百特醫療 (BAX) 2002 Q4 法說會逐字稿

Good morning. Ladies and gentlemen, welcome to Baxter International's fourth 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. This call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objection, please disconnect at this time. A replay of today's teleconference can be heard by dialing 800-642-1687 or 706-645-9291, and entering the pass code 7145896. This replay will be available following today's teleconference until January 29, 2003.

I would now like to turn your call over to Mr. Neville Jeharajah, Vice President Financial Planning and Investor Relations at Baxter International. Sir, you may begin.

Thank you. Good morning, everybody.

By now, I'm sure you have seen a copy of our press release for the fourth quarter of 2002. As the press release indicates, comments regarding the outlook and forward-looking statements actual results may differ materially from our current expectations. Please refer to our SEC filings for more details.

Now let me introduce Harry Kraemer, Chairman and CEO of Baxter International.

Thanks, Neville. Good morning, everyone. Joining me today are Brian Anderson, our CFO, our chief scientific officer, Steve Meyer, our corporate treasure remember, our Corporate Controller.

Today what I will do is walk you through the highlights for the fourth quarter and full year 2002. Brian will cover our financial results. And more Norbert Riedel will provide you with an overview of the progress we are making in the area of research and development. I will then walk you through our expectations for 2003 by business and explain why I'm confident about our financial outlook for this year.

But first, I would like to say that the Baxter team and I appreciate the feedback and comments we have received from many of our shareholders over the last several months.

Given that we want to make sure you have a good understanding of where we are today and what you can expect in the future, and with the added complexities of analyzing the financial results given special charges and discontinued operations, we have provided you with several additional schedules that are attached to our press release and can also be accessed on our website at www.baxter.com.

And again, if all of you have some of these schedules, I think it is helpful to make sure that a lot of the information that people have requested we tried to make sure that we provided.

So very quickly, on page 7 is the GAAP P&L which we always provide every quarter.

Page 8 gives you the operational and total cash flow and balance sheet changes overall as we typically provide.

Page 9 is the pro forma schedule for the consolidated statement of income on a pro forma basis. As we had discussed.

Page 10 shows the net sales from continuing operations. A new schedule that had been requested was to show product line sales for 2002, and this schedule for the first time shows the top 10 products that account for more than 90 percent of Baxter's total sales.

Also, additional schedules that had been requested were the pro forma restated consolidated statement of income for continuing operations which is page 12 and for discontinued operations, which is page 13. So I hope that is helpful in terms of giving some transparency, to help people understand exactly where we are.

As we turn to the fourth quarter, recent highlights include the FDA approval of Extraneal, which is a long dwell PD solution that offers increased removal of fluid from the bloodstream during renal dialysis, as well as US clearance of the Accura hemofiltration system which is a new instrument that delivers continuous renal replacement therapies in critical care settings.

Also, the closing of the ESI Lederle acquisition which expands our anesthesia business, and the announcement of the Alpha therapeutics acquisition that expands our BioScience product portfolio, broadens our therapeutic focus in the pulmonology market with the introduction of Aralast Alpha 1antitrypsin and increases the overall profitability of our plasma business by adding an additional fraction to our manufacturing process.

Also as you know during the fourth quarter we announced the divestiture of the majority of our renal services businesses and also decided to divest medication -- Medication Delivery, US, off site pharmacy add mixture services which an annual -- had annual sales of approximately 40 million. The financial performance of these businesses are reflected as discontinued operations in our financial statements.

Now turning the financial performance, you can look at the attachments and schedules that I talked about that were included in the press release and now,?

We take a look at the financial highlights, our Q4 financial performance from continuing operations include Q4 sales growth of 10 percent, Q4 operating margin of 22.3 percent, a .7 percentage point improvement over the operating profit margin of 21.6 in the fourth quarter of last year, and I believe our highest operating margin in more than 20 years.

Earnings growth in the quarter of 11 percent and EPS from continuing operations of 59 cents which also represented an increase of 11 percent.

In terms of the full year, our results from continuing operations include sales growth of 10 percent and operating margin ratio for the full year of 21.3 percent, compared to an operating profit margin of 20.4 percent for full year 2001.

Earnings growth of 15 percent for the full year. And an EPS growth of 13 percent. Operational cash flow from continuing operations of 468 million. And cash flow from operations of 1.3 billion before capital expenditures of 848 million. And Brian will be getting into that in more detail.

Turning to sales, sales from continuing operations in the fourth quarter totaled $2,261,000.000 and increased 10 percent. Foreign currency represents approximately 2 percentage points of our growth in the quarter. Total US sales of $1,127,000,000 increased by 5 percent for the quarter. International sales of 1,134,000,000 increased a very strong 14 percent for the quarter. Foreign currency contributed 3 percentage points to international growth in the fourth quarter.

Also very important is if you take a look at full-year 2002 sales, which total 8,110,000,000, that increase of 10 percent there was no foreign exchange impact on sales growth for the full year. That is our sales growth was 10 percent for the full year before and after taking into impact the currency. now let's look at each of the mainly businesses.

First of all, Medication Delivery. Q4 sales for Medication Delivery totaled 964 million. Sales growth in the quarter was 16 percent. Full year 2002 sales totaled 3 billion 317 million, an increase of 14 percent. Sales growth for the full year excluding the contribution of acquisitions was 10 percent. US sales of 603 million grew 15 percent in Q4 and international sales of 361,000,000 increased 18 percent.

Medication Delivery sales growth for the quarter was driven by sales growth in the anesthesia business of 22 percent and continued strong growth of our drug delivery business which grew 24 percent. Based on its strong performance in 2002, the Medication Delivery business is very well positioned for 2003. In fact, the 2002 sales growth for medication delivery business was the strongest it has been in more than five years.

Now turning to the renal business, sales for renal in the fourth quarter totaled 455 million and represented an increase of 4 percent. Full year 2002 sales totaled 1,697,000,000, an increase of 2 percent. US sales of 102 million were up 2 percent in the quarter, and international sales of 353 million increased 4 percent.

PD therapy sales increased by 3 percent in the quarter and for the full year 2002 the HD therapy sales increased by 5 percent in the quarter and declined by 2 percent for the full year.

As I mentioned earlier, during the fourth quarter, we announced the divestiture of the majority of the renal service portfolio including most of the Renal Therapy service business in Latin America and Europe and the US renal management strategies and lifeline businesses. As we look to 2003 and beyond, the renal business will focus on the growing and profitable products and pharmaceuticals used in treating patients with kidney disease.

In terms of total BioScience, Q4 sales for the total BioScience segment totaled 842 million an increase of 7 percent. Full year 2002 sales for total BioScience were 3,096,000,000, an increase of 11%. Under the circumstances sales in Q4 were 422 million and declined by 5 percent. Q4 international sales of 420 million increased 21 percent.

Sales for transfusion therapy, formerly known as Fenwal, totaled 157 million in the quarter and declined 8 percent as a result of sales of 30 million to a large US customer that occurred in Q4 of last year. For the full year, transfusion therapy sales totaled 548 million and were flat. Sales in Q4 for BioScience excluding transfusion therapies were 686 million, an increase of 11 percent. Sales for the full year total 2,548,000,000, an increase of 14 percent.

Recombinant sales for full year 2002 totaled one billion with sales increasing 24 percent. Recombinant sales growth in the fourth quarter was 11 percent given our improved inventory position as a relative humidity of resolving the yield issues -- as a result of resolving the yield issues with Wyeth.

Antibody therapy sales declined by 5 percent for the quarter and 3% for the full year. Clearly pricing has been an issue as competitors have entered the US marketplace. However, although our US sales declined in the quarter, due to lower pricing levels as compared to Q4 last year, unit volume with these customers has increased given the renewal and expansion of our long-term agreements that occurred in the third quarter.

Biosurgery sales were once again very strong with sales growth in the quarter of more than 40 percent and sales growth for the full year in excess of 25 percent.

Vaccine sales for the year totaled more than 170 million as we met our commitment in completing our bulk shipments of a smallpox vaccine to our partner for the U.S. Government.

Clearly 2002 was a challenging year for BioScience. However, with our clear competitive cost advantage, and our plasma business, given the number of fractions we produce, our differentiated position in the Factor VIII market with the introduction of the first totally plasma albumin-free product and continued strong sales of biosurgery products as well as vaccines, I expect BioScience sales growth to accelerate in 2003.

Now let me turn it over to Brian Anderson.

Thanks, Harry. Happy New Year, everybody, and good morning.

If you turn to page 9 of your press release, I'd like to just quickly walk you through the details of the pro forma P&L for the quarter. As Harry mentioned, sales growth in the fourth quarter was 10 percent and sales growth for the full year was also up 10 percent.

The gross margin rate in Q4 was 46.8 percent, an improvement of .5 percentage points over Q3 of this year and a half a point lower than the prior Q4 which was 47.3 percent. For the full year 2002, the gross margin rate was 46.8 percent, an improvement of .4 percentage points compared to the 2001 gross margin rate of 46.4 percent.

The SG&A ratio in Q4 was 18.2 percent compared to 18.6 percent in Q3 which shows a sequential improvement of .4 percentage points in the SG&A ratio. For the full year, SG&A ratio was 19.3 percent compared to 19.6 percent for full year 2001. And SG&A overall increased 8 percent.

As I mentioned in the past, we have several initiatives aimed at reducing G&A expenses enabling us to continue to make the investments that are necessary for our planned new product launches including the Alex red blood cell collection system, INTERCEPT platelets, Extraneal PD solutions and the third generation recombinant Factor VIII products.

R&D spending for Q4 was 142 million compared to 115 million last year. This is an increase of 23 percent over last year's fourth quarter. And R&D spending for the full year 2002 was 501 million, or an increase of 18 percent. And this growth was primarily related to our continued investments in the biosciences vaccine businesses.

The operating margin as Harry said earlier improved by 7/10ths of a percentage point to a very strong 22.3 percent compared to 21.6 percent in Q4 of last year. And for the full year, our operating margin was 21.3 percent an increase of almost one full percentage point compared to the 20.4 percent operating margins for last year.

Income from continuing operations in the fourth quarter increased 11 percent and income for the full year was up 15 percent. The diluted shares outstanding in the quarter totaled 619 million. Shares outstanding.

And as I mentioned in the past, our plan is to exit the remaining equity agreements over the course of this year and at the end of the third quarter of last year, we had roughly 35 million shares of equity torwards outstanding and as of the end of Q4, we have made great progress in reducing that to 15 million remaining shares outstanding under equity forward agreements.

Earnings per share for the fourth quarter was 59 cents and 11 -- an 11 percent increase, and EPS for the full year was $2, an increase by 13 percent.

Now if you turn to page 8 of the press release for some comments on the statement of cash flows.

Operational cash flow from continuing operations in the fourth quarter was $568 million, which resulted in full year operational cash flow from continuing operations of 468 million compared to 556 million in the prior year. The net cash outflow for discontinued operations was 41 million in 2002. On receivable management, DSO at the end. Year was at 54.5 days, and declined by 7.5 days in the fourth quarter compared to the third quarter. And while this was a very significant sequential improvement, DSO was 2.5 days higher than last year's fourth quarter. And this is due to continued significant international sales growth and, as you know, DSOs are typically higher outside the United States.

Inventory turns in Q4 improved from 2.5 turns in Q3 to 2.7 turns in Q4. However, inventory turns in 2002 were lower than 2001 due to a higher level of plastic in a in-- plasma inventories and also the inventory investments related to our planned new product launches.

Capital expenditures for 2002 were 848 million, an increase of roughly 90 million over last year. Going forward, as I have said in the past, we will continue to place significant focus on working Capital Management, especially in the inventory and supply chain area where we have a number of initiatives continuing as we head into this year.

Now I'd like to turn it over to Norman, our chief scientific officer, for some comments on R&D.

Thanks, Brian. And good morning, everyone.

Products development continues to be a key driver of our innovation and growth and as Brian just mentioned, our R&D spending for full year 2002 totaled $501 million and increased 18 percent over previous years.

Our product development pipeline is supported by our very strong technology platforms as we continue to focus our R&D efforts in terms of the resource deployment and internal (indiscernible). [ low audio ] as a result, we have a strong balance of both short term and long term pipeline opportunities and with significant unmet medical needs and positions us for accelerated growth.

2002 was a very exciting year from a research and investment perspective in terms of the number of key product approves and milestone achievements. These included the approval in Europe of our INTERCEPT pathogenic activation technology for platelets, an evolutionary advancement for ensuring the ongoing safety of the blood supply.

Interset Blood System goes a step beyond current blood safety measures which only test for certain infectious agents by inactivating a broad spectrum of known and potentially emerging pathogens including viruses, bacteria and parasites.

The approval in the US and Canada for our Alex automated red blood cell collection system which will increase the supply by enabling blood centers to collect two units of red cells instead of just one from eligible donors.

The approval of NeisVac vaccine for the prevention of menengitis c. in a number of countries outside of Europe. The approval of (indiscernible) in Germany. And the approval of influenza vaccine in the Netherlands. The approval of our long dwell peritoneal dialysis solutionExtraneal in the US.

The extension of our drug delivery platform adding new technologies for the formulation and packaging of controlled release small molecule end protein drug. Our new pro med microshpere technology allows the creation of uniform microspheres that can be tailored formulate many types of drugs including protein drugs.

microspheres release the drugs in the body over a period of time from hours to weeks, thereby reducing the need for frequent injections. The launch of [INAUDIBLE] The computerized, wireless, patient management system that further enhance the safety of medication delivery. The filing in the US and Europe for the third generation recombinant Factor VIII and finally, the initiation of a Phase 3 trial for our liquid IGIV in primary immunodeficiency and the Phase 1 trial for [INAUDIBLE] in hereditary emphysema.

As we look to the future, we expect to continue to increase our investment in R&D. At the same time, our strong project management processes and R&D portfolio approach en surety proper prioritization and execution of projects across all of our business. [INAUDIBLE]... managed project risk, enhance productivity and thus support increased return on our investment.

As I mentioned earlier, our product investment pipeline focusing on innovative services in areas of significant unmet medical needs. Enhancements to our portfolio management is a regular review of our key progress with the appropriate adjustments to the pipeline with an ongoing basis.

For example, in 2003, we discontinued [INAUDIBLE] project, including separate programs on meningitis b and c for the US and we combined -- these programs.

In conclusion, I am very excited about our product approvals and development milestone accomplishments in 2002 as well as our short term and long term pipeline opportunities for 2003 and beyond. I look forward to sharing more information with you at our upcoming conference in March and will now turn it over to Harry for the 2003 outlook.

Thanks, Norbert.

It is very important that our shareholders have a very good understanding of the key drivers contributing to Baxter's future growth, profitability, return, and cash flow. Today, I will provide you with our outlook regarding the key growth drivers for 2003 and for the first time give you a specific numerical range for sales and EPS in terms of our expectations for both the full year as well as the first quarter.

Sales growth we expect for full year to be in the 10 to 12 percent range. Specifically, we expect for 2003 renal sales growth in the 2 to 5 percent range. Medication Delivery sales growth in the 12 to 16 percent range. And BioScience sales growth in the 12 to 16 percent range.

Now let's take a look at each business specifically. Al Heller and the renal team remain focused on improving the growth rate of this business over time. Specifically, for 2003, we expect renal sales to be driven by low to mid single-digit growth in both PD therapy and HD therapy sales.

We expect to increase PD use a.m. globally to the introduction of new products to the marketplace including Extraneal in the United States and Japan, and physioneal and the q connector in Canada as well as focus on improving our HD growth with several new product launches including the arena hemodialysis machine, the Accura instrument and the Centra plus dialyzer.

In terms of medication deliver, Dave and his team are very well positioned in 2003 given the focus on several growth initiatives including the continued international expansion of our higher margin specialty products which differentiates us from the market and creates a competitive advantage for our business with the goal of providing access it our complete portfolio of Medication Delivery products and drugs to more patients worldwide, expanding our portfolio and end, new market segments by continued expansion of drug delivery platforms and expanding the anesthesia business into broader critical care markets, in fact, I expect 2003 sales growth for the drug delivery business to exceed 20 percent as we continue to expand the number of delivery platforms we offer to our pharmaceutical partners which now includes IV reconstitution, frozen and liquid premix bags, freeze drying, prefilled syringes injectable reconstitution and clinical services, and in addition, I expect sales growth of the anesthesia business to grow more than 40 percent including 200 million of incremental sales related to the acquisition of ESI Lederle.

In terms of BioScience, I expect Thomas and the BioScience team to grow their sales for the full year including transfusion therapies by 12 to 16 percent given the introduction of several new products. This growth includes transfusion therapy sales growth in the 8 to 10 percent range and the rest of BioScience growing 13 to 18 percent.

Specifically, I expect our recombinant Factor VIII sales growth to be in the 20 percent range for the full year with sales growth in the mid single digits prior to the approval of our next generation product.

Full year growth is driven by the recent national hemophilia foundation recommendation to therapy providers to return to preshortage treatment protocols, anticipated licensure of our next generation recombinant product that remains on track and will further differentiate us in the marketplace, our excellent track record of safety and efficacy as well as consistency of supply and finally, our strong global relationship with patience, therapy providers, as well as customers.

I expect our vaccine sales in 2003 to exceed 200 million given the success of our tic borne encephalitis vaccine in Germany and the licensure of another vaccine in several countries and finally with pricing stabilizing in the United States, and the renewal and expansion of our long-term agreements and comparisons easing of the back half of the year, I expect IVIG sales to grow more than 10 percent for the full year and in fact, I expect all plasma proteins to grow in the 10 percent range.

In terms of an overall sales summary, as I said earlier, we are well positioned to deliver sales growth for the full year in the 10 to 12 percent range. In addition, I expect our Q1 sales growth to be in the 7 to 10 percent range.

In terms of operating margin with continued improving gross margins, I expect our operating profit rate to be in the 20 1 to 22 percent range for full year 2003.

In terms of net earnings, given the improvement in our operating profit margin, I expect our earnings growth to be in the mid-teens for full year 2003.

In terms of our share count for full year 2003, I expect our shares outstanding to be between 615 million and 625 million.

In terms of EPS, I expect earnings per share for full year 2003 to be in the $2.22 to $2.29 range, and our guidance for earnings per share for Q1 of this year is in the 42 to 45 percent range.

In terms of cash flow, I expect our cash flow from operations to be in the 1.3 to 1.5 billion range for 2003. After investing 800 to 850 million in capital expenditures this year, I expect our operating cash flow -- operational cash flow to be between 500 and 600 million.

At this time, Brian, Norbert and the team and I will be more than happy to take any questions on any of the topics.

Thank you. We will now begin the the question-and-answer session. If you have a question, press Star 1 on your touch-tone phone. You will hear an acknowledgement that you have been placed in queue. If your question has been answered and you wish to be removed from the queue, please press star then the number 2. If you are using a speaker phone, please pick up the handset before pressing the numbers. Once again, if there are any questions, please press Star 1. On your touch-tone phone. Dan Lemaitre from Merrill Lynch is online with a question. Please state your question.

Good morning, everybody. First off, thanks for the extra numbers. They really help. Just a question on Q1 if I may, Harry. I know you're guiding 7 to 10 percent includes currency and Lederle but if currency adds like three percentage points to the top line in Lederle's a couple of percentage points, I guess would you back out a kind of a unit number of 2 to 5 percent and if that's the number, I'm assuming there's some stuff that's actually down year over year or flat to down? So can you maybe just help us understand, you know, what kind of all the give and takes are in Q1 where there could be some businesses that are actually flat to down if my math is right?

Okay. Sure, Dan. A couple things. And Brian obviously feel free to jump in on any of these. I would say overall, Dan, that the FX component I think we would say is about 2 percent and again, Dan, what I'm trying to do is give you a range for each one of these pieces to give you just a sense of, you know, what's the downside case, what's the upside case. So to the extent that we look at a range, in some of these areas, for example, for recombinants, the growth will be in the mid single digits. For Fenwal, Fenwal clearly will be flat for the quarter. I don't expect significant growth there. And as I mentioned earlier, I believe that the renal business will be in low single digits in the quarter. So said the other way, chief, I think the pieces that you could expect fairly significant growth would be around Medication Delivery for all the reasons that we talked about.

Right.

A higher growth rate for antibody therapies and recombinant given all the things that we talked about. So, you know, I would say that we expect to see the overall sales growth all in I think a renal expectation to try to give you as good a sense of this as possible, Dan, somewhere between 7 and 10 percent.

Okay. And then just one quick follow-up. Anything new in terms of Neuchatal timing and your comfort in being able to find a home for that product at the price premium I think you're still hoping to achieve?

Sure. Norbert, why don't you address that a little bit?

As we said before, we have submitted our regulatory dossiers in the United States as well as in Europe for our next generation Factor VIII products. Everything is on track as part of the review process, our facilities have been inspected. The Neuchatal facilities where we make the (indiscernible), the Vienna facility, and everything is very much to our satisfaction. So at this point, I can only say that we remain on track with this critical product.

I would just add, Dan, that given all the advancements we have had and where we stand in the facility and all of the suites in California, given the expertise we have, given the internal teams, given the overall perspective from Norbert, I would say we continue to be extremely confident of our position. And again, the one thing we really can't do is try to predict what the FDA is going to do but we are very confident in terms of where we stand.

Thanks, you guys.

Glenn Navaro from CSFB is online with a question. Please state your question.

Hi, guys. I'm wondering, when do you kind of get a good sense of demand for the next generation recombinant fact or 8 -- Factor VIII product? Does it come at the time of the approval? Do you start to build a book of demand about a month or so ahead of time? The reason I'm asking is obviously, this is a second half story. And, you know, we are probably not going to see the true recombinant growth until we actually see the numbers. And that may not be until October of this year. So let's just say we run a scenario July 1 you run approval of the next gen product. Obviously three weeks later you'll have a conference call to report Q2 results. I'm just wondering, at that point will you have a good sense of what the demand and how the ramp will look so that you can give us confidence that the second half story will transpire? Thanks.

I think, Glenn, that's a very fair question. And again, you know, we got a lot of different scenarios. But I would say playing out your scenario, Glenn, I think that would be very renal. And I would expect that we would on the second quarter call be able to give you a pretty good sense of where we stand, particularly given all of the marketing that's going on. You know, a sense of the stocking orders from our major customers, some of the further discussions we have upon approval with the national hemophilia foundation. So, you know, I would think within a month of approval, we could give you a pretty good sense of that, Glenn. I think that would be fair. Do you want to add anything?

The only piece I would add is that as you well know, we have a very established franchise in hemophilia products and recombinant Factor VIII. We have built up a significant inventory of our next generation Factor VIII. And so I believe we are really ready to rock and roll as soon as we get green light to do so from the agencies. And the fact that the hemophilia population is very much waiting for further improvements and advancements in hemophilia care and therapies. This really is a cutting edge product.

Okay. All right. Great. Thanks, guys.

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

Good morning.

Good morning, Ben.

Couple of financial questions, Brian. Maybe you can help us with share count in the quarter, the full year share count for '01. I'm just looking at the average quarter being down below where we were and the full year even actually lower. Was there some sort of a restatement in that share count throughout the course of the year because of the retirement of the the Ford contract? And if you can talk about the tax rate where you expect that to be for the next year as well, thanks.

No, no restatement of the share count at all, but, yes, obviously, the -- it's a weighted average share count. So depending on looking at quarters versus the full year, you could get some differences. But share count is not restated at all. And it reflects the fourth quarter activity around the offering that we did which has minimal impact because it was late in the year. As it relates to the tax rates, the tax rates for the full year of 2002 is pretty comparable to 2001. I would expect going forward we would be in that 24 to 26 percent range broadly. This past year, it was about 25 percent. And I would expect, you know, to be in about the same spot. You know, we do get some benefit to the tax line. Because of goodwill amortization which is a nondeductible item no longer being in the P&L but overall you can model I would say in that 25 percent range.

And then follow-up on the product side. You talked about plasma coming back and specifically IVIG. We have continued to hear some noise about your competitors using price even in the fourth quarter. Is that just not affecting you guys or are you feeling that soaking it up and you think it's going to ease going into next year? I guess the next question is where do you see pricing next year? Is it flat or are you modeling it continuing to be down?

I guess, Ben, in your two scenarios I'd say the latter. I think there will be some pricing decline. I think in [INAUDIBLE] but again, just given everything in the marketplace, [ stabilizing ] Particularly in the United States, I would continue to see some impact.

Okay, thanks.

Matthew Dodd from S.G. Cowen is online with a question. Please state your question.

Thanks. A couple of questions. First, on recombinant Factor VIII, can you comment at all about any marketing efforts you have made recently especially in the fourth quarter to accelerate demand for the product? You are probably going to talk a lot about that at March but can you give us any broad idea of what you have already started? And then can you also tell us when you think that you might divest the Renal business?

Okay. In terms of the recombinant Factor VIII, chief, talking about the specific marketing programs competitively, inform we actually do them I would not get into the detail. I would tell that you we have added significantly to our sales and marketing presence within BioScience. We are trying to make sure that as we get closer, that we are prepared to move very, very aggressively and that is something that I think once we get the approval, we would talk about in more detail. In terms of the Renal business, as I had mentioned earlier, for all the reasons that we had talked about, I think the service business given our growth requirements, return requirements, I'm looking at the business overall, focusing specifically on PD and HD. There are absolutely no plans that we would divest the renal business.

I'm sorry, Harry to clarify, just as a discontinued piece.

Oh, the service business. I thought you said renal.

Yeah, I did. I'm sorry. Just the better handle on the timing. I thought you felt you would be able to unload it pretty quickly.

I would say, you know, again, dealing with all the different countries and all the different pieces, I think we would say we're comfortable occurring in the first half of the year.

Thank you, Harry.

Mike Weinstein from J.P. Morgan is online with a question. Please state your question.

Hi, thank you. Can you hear me?

Sure can, Mike.

Okay. Harry, just a couple of things. I do want to clarify first off just exactly what you're saying about 2003 earnings. I think you had said at one point on this call that you thought earnings in '03 would grow mid-teens, but then you endorsed the 2.22 to 2.29 EPS. Could you just clarify that are for us?

Sure can. In our last call, chief, which I do at the fourth quarter of -- on our October call every year, is to give you a best sense of how we look at it. And up until this point, we always looked at it as sort of a point estimate of saying it would be in the mid-teens. What we are now doing for both sales and earnings for the full company as well as sales for each of the major areas for both the full year as well as the individual quarters is to give you a range. That is, if we're able to do everything we think we can do, what could we achieve, which in this case in the old terminology would be the mid-teens. Which I still believe is definitely something we can do. However, to give it to you in a range, given all the things that could occur, our EPS for the year could be 2.22 or in the old terminology, you could think of as the low teens. Or 11 percent. So overall, my level of confidence in what we will be able to achieve for 2003 has not changed at all, but I'm giving you a range for sales. I'm giving you a range for EPS, for both the total company as well as the sales. And I'm trying to do it now, Mike, in terms of a specific point range to eliminate any confusion whatsoever.

But you're saying mid-teens, then your EPS guidance is 11 percent to 14.5 percent?

11 percent to 15 percent. Right.

Right. But -- so -- but we should be really looking at what you're saying on the EPS line?

I think you should assume the following, for the full year, we expect our sales growth to be between 10 and 12. We expect our earnings per share to be between 2.22 and 2.29.

Okay. Let me ask a second more strategic question. And maybe Norbert can chime in here. But what we have been waiting for Harry as you have been aware of is some visibility on the company's growth in 2005 and 2006 coming out of Neuchatal in particular where you're going to allocate the capacity for suite c and d. Can you just talk a little bit about why we haven't seen any deals at this point and when we might see some deals? And if Norbert has any value to add there, it would be appreciated.

Sure. Let me give a point and then Norbert can come in because he is obviously very involved in this. What we had said at the beginning, Mike, as we were getting ready for the first several suites is to try to get an understanding of what the yield would be, how big the individual suites and the output could be, how long it would take us to convert any of the other suites to PFM so we could get a sense of the capacity for the other products. One of the things I mentioned on the last call is that we continued to look at both internally and some of the things that Norbert can talk through as well as some of the outside things that we obviously cannot discuss until it occurs. What are the opportunities for us? And one of the things that we had expected to be able to do by now externally was to add several of these programs. At this point in time, we have not. We have had a lot of discussions, but we really want to make sure given the capital that we're investing that the overall returns that we would generate would make it worthwhile. But in terms of some of the specifics, Norbert, maybe you can make a couple comments.

Maybe just to look a little bit across the pipeline. We have a number of products in the pipeline today that are protein based therapeutics for which Neuchatal is a suitable manufacturing facility. And I mentioned in my quick review here that they are moving forward quite nicely as an example the recombinant Alpha one antitrpsyn we also shared with you that we have acquired [INAUDIBLE] in the renal division however as a protein therapeutic that of course falls into our [INAUDIBLE] [ low audio ] As we have in BioScience. Over al if you ask me am I satisfied with our pipeline in the outer years, the answer is no not really and we continue to aggressively look for additional opportunities to enhance and enrich the pipeline further. (Pause)

Rick Wise interest Bear Stearns is online with a question. Please state your question

Good morning, and I also thank you for the additional detail. Let me ask some Factor VIII questions, Harry. We're in a more competitive environment than you were a year ago growing competition, expanding inventories. Can you talk a little bit -- in a little more detail about the competitive environment in the quarter and the outlook for '03? Are growing inventories a concern? Can you talk about maybe specifically price -- Factor VIII pricing in the fourth quarter, trends and outlook for '03? And then as a follow-up, can you talk a little bit more detail about your assumptions about the percentage of the market that's likely to switch to recombinant Factor VIII, maybe just some thoughts about how quickly that could occur?

Sure, Rick. A couple of pieces for you here. First of all, for 2002, I think I stated that we grew recombinant in excess of 20 percent. And if you ask yourself, you know, what is the inventory situation, other than the inventory that we keep for all the reasons we talked about, Rick, over the last five years of making sure that we have a renal safety stock for our customers, we are not building into our recombinant products, number one. Number two, on our last call, we actually said that our sales growth of recombinant in the fourth quarter on in the low to mid single digits. It actually came in as I stated at 11 percent. Because given the fact that we now have the Wyeth inventory coming in and they have done a super job of working with us, he would were now able to actually have a higher level of sales. So as we go into this year now, we said that our sales growth would be sort of in the mid single digits until we get approval for recombinant, the new suites PFM. However, that we also said we will generate sales growth for the year for recombinant in excess of 20 percent. So I guess overall, Rick, we remain very bullish on what we have not only proven to be able to do as of and including this last quarter but where we stand as Norbert talked about in the overall timing. The pricing impact for us has not been an issue. And at this point in time, we continue to believe that the PFM product will sell at a price premium. So, you know, I would say we remain very bullish based on everything we know. Norbert, would you want to add anything to that?

Yeah, what I'd like to add is that of course we know that supply is going to be less constrained going forward than it has been in the past. However, I'd like to remind you that we in fact have had a world leadership position in hemophilia care. We have since 1992 when we were the first to launch a recombinant Factor VIII product provided billions, billions of units to the marketplace to our customers with no adverse events. We have been the most consistent supplier in the industry. We have an excellent -- and I really reiterate excellent -- relationship with the hemophilia community. They are indeed waiting for us to yet again be the first to market with the next generation product which is waiting for approval. And as I will share with you at the conference in March, we are already working on the next generation product, the next improvement to Factor VIII because we will be and we will continue to be the world's leader in hemophilia care and we believe that we will have that position in the presence of sufficient supply offered by the competitors playing in the field.

If I could follow up on that Harry. A lot of the industry participants we have talked to recently are inclined to be skeptical about Baxter's belief that the market and units I guess -- market demand is going to double over the next five years. Just -- I appreciate your thoughts and reflections on, you know, what do you think they are missing or what is Baxter seeing that they are not perhaps understanding?

Again,, I actually think that's a fantastic question because there is always so much confusion. Let me give you a couple of perspectives. If Norbert or Brian want to add to this. Again, Rick, what I think is at issue here is that given the fact that for this marketplace, that there's been such a significant period of time where demand has exceeded supply, I don't think there is a very good understanding of what the underlying dynamics are. And physicians have been constrained for so long, I think that has been an issue the other thing I don't think people appreciate which I think Norbert got into is to a certain degree, given the fact that we will have a lot of additional product, we are really not concerned with how much inventory some of the other competitors have. If it was the similar product, it was something that was easy to transfer to and people felt comfortable about the quality and the supply, and you wanted to look at how do you sell every unit that's ever produced, it would be a larger issue. Given all the reasons that Norbert mentioned, and given the fact that we continue to see a significant percentage of the world population that does not receive treatment and the percentage that does, receives a very low level of profalactic treatment today, we have continued to see this as a very significant opportunity.

I'd like to just make one other observation here. And that is really a very strong pharmical-economic argument in case for Factor VIII. When you look at the difference between individuals that are only treated acutely for repeating episodes versus prophylactically, clearly prophylactic treatment provides for a much higher quality of life, a significantly reduced incidence of joint disease, joint replacements, so from a total healthcare cost point of view and quality of life point of view, the industry cannot provide enough supply for there to be fully adequate therapies across geographies. And we believe that that is a very, very under-recognized opportunity that was largely not served because of our supply constraints. And where we see a real great opportunity for this product going forward.

Thank you.

Ted Huber from Banc of America Securities is online with a question. Please state your question, thank you.

I just wanted to focus on the balance sheet for a moment. You mentioned in the release that your current debt to cap is measured boot credit agreement as 41 percent. And I wanted to get a sense of how that's going to trend during the year given the equity forwards and your cash flow has tended to be back end-loaded, what the year end target is and then also how much room do you have in your current leverage position, still being able to maintain this credit rating?

You know, why don't we have our corporate treasurer Steve Meyer address that.

You know, that's a great question. If you look at how our credit agreements address our debt to cap, the best way to think of it is it's really unchanged from where it's been for the last several years. We have said that our debt to cap would be in the 40 percent range. The rating agencies have reaffirmed our credit ratings exactly where they're at with stable outlook. So net-net the answer is no change. We're done unwinding more than half the forwards and expect to continue that process very easily over the first half of this year. And the net effect on the capital structure is basically zero.

So, in other words, you expect it to stay in the low 40s if for whatever reason cash flow isn't as strong in the first part earth year as you're forecasting, again, how much room do you have -- wiggle room before that A rating is at risk?

We have the exact same room we have had in the last several years. Completely unchanged. We have spent a lot of time with the rating agencies and they continue to reaffirm the A rating with the stable outlook and they wouldn't do that -- obviously their legal insiders. We go through all of our forecasts and financing plans with them and they continue to reaffirm the A rating.

I'll try once more. Can you quantify that is that can it go to 45? Is it 43, 48? How much room is really there?

Well, we -- now, we do a variety of scenarios with the rating agencies. But it's never a specific point. We -- we appointed our capital structure goals in this range and don't see any issuance staying in the range. Even in terms of covenants, we have a lot of latitude. A lot of latitude.

Okay. Okay. Good. And then Harry, just a quick follow-up. I wanted to get your feel for what your viewpoint is on the expectations for charges, special charges, in the forward period. Now, there's been probably more than you would have cared for in the last two years or so. I know you don't have a crystal ball there. But do you feel that the business environment that you're in, the situations with products, what not, is cleaner than it was before and is this something we can expect to see less of, or is that not the case?

Ted, good. Actually, let me -- two things. I want to come back to the financing one, Ted. I'm glad you brought it up because given over the last six months a lot of the questions and so on, and just focusing on some of the things that Steve told you, as a company, chief, or myself as the CEO, Brian, we feel extremely comfortable related to the financial strength, the financial liquidity of the company. Given some of the concerns and given some of the perceptions as you well know, we tried to make sure that we eliminated as many of those issues as possible. So based on where we stand today financially, the overall cash generation of the company, I know there was a lot of folks that said, boy, given the issue, you guys really are going to generate, you know, $500 million of cash flow, generated 468 million, I take a look at our overall coverage where we stand.

Financially, I believe we are extremely strong. I believe the financial strength of the company has not changed at all in the last several years. But again, we wanted to make sure those perceptions were taken care of and I appreciate the fact that you bringing it up, Ted. On this whole issue of charges, et cetera, I'll break it up into two pieces, Ted, I think the short answer, yes, you're right. I believe that there will be very few impacts that you would see. Now, if you think of it, Ted, the big issue that sometimes falls out is when we make an acquisition, there is an IP R & D charge. If you look at the portfolio, you'll look at the businesses that we're in today, you look at the changes and the overall focus we provided over the last five or six years, I would not expect you to see anything of any significance going forward other than occasionally an Ipitched sp R&D charge.

Okay. That's helpful. Thanks.

Glen Rice from Morgan Stanley is online with a question. Please state your question.

Thanks, folks. What's the contibutions from aquisitions in the quarter?

Zero.

Zero. Okay. Next. What was the number in terms of proceeds for factoring in the fourth quarter, factoring receivables?

Very little. For the full year, I think roughly 60 million.

6-0.

And the quarter is probably 30.

30 or less in the quarter.

Okay. Next question. On the other expense line, what is the charge there? $10 million charge?

It's primarily FX and, you know, on sundry generally within the 10 million range, plus or minus. It's principally FX.

Okay.

Some minority interests. Those types of things.

All right. And then, , in the third quarter, I think you had roughly 4.4 million -- billion of shareholder equity. I could be wrong with that I'd have to go back and look. Can you tell us the change from Q3 to Q4 and what goes into the calculation in terms of the write-offs and versus the equity offering? Can you give us those calculations?

Why don't we have -- why don't you give Neville a call and he will give you the full detail, chief. I don't think we've got that with us today.

Okay. Two other quick questions if you don't mind?

Sure.

The write-offs in the quarter, does that impact amortization going forward?

I would say extremely small, not of any meaningful magnitude at all.

Okay. And then on January 17, there were some new FASB guidelines regarding special purpose entities and R&D partnerships. Could that have an impact on the numbers in '03?

No.

No. Okay. Thank you very much.

Sure.

Scott Davidson with Piper Jaffray, please state your question.

Good morning. Relative to the anticipated approval of Neuchatal, Harry, can you talk a little bit about the importance of getting both the US and European approvals and specifically what would happen in terms of your ability to make the guided numbers if we saw a situation like we saw in Thousand Oaks where we get a European approval and then a delay in the US approval?

I think overall, Scott, the issue is how quickly can we get approval given all the comments we made earlier and all the things that Norbert said related to our product, as long as we get approval in one of the locations, we have enough flexibility in the distribution side to move product from one area to the next. The key areas to be -- the key area is to be able to get it approved so we can sell as much overall. But -- but again, for all the reasons that Norbert had mentioned earlier, we feel comfortable that the time lines would move along the line that we had talked about. So we actually feel pretty good about that.

Okay. Great. And then just a follow-up question relative to R&D spending, now, obviously, R&D grew a good bit faster than sales in '02.

It grew a lot faster, Scott.

A lot. Sorry.

18 percent for the year, 23 percent for the quarter. You should ask renal a lot of questions about that one.

It wasn't a big deal.

It was a very big deal. (Laughter) a very big deal.

Okay. What is the question?

Well, could you just talk a little bit -- you know, as we look out at '03 and perhaps beyond, you know, should we expect a similar trend going forward? And also could you maybe just highlight, you know, several of the top projects in '03 where that money's going to be spent?

Yes. I can definitely see that we will be continuing to spend increased R&D as we go forward. How much exactly I think will depend on a number of parameters. With respect to key programs, what I would like to do would really be to invite to you joins for the growth conference in a few weeks from now because I plan to go through quite a significant description of our key programs, our key [INAUDIBLE]-- how they connect and actually play together. And I think you will have a very good impression at that time as to the key focus areas for 2003 and beyond. So if you don't mind waiting until then.

Okay, thank you very much.

We'll take 2 more questions.

Bruce Cranna from Leerink Swann is online with a question. Please state your question.

Good Morning.

Good morning, Bruce.

On the Medication Delivery side, I'm sorry if I missed it, but Harry, did you say in the quarter that was up 10 percent net of acquisitions?

Yes.

So within the --

For the full year, chief, it was.

Oh, okay. What was it in the quarter?

I believe it was 16 percent. But I have to look again. Neville, what was it?

The net number. There is no acquisitions in the quarter.

There was no impact of acquisitions in Q4, chief.

Okay. So 10 percent was the year. So within the 12 to 16 percent expectation, for '03, can you give us a feel as to what -- I mean, the math tells me it's like 8 to 9 -- maybe 8, the percent core rates. Is that anywhere near reality or is my math wrong?

No, it's close. I think that's reasonable, Bruce.

And Harry I think you mentioned Fenwal. Sort of 8 to 10 percent expectations for growth in '03. -- versus flattish now. And it sounds like flattish in Q1. I assume that the delta there is predominantly viral in activation?

It's predominantly two things. It's pathogen activation as we continue to move ahead with our partner Cerus and again, so far, so good across the board. Second of all, it relates to Alex, which is our automated red blood cell system and between the two of those, that accounts for significant amount of the growth for the year.

Okay. And lastly, just on IBIG, I think if you could go through your expectations there just quickly again, you mentioned the tough pricing environment. And I think you mentioned supply contracts as a defense, is that correct, or did I --

We definitely have put in -- I think Thomas mentioned this on the last call, we have just given our overall marketing presence, the quality of the product, the relationships we have. We've got a significant amount of contracts with our major customers. But to your point and to trying to be a little specific overall as we go forward here, right now, our best sense is that pricing will continue to be an issue in the United States, not outside of the United States, and we expect given our added capacity a significant increase in the capacity. So given that, net-net we would see sales growth in this area in excess of 10 percent. -- which includes, obviously, a higher unit volume given subpricing issue.

Can you give us a sense as to what percent of these sales are under agreement?

60 to 70 percent.

Okay. And how long -- are they evergreen contracts or how long do they typically run?

I would say at any one point in time, those agreements run somewhere between 60 and 70 percent of our sales. I wouldn't get into more detail than that.

Okay, great. That's very helpful. Thank you.

Sure. One more question.

Steve Hamil from RBC Capital Markets is online with a question. Please state your question.

Good morning.

Good morning, Steve.

Sure. In terms of the Alpha therapeutics acquisition, can you give us a sense in terms of what this would do for your own plasma? I know it comes in overtime, but on a liter basis, can you give us an idea?

Do you want to take that one, Norbert?

I'm not going to break it down. Other than to say that as you well know, the whole arts of being in the plasma business is really by trying to capture as much therapeutic value out of every liter of plasma as we can. And with Alpha 1 antitrypsin being a plastic in a device product and one of significant commercial opportunity, it just simply optimizes our plasma economics by providing that extra product and since we have significant volume of plasma, it will be a significant product in Alpha 1 antitrypsin adding to the marketplace.

Okay. And if I could ask a second question, the -- with regard to the timing for approval of Neuchatal and PFM by the FDA, do you have any concerns about what seems to be a lot of turmoil at Seeber right now, some recent reports about questions of people departing particularly from the manufacturing inspection side? Does that change, outlook at all?

It does not. It sim -- simply for the reason that we have not experienced any turmoil with respect to the attention we have been given with our submissions, with our Factor VIII submissions. So I am very comfortable at this point that it has had no impact at all on the efficiency of the agency dealing with our submissions.

Great. Thank you.

Okay. Thank you, Norbert. Thank you everyone. We will stay in touch. Talk to you next quarter.