say anything that would have any impact on another publicly traded company and obviously canvas is a publicly traded company but from what they have said that things are going along extremely we will with the contract and there continues to be quite a few other countries that have a significant interest in also receiving product. So as [inaudible] and Baxter complete its requirements for the government I would think, Dan, there would be a fairly high likelihood of additional contracts.

Dan, let me just add the other piece to this on the vaccine business it is obviously vaccines not just smallpox we've got a number of other products, we have [Inaudible], we have immune, the [Inaudible] story is actually a fantastic story, we've been getting a lot of licenses in the world, we just had a major launch in Q3 in Australia, with launched a product from Brazil. So vaccine sales, the other products in the whole vaccine business are doing very well. So we are actually very upbeat about some of the progress we are making with the products that we are launching around the world in vaccine and that gives me a lot of hope and expectation for continued great progress with our vaccine business.

And Thomas, yellow fever next year, you think we will get yellow fever approved.

Again, it's not in our hands. It's something at canvas Scott, we really can't comment on that. The [Inaudible] expansion continues as we told you we got our [inaudible]. approved in Germany six months early that happened as you know in June and we are now ready for next season so when the season starts basically in January, so very upbeat about that and we continue to make progress.

And, Dan, while we can't really comment on the small pox, if you look at the entire vaccine business I think it's safe to say given all the good things that Thomas has mentioned the total vaccine business for full year, 2002 let's call it in the $150 million range.

The total vaccine business.

Yes.

Total, 150.

Yes.

And we ought to assume in next year roughly what kind of growth on that, do you think?

I would say that depends on the earlier comment I made of how many of these contracts will the canvas and Baxter receive for other areas. So I would say it could be a reasonable growth rate.

Okay. Great. Thank you.

Sure.

Thanks, Dan.

Okay. Well thanks everyone I appreciate everybody's time and I hope everyone has a good week. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference with Baxter International. Thank you for participating.