百特醫療 (BAX) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Baxter International's first quarter cash flow cash earnings and 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 and 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 objections, please disconnect at this time. A replay of today's teleconference can be heard by dialing 800-642-1687 or 706-645-9251 and entering the pass code 9475579. This replay will be available following today's teleconference until April 27, 2003.

I would like to turn over to Mr. Neville Jeharajah, VP of financial planning and investor Relations at Baxter International. Mr. Jeharajah, you may begin, sir.

Good morning, everybody. Thank you so much for joining us to listen to the first quarter 2003 financial results and highlights. As the press release indicates, comments regarding outlook contain forward-looking statements, and our results can differ from our current expectations. Please refer to the SEC filings for more details. Now let me turn this over to Harry Kraemer, Chairman and CEO of Baxter International.

Harry Jansen Kraemer, Jr.: Good morning, everyone. Joining me this morning on our first quarter call is Brian Anderson, our CFO; Dr. Norbert Reidel, our Chief Scientific Officer; Tommy Sabatino, our General Counsel; Steve Meyer, our Corporate Treasurer; and Doug Schumer, our Corporate Controller. First of all, what we would like to do is give you a brief overview of our results, break it out into individual businesses, and then Brian will take you through some of the financial implications. We will try to keep the intro to this brief, based on the feedback we received from all of you. And we will focus on answering specific questions that have come up over the last several months, particularly related to liquidity, financial flexibility, and some of the complexity of the financial instruments, cash flow, where we are, just to make sure everyone has the same basic facts. Then we will turn over to questions on any areas that may be helpful to all of you.

As I'm sure you have seen from the press release, for the first quarter our sales were 1 billion, 997 million, representing a 6% increase over the first quarter of 2002. The earnings per share for the quarter were 36 cents, a 12% decline from the first quarter in 2002, and cash flow from continuing operations was a negative 23 million, which was 72 million better than the 95 million outflow in the first quarter of '02, very strong performance on cash flow versus the typical first quarter, and Brian will give more detail on that. Over all the Q1 results are consistent with expectations set at the growth conference for both sales and earnings per share. In terms of the first quarter sales performance, of the 6% increase, foreign currency benefit at the sales line was approximately 4 percentage points; and acquisitions, primarily the ESI Lederle acquisition was approximately 2% of growth. If you look by business, bioscience, 740 million for the quarter represented a decline of 1% from the prior year quarter. Medication delivery, 850 million in the first quarter, representing a 17% increase over Q1 '02. And renal, 407 million, representing a 2% increase over the first quarter of last year. Overall, the Q1 '03 results are in line with our expectations. If you first take a look at bioscience, of the 740 million, transfusion therapies or the division formerly known as Fenwall had sales of 3% in the quarter, and if you look at everything other than transfusion therapy within bioscience, sales declined by 2%. Recombinant sales in the quarter increased by 5%. The U.S. actually saw a sales decline for recombinant of 7%, in part due to the fact as we talked at the growth conference some of the major distributors reduced level of inventory days, vise sa vie the end of last year. In terms of plasma proteins, sales declined in the quarter by 4%, and as we talked earlier, a significant portion of that is due to pricing. As an example, in the case of Albumin, dollar sales of Albumin globally increased 1%, however -- and several of you asked related to the pricing, and we will talk about the pricing specifically in terms of what has historically happened now. If you look at the first quarter for Albumin, the price on average globally declined 35% in the quarter vise sa vie first quarter of '02. In terms of anti-body therapy, which is primarily IBIG, the sales declined by 12% in the quarter. If you look at pricing in the first quarter, global pricing for Baxter overall declined 20% from the first quarter of '02. So as we've talked about, the pricing issue that we experienced in '02 continued in the first quarter of '03.

As expected bioscience Q1 sales were soft. In terms of medication delivery, Q1 '03 sales for medication delivery were 850 million, representing a 17% increase in the quarter. Anesthesia and critical care sales were 199 million, representing a 64% increase in the quarter. Interestingly enough, if you take look at the growth of anesthesia and critical care excluding the ESI Lederle acquisition, sales were up 15%. The ESI integration is on track, going extremely well, and, in fact, the full year sales contribution we would expect to be approximately 200 million. IV therapy sales 248 million, representing an 11% increase. Drug delivery sales 161 million, representing a 21% increase. Over all medication delivery, strong sustainable growth continued across almost all areas of medication delivery for the first quarter.

In terms of renal therapy, Q1 '03 sales 407 million, representing a 2% increase. PD sales were flat for the first quarter, consisting of U.S. sales declining by approximately 4% and international sales growing approximately 2%. In terms of the U.S. decline, for the most part it's the result of lower pricing to large customers. In fact, we have signed 3-5 year agreements now with customers accounting for 65% of the U.S. patient base. In terms of HD or hemodialysis, sales increased 6% in the quarter. The Extraneal launch in the United States is on track. The launch is expected in Japan in the third quarter of this year. In terms of the renal services portfolio divestitures that we talked about earlier, that process is on track. The U.S. divestitures are expected to be completed in the second quarter of this year, and we expect the international divestitures to be completed in the second half of this year.

Over all, the renal sales performance is in line with expectation and the product launches are on track. In addition the service divestitures are on track. At this point in time I would like to turn over to our CFO, Brian Anderson.

Thanks, Harry. Good morning, everybody. I would like to just quickly go through the highlights on income statement page four of your press release.

As Harry mentioned, our sales growth in the first quarter was 6% with foreign currency contributing 4 percentage points of growth. The gross margin rate this quarter as expected was down. It was 44.1%, down 2.8 percentage points compared to the gross margin of 46.9% in Q1 of last year. This reduction is primarily due to the impact of pricing in the plasma business, as Harry described, foreign currency as well as the change sales mix of sales mix given the lower sales growth of recombinant. The SG&A ratio first quarter of this year was 20.7% compared to 21% in Q1 of last year, and SG&A increased 5%. As I mentioned, we have several initiatives aimed at reducing G&A expenses, enabling us to continue to make investments that are necessary for upcoming product launches including the ALYX red blood collection system, Intercept platelets, the Extraneal GD solution in renal, and Advate, our third generation recombinant factor A product. R&D spending in this year's first quarter was 136 million, compared to 115 million last year, which an increase of 18%. And this was primarily in the medication delivery segment and includes the impact of the ESI Lederle acquisition which we completed in the fourth quarter of last year.

Our Operating margins declined 3.2 percentage points to 16.6%, compared to 19.8% in Q1 of last year, and again, due primarily to the decline in gross margin and increase in R&D spending. The tax rate in the quarter was about 24%, slightly lower than we experienced in the past. This is due to just the mix of earnings between the U.S. and international locations where we have our tax advantage environment. Earnings per share was 36 cents in the quarter, a decline of 12%. This includes a pretax charge of 13 million due to the impairment of minority investment, and that 13 million charge is included in other expense on the P&L. In summary the P&L for the quarter was consistent and exactly in line with expectations that we talked about at the growth conference.

Turning to the cash flow statement on page five, we improved cash flow from operations by over 70 million in this year's first quarter, and I'm pleased with the start that the year is off to. We had an outflow of 23 million in this year's first quarter compared to an outflow of 95 million last year. Over all, working capital consumption declined from 472 million last year to 306 million in this year's first quarter, a decline of approximately 166 million. Turning to capital expenditures. In the first quarter of this year cap ex was 174 million compared to 132 million last year. However, unlike prior years where capital expenditures ramped up throughout the year, this year that trend is going to be a lot different and you will see very gradual increases in capital expenditures such that we will spend no more than 800 million in capital expenditures this year. I would peg the range at 750 to 800 million as we talked about in March at the growth conference. This is obviously due to a lot of the bioscience capacity now being largely in place to meet the needs of the business going forward. The debt-to-capital ratio ended the quarter at 46.9%, up from 40.8% at year end due largely to the annual dividend which was paid in the and share repurchases associated with the retirement of equity forward. Based on the first quarter results for cash flow, I think we are extremely well positioned to deliver the 1.3 to 1.5 billion in cash flow from operations for the full year.

As Harry mentioned in his opening comments, a lot of investors really asked our-questions about liquidity and financial flexibility. I would like to spend a few minutes to give you my view as to why I do believe that the company continues to have very strong liquidity and very good financial flexibility to meet our ongoing obligations. First, Baxter continuing to be a single A rated company, and this rating has been recently reaffirmed by rating agencies, and we continue to operate with net debt to capital and interest coverage ratios significantly below our debt covenants. Second, Baxter has a billion four in cash on hand at the end of the quarter, a billion six credit and this is more than sufficient to fund our existing obligations. Third, we have completely prefunded the 800 million convertible bond that will likely be put to the company in May of this year, and we did that largely with a private bond issue that was completed in March of this year. Fourth, although our pension is currently under funded, we are not required to make any contributions until the end of next year, at which time I would expect contributions of approximately 100 million. Of course we can make voluntary contributions at our discretion at any time. Finally, we continue to have ready access to the capital markets as evidence by the issuances of equity units in the, a recent bond issue, and the renewal of our bad credit facility last fall up sized. And quite frankly we had more banks wanting to participate than was actually required to meet Baxter's needs. All of these factors, I believe, continue to clearly demonstrate our strong liquidity and financial financial flexibility.

Another area of significant investor questions really focuses on the complexity of some of the financial instruments we used in the past. You have assurance that I am working to simplify the financial instruments we use in managing our overall capital structure. As I said before, we will exit our remaining equity forward contracts this year, and we will not use these instruments in the future. Since October of last year, we have reduced on equity forwards by two thirds, and we will exit the remainder of these contracts this year. And I would say that most of that will be done before the end of the first half. In the past, we also entered into a handful of synthetic leases to finance operating assets used within the businesses. We will not enter into similar transactions in the future, and the modest off balance sheet obligation that existed at the end of the year, roughly less than 200 million, and the related off-balance sheet assets will be put on the balance sheet in the third quarter of this year. Again, I will be working to continue to simplify the financial instruments used to manage our capital structure.

Turning to the over all cash flow position of the company, I do believe that this company has the capacity to generate very strong cash flow from operations, and that will continue to improve over time. Clearly in addition that, we do intend to reduce capital expenditures, as I have communicated before, and we will hold our dividend flat, leading to increase free cash flow. In 2002, cash flow from operations was 1.2 billion, and I'm very confident in our ability to generate the 1.3 to 1.5 billion in cash flow from operations this year. The key to this will be continued reductions in working capital consumption as I just described for the first quarter. For the full year last year, working capital consumption was an incremental 500 million, and for this year I would expect an outflow of roughly 350 to 400 million and working capital consumption as compared to the 500 million last year due to very aggressive management of our receivables and inventory levels. Cap ex as I said earlier will decline from the 850 million that we spent last year to the 750 to 800 million this year as bioscience manufacturing capacity is now largely in place to meet our demand for those products. I would say the range of spending would be much closer to 750 than 800. I think all of these factors ought to lead you to conclude we are absolutely focused on continuing to generate strong cash flow and improving cash flows overtime.

In summary, I think Baxter absolutely has strong liquidity and ongoing financial flexibility to meet our needs. I am personally very actively working with our team to simplify the financial instruments used in managing our capital structure, and finally, I feel very confident about our ability to improve cash flows going forward.

I will turn it back to Harry for the summary and outlook before we take your comments and questions. Thanks.

Harry Jansen Kraemer, Jr.: Thanks a lot, Brian.

At this point I will walk you through the 2003 expectations for both the full year as well as the quarter and talk through each of the three major businesses. First, in talking about '03 expectations for the full year, the expectations are consistent with what we talked about at the growth conference. First of all, we expect full year sales to be between 8 and 12%. Second we expect earnings per share for 2003 to be between $2.10 and $2.20. And as Brian indicated, we expect cash flow from operations to be between 1.3 and 1.5 billion. I believe based on we talked about earlier and Brian's comments that we are well positioned to meet the full year expectations for Baxter.

In terms of the key driver, obviously, around sales growth, the overall expectations by business are consistent with what we talked about at the growth conference. That is, medication delivery we expect for full year 2003 to grow between 12 and 16%. You saw that in the first quarter this growth rate was 17%. This is a basis of the strong overall performance that has consistently been driven by Dave Drohan and the medication delivery team, fueled by the ESI Lederle acquisition that we talked about earlier, as well as the consistent expansion of drug delivery programs. The second area is our global renal business that we expect for the full year to grow between 2 and 5%. Note I mentioned earlier that the first quarter growth was 2%, and I believe a lot of expectations around '03 are consistent with the comments Al made at the growth conference related to product launches, particularly Extraneal, but as Al indicated at the growth conference, the renal business has more product launches in '03 than we have had in the last six or seven years combined. In terms bioscience, the expectation for sales growth for full year '03 is between 10 and 14%. his full year expectation is really a combination of two major areas. One, continuing to enter new markets with existing therapies and products such as IGIV and vaccines as well as selling our recombinant product in Australia, Korea, and Singapore. Also the launch of new products including ALYX, our double red cell automated system from transfusion therapies, our Intercept program that has been launched in Europe for platelets in conjunction with the strong partnership with Cirrus, as well as the expected approval of Advate the first company with a third generation factor A product. As a result of these factors, we believe the overall expectation for Baxter's sales growth for full year '03 will be between 8 and 12%.

Given where we stand as of the first quarter, and it's probably a study in the obvious, but I think it's worth thinking through. When we take a look at where we stand, clearly renal and medication delivery full year growth is consistent with the first quarter and I think is a pretty clear fallout of where we started together with the momentum that we have in some of those areas. In terms of bioscience, I think it's important to give you I more full explanation to get a sense of this. Obviously given the fact that bioscience's sales growth in the first quarter actually declined by 1%, why we expect the sales growth for bioscience to be for the full year between 10 and 14%. There is sort of four major areas that I want to take you through consistent with expectation for the full year between 10 and 14%. First of all, in terms of the whole recombinant area, we are expecting to get the approval for Advate, which we expect to improve the growth rate of recombinant in a second half of the year. Also we are focusing on selling our recombinant product in several new markets including Japan, Singapore, Australia and other areas in Asia. The second major area is related to plasma proteins, including IGIV. A couple things in this area. First we are continuing to expand our presence in driving compliance with new agreements with the GPOs as well as several of the major home care distributors. If you take a look at for example the infusion protocol, given what we end up doing where less time is required for infusion with a [liopolized] product, it's ideal for the home care setting and working closely with the home care distributors to increase our unit volume in those areas. The other part related to plasma protein and IGIV, and we mentioned this at the growth conference -- I think Thomas made a big point of this, is that we set up a new IGIV sales force which is focused exclusively on this area and making sure we continue to differentiate our product in the market place, particularly focused on the fact of the high purity and low sucrose formulation of the product. Also, within biosurgery as a component of plasma proteins, we are continuing to grow those areas, particularly now with the acquisition of fusion medical. In in terms of vaccines, the re-introduction of the tick-born encephalitis in Germany will help the growth rate as we go throughout the year, particularly in the second and third quarter. And smallpox, once we completed the obligation with our partner at Canvas for the 155 million doses for the U.S. government, we are in a position to satisfy smallpox contracts for a number of different areas. At this point in time, we have more than 30 million in incremental sales expected for more than eight countries, and this is something we continue to focus on as we move forward. In terms of transfusion therapies, as Greg Young mentioned at the growth conference, we expect ALYX and Intercept to add to the growth rate of transfusion therapies, and we would expect the overall growth rate of transfusion therapies as a component of bioscience to be in the 10% range for the full year as we discussed at the growth conference.

In terms of the second quarter, what we said we would do at the growth conference is at the end of every quarter and on every quarter call, we would give you our best expectation for what we think is reasonable for the following quarter in addition to affirming what we will do for the full year. For the second quarter, our expectation is that sales growth will be between 8 and 10% and earnings per share in the second quarter will be between 40 and 42 cents. Now, if you take a look at the expectations for each of the three businesses in terms of delivering a sales growth expectation of 8-10%, medication delivery we expect to be between 12 and 16%, consistent with what we said for the year and slightly lower than the 17% actual achieved in the first quarter. In the renal area we are expecting sales growth for the quarter between 2% and 5%, which is consistent with the ull year and slightly above the 2% recorded in the first quarter. Bioscience we said would be between 10 and 14% for the year, we are expecting to accelerate from the minus 1 in the first quarter to 5-10% in the second quarter to achieve then a higher sales growth in Q3 and Q4 with a continued Recombinant sales and launch of Advate to get us to a full year number for bioscience between 10 and 14%. Net/net for the quarter we expect sales growth for the second quarter 8-10%. EPS between 40 to 42 cents. And we believe the expectations of definitely reasonable at this time.

Given that, I will conclude or comments here, and Brian and I and the rest of the team, including Tommy Sabatino and Dr. Reidel will be more than happy to answer any questions on the materials we went through or anything else you would like to talk about. Thank you.

Thank you. We will now begin the question-and-answer session. If you have a question, you will need to press star and the number one on your touch-tone phone. You will hear an acknowledgement that you have been placed in queue. If your questions have been answered and you wish to be removed from queue, please press star then the number two. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if there are any questions, please press star then the number one on your touch-tone phone. Ben Andrew from William Blair is online with a question. Please state your question.

Thank you. A couple of quick questions, I guess. Most important is you talked about recombinant at the quarter was in part down to inventory destocking at the inventory or distributor level. Can you talk in greater detail about what you were seeing and the pull through and demand use?

Harry Jansen Kraemer, Jr.: I would say very consistent with what Thomas talked about in the first quarter calls, Ben. Nothing really unusual, clearly on the part of the expectation of the customer base. All the buzz now is, when are you going to get approval for Advate? When will it be available in the market? Clearly, our competitors are focused on what they can do to combat the fact that when the product is launched that's going to be a significant issue given the comments that Dr. Reidel mentioned at the conference and the overall significance of the third generation product. So right now, Ben, I would say the first quarter sales for recombinant were slightly higher than expected on an overall basis. I would say for the most part, Ben, I wouldn't expect to see any significant change in the over all recombinant sales volume until we get the approval for Advate.

That's still on track for kind of mid-year timing?

Harry Jansen Kraemer, Jr.: You know, Ben, let me put it this way: We always have this little hang up of it will be approved when the FDA approves it. Let me put it this way --in fact, Norbert, you may want to add to this. Based on everything that we know now, Ben, we believe we are on track. As you know, given the experiences we had in the past and when Norbert was running that area and the overall infrastructure we put in place, I'd say we feel comfortable, but Norbert, why don't you add color to that.

All I would like to add is that we have a very, very high level of confidence in the quality of the submission we made in the U.S. as well as Europe and Canada. And the dialogue we had with the agencies on the submission give me a high level of confidence and comfort that the submission is on track and the proceedings are on track. I have a very positive feeling about where we are as with the submissions at this time.

Okay. Very good. One brief additional question on the financial side for Brian. Given the lumpiness with cash flow historically with big-time back-end loading, are we going to see a different pattern this year? It already looks somewhat different here in the first quarter, but will we get more confirmation earlier in the year that cash flow is trending in the right directions? Thanks.

That's definitely our expectation, and that's why I feel very good about the start that we are off to here in the first quarter. There is definitely a lot more internal focus on this, and I think that will continue to pay off good dividends going forward.

Mike Weinstein with JP Morgan is online with a question. Please state your question.

Thank you. Can you hear me?

Harry Jansen Kraemer, Jr.: Sure can, Mike.

I know we are short on time here, given we overlapping calls. So I will cut to the chase on questions here. One last year, Harry you had 60 million of gains from insurance recovery, you had 24 million of gains from some of the hedging contracts, 7 million of gains from receivables. Can you tell us without us having to wait for the 10-K whether there is any gains in the quarter we should know about?

Harry Jansen Kraemer, Jr.: It's appropriate for Brian to answer that question.

You know, to the contrary. The more unusual item is the charge associated with impairments that I mentioned. The only thing new is relatively minor. We did increase our equity ownership in the Canvas, and that requires us now since we are over 20% to pick them up on the equity method. In the quarter, that was very insignificant.

That's helpful.

Harry Jansen Kraemer, Jr.: In fact Mike, to give you just as good a flavor for this, the impact of the minority interest impact was much more significant than any gain anywhere, to Brian's point.

Understood. Understood. Second -- and two other questions. Second, the dialysis sales down 4% in the U.S., Harry you talked about signing contracts. I think we all thought about patient growth there being in the 5-6% neighborhood, and you are reporting revenues down 4%. Should we be reading that since the prices are down 10%? This comes as a bit of a surprise that you are having to cut price in the business.

Harry Jansen Kraemer, Jr.: Without the specific price sheet, we definitely reduced the price and part of that was what can we do with a lot of the other volatility in the market place is to really lock things up in terms of our over all contracts for a longer period of time. Al and Rich, who run the business in the United States, they thought the benefit of getting this thing set up for at least the next 3-5 years made a lost sense. So there is definitely a price impact.

Okay. Final questions gets to the heart of the numbers. Your guidance for the second quarter suggests that is if the first half of the year you will earn 76-78 cents assuming the second quarter estimates are accurate and you stay in line with that. And then to get to the numbers you have for the full year, you will have to earn between $1.32 and $1.42 in the second half of the year. Speaking probably for everyone on this call, it just seems so difficult to imagine earnings could step up that much in the back half of the year. You can give us more than you did in the biosciences to give us some comfort that that seems at all achievable at this point?

Harry Jansen Kraemer, Jr.: Mike, as usual, I think you do a great job of cutting through the morass. I think if there would be only one question, if people really take the time, Mike, to understand the financial implications that Brian talked about, it comes down to your question. When you think about what needs to happen, I think it's as simple as medication delivery, on track, we're there; we know wat we need to do. Renal: We're there; we know what we need to do. We have a good lock for the next 3-5 years. So it comes down, Mike, as you say, to bioscience. And overall when we look at this, basically the issue for us is given the fact that the sales growth was down minus one, what's the level of confidence we can grow 10-14%? That is a reasonable expectation for the reasons I mentioned. Obviously weave got an increase due to the approval of Advate. We are continuing to sell recombinant in more markets. The pricing, chief, -- and this is important -- the pricing that has really had an impact on plasma, we expect now the pricing to be fairly stable. Obviously you take a look year over year, the impact of that on growth will be significantly less. And obviously we have vaccine growth and we also transfusion therapies growth with ALYX and Intercept. No question it is definitely a much higher growth. We would say it's something that is reasonable based on what we know today, Mike.

Okay. I will let others jump in. Thank you.

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

Good morning, Harry. A couple of questions. Can you talk a little more about the second half recombinant outlook? But let's assume that Advate approval comes in the middle of the year as you expect it. Seems like a reasonable assumption. You can help us understand, however roughly, your assumptions for market penetration for that product and particularly as it relates to recombinant, the first generation product? What comes from recombinant and what new market does Advate capture? And perhaps expand on that with your comments on addressing new markets in the far east. When you look at these three things, you can give us a sense of how all these will contribute to the second half? Thank you.

Harry Jansen Kraemer, Jr.: I will do it in an over all sense, chief. Clearly given the comments that Norbert made, you get a sense of the level of confidence in that getting approval proved, which is sort of issue number one. Assuming that is on track and it occurs, I think for the most part you've got Advate being impacted the most in the United States and Europe with a combination of competitor products as well as our recombinant product, which then frees it up for some of the other markets along the lines that I talked about, particularly Japan and the countries in Asia that I mentioned. And then a lot more of the plasma-based product would be in the areas of what we call intercontinental, some of the developing country that has have not had access to the product historically. It would be the dynamics among the three of those with the tilting in the developed countries, Rick, a continued progression of the penetration of recombinant products.

So again, it's tough to ask the question properly, but I'm just struggling with -- it seems like the Advate uptake will initially take share from recombinant. And it's hard for me to understand how much incremental you could expect short-term and why the net in the second half wouldn't be one offsetting the other. Maybe I'm not understanding it properly.

Harry Jansen Kraemer, Jr.: I think there a lot of moving pieces to it, chief. One of them, I believe, is obviously with the approval of the product you will have people stock the product that never stocked the product before. You have that impact immediately. Then you've got a lot of folks who have not been on a Baxter product that have waited for the third generation product. You have some of the folks that are a first generation product of another company that rather than moving to the gen 2 product -- if you remember, Rick, the discussion we had several years ago, there was always the question of, "Geez, since you guys are going directly to a third generation, what's the impact of these other guys have a gen 2 product?" And we said that we think there is enough of a differentiation that some of those folks will wait. So the combination of the stocking orders for the new product, market share increases for the recombinant products vise sa vie the first generation product of our competitors, and some movement from our recombinant A product to Advate. So I think it is a combination of those that feuls the growth of Advate, and the recombinant growth is along the lines that I just talked about.

On a separate note, questions for Brian. DSOs were up and inventory turns were down. I assume that has to do with the international mix. Help us understand that better. And again, if we normalize, Brian, as you talk about the off balance sheet items coming on balance sheet, what are the implications for your coverage ratios and debt to cap and all that? Thank you.

Sure. I think one other reason I feel very good about the quarter is that there was also less securitized receivables in the quarter. That added about three days to the DSO. A combination of the international mix of receivables, faster growth outside the U.S. as well as less securitization. The off balance sheet items coming on the balance sheet will not significantly impact covenants. These transactions are well-known by our bank group, and that will not have any significant impact in terms of compliance or financial flexibility.

One last follow-up. Where do DSOs and turns go in the second half? What directionally should we expect? Thank you

DSOs will -- I mean, I'm sorry. Terms will improve as we launch these new product and sales accelerate in the back half. On DSO, I would continue to expect improvement in DSO throughout the end of the year. We are targeting an over all 2-3 day improvement in DSO year on year.

Thank you.

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

Good morning, everybody. Just one question. On the construction in progress number, Brian, that you guys carry on the books at the end of last year which was about $1 billion, can you tell us how much of that is related to Deutschetel? And when you get the approval, since there thing that is won't be completed, do you have to start amortizing all of that when you get the approval or a portion? Can you give us a sense of what your additional overhead absorption will be to be specifically tied to Deutschetel once you get approval?

Roughly 200 million, Dan, and once we put the facility in place and are selling commercial products, we will start amortizing that. And that's built into, you know, the guidance we have given. Typically for a facility of this type, I would say the average life is in the 20 to 25-year range, depending on the underlying assets.

Perfect. So it's just 200 of the 1 billion is Deutschetel, and just what is the other stuff? Are there other big chunks that will get approved this year?

No. The remaining items that are large are primarily vaccine facilities, which aren't slated for approval until '04, '05. There also projects in the medication delivery business that will spend this year going into next year as well. Those will increase over the course of this year because we are continuing spending on those projects largely in the Baxter pharmaceutical solutions business.

Okay. Thank you. Great.

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

This question is for Brian. If you look at the gross margin, obviously the recombinant factor looks like a mixed shift to outside the U.S. I think that carries lower prices. I think a lot of that was plasma, but was there inventory write downs in there in the quarter that differed from a normal quarter?

No, there weren't. You hit the right issues. The only other piece was the impact of currency because with the stronger Euro, as I said before, because we are hedged, we get the pick up on sales, but the gross profit remains the same because of the hedging. It does impact the margin by about a point this quarter.

Is there a lag on that? Does that eventually come through as a positive on the gross margin line down the road in '03?

I would say over all we are definitely expecting margins to be slightly down year on year. I would say mid-40s compared to the 46.8 or so that we had last year. I think the reasons will be pretty much the reasons that we saw in the first quarter.

That's mid-40s for the full year?

Yes. The other thing that I should probably clarify as well is R&D was up 18 percent in the quarter for the full year. I wouldn't expect R&D to continue to ramp in that manner, despite Norbert sitting here. I think for the full year, R&D will be up in mid-single digits. The operating margin with a continued leverage on SG&A will be slightly down from last year, but somewhere around the 20% range.

One follow-up for Norbert, and it won't be on R&D. On liquid versus powder IGIV. I've seen there is a lot of speculation out there, that with a lot more liquid product online, there is no market for powder. Can you explain the benefit of liquid and why powder should still be a big part of the market?

The benefit of liquid IGIV that we have is, of course, the convenience of use because it's ready for use. Also the additional activation step that is we introduce in the product. I think the mix of liquid versus powder is a bit of a preference perhaps by individuals that use the product. It's a bit of a question of the geography in which you have the product. It has a number of reasons why those will coexist in the market place. The major benefit of the liquid is indeed ease of use and readiness of the product.

Thank you.

Ted Huber is from Wachovia Securities is online with a question. Please state your question.

Hello?

Harry Jansen Kraemer, Jr.: Hey, Ted.

I wanted to peel the onion back on the second quarter revenue forecast a bit. It looks like in the if you take out currency and acquisitions your organic growth was pretty much flat. With the 8-10% for the second quarter, how much of that was currency and acquisitions and how much is the balance from organic growth in the business?

Harry Jansen Kraemer, Jr.: I would say roughly the acquisition impact would be probably 2 percentage points again. Currency may be 3 percentage points. The remainder to 8-10 would be growth of the businesses along the lines that I talked about. Particularly medication delivery, renal and the step up in bioscience for the reasons I mentioned.

To go from flat to a 3-5% organic growth is what I'm not tracking with. It seems like the product launches you have would take time, particularly in the renal side and in the blood collection side to get traction. What gives you confidence in the short-term acceleration and the revenue growth?

Harry Jansen Kraemer, Jr.: I mentioned a couple of those things earlier, chief. Remember the comment on the stabilization of pricing. So, when you take a look at what happened in the second, third, and fourth quarter around pricing that the over all year to year price impact would be easier in terms of the pricing impact.

Harry, can you guys quantify that at all? You said you were down year over year 35 in Albumin and 20 in IGIV in this quarter. If we don't see any sequential changes in prices for the balance of the year, where do those numbers go? Are they still negative or do they flatten out?

Harry Jansen Kraemer, Jr.: They flatten out. In terms of the sales, chief, for plasma now, we are saying that our dollar plasma sales will be in the mid-single digits for the year. So Ted, think of it as the pricing impact now will be offset by the higher volumes. That's probably the single biggest impact when you look at the second quarter.

Okay. Just a final question to Brian. One of the elements of confidence you have in financial flexibility was the single A rating. If that were to change sometime this year, how does that affect your interest expense and the other elements of your financial flexibility?

I think that is very speculative. I don't expect that the rates would change, but if we were downgraded a notch in terms of interest expense, that would not be significant. Most of this debt has been termed out.

It doesn't -- I wonder if there is a domino effect here where you somehow lose access to credit facilities or other vehicles if there was a single notch downgrade by the rating agency?

No.

Okay. Thank you.

Harry Jansen Kraemer, Jr.: I want to come back and start answering your second question. The other thing for you, chief, is that the growth rate that you will see in a couple of these pieces in addition plasma-like vaccines, you will see a much higher growth rate year over year because in the first quarter of last year, there was a reasonable amount of the smallpox recognized.

Okay. Thanks, Harry.

Glenn Navaro from Banc of America is online with a question. Please state your question.

Yeah. For Brian, just two questions. First tax rate is 24% what we should be using going forward for the rest of the year and then the share base in the quarter was a little bit lower than we thought. Is that due to the share base coming down because you are redeeming the forward contracts or buying back share? And then secondly, what's a realistic share base to use as well for the rest of the year. Thanks.

First on the tax rate, Glen, I would say the 24% is reasonable for the year given the earnings mix I talked about. The over all guidance for the share count would be in the 615 to 625 range that we talked about at the growth conference.

Just to remind me, what leads to the tick up in the share base for the rest of the year?

Depending on how we choose to on line equity forwards, we talked about either doing this in straight cash or a combination of cash and stock. The variability in the share counts is the swing factor between low to high end. That's the major variable impacting the range.

If you used stock, would it be in a structured manner or how would shareholders know?

We will tell you when we decide on the specific form it would take.

Thank you.

Bruce Crana from ABN Amro Incorporated is online with a question. Please state your question.

Good morning, everyone. Quick question, could someone -- and Harry maybe this is for you. In terms of house keeping, what was the organic sales growth rate by business in the quarter? I saw the over all number, but I did not see it by business units.

Harry Jansen Kraemer, Jr.: You mean without the impact of foreign exchange?

Yeah, I'm trying to strip out FX by renal bioscience and IV.

Harry Jansen Kraemer, Jr.: I would say roughly 4 points.

If I had -- in other words, by business.

Harry Jansen Kraemer, Jr.: Yeah. I would say roughly 4 points.

Evenly across all?

Harry Jansen Kraemer, Jr.: I would say pretty close, yeah.

I got you. And, Harry, can you remind us in your opinion, this plasma pricing issue, when do you lap the tough pricing comps? I can't recall when you really started to see pricing erode.

Harry Jansen Kraemer, Jr.: It was pretty gradual throughout year last year. You definitely see an impact in each quarter, but obviously the worst comparison would be the first quarter. The comparison, Bruce, gets better quarter by quarter.

Okay. Has there been any -- I guess net of the pricing change, you mentioned an offset and volume and I know some of that is IVIG, but in some of other fractions, has there been change in the volume demand or is it all really a pricing issue?

Harry Jansen Kraemer, Jr.: I would say there has been some units, but relatively small. I think the major issue is market share.

Okay. On the recombinant side, I think we're all kind of wondering with the coming of Advate and presumably you moved some of the recombinant down the chain, if you will, into the Asian rim. What is the distribution set up there? Is it your own, or are you doing it in independence? I guess the question I'm getting at is pricing expectations if you start to move that into the Asian rim, what do you see there?

Harry Jansen Kraemer, Jr.: It completely depends on the country. Japan obviously is very good. Singapore, Korea and Taiwan would all be considered good as Australia would. If you look at the other countries, the price would be lower. We are focusing on the higher valued countries at this point.

You guys are doing your own sales and marketing?

Harry Jansen Kraemer, Jr.: Yes. In fact, that ends up being one of the strengths that we have our own sales force in virtually every one of these major countries.

Thank you.

James Terrell from Capital Research is online with a question. State your question.

Thanks. Harry, the plasma pricing continues to be weak as you clearly stated, and I guess in an ideal world Alpha would go out of business, but they are not now. I'm wondering what the strategy is in a world where prices don't firm. Is it your belief that the competition cannot sustain the low price levels and so you will match to drive them out, or is there another element of the strategy that gives you confidence in a rebound in pricing?

Harry Jansen Kraemer, Jr.: I think for us over all it comes down to being the absolute best economic player. The combination of A, sourcing our own plasma and creating a competitive advantage and B, continuing to have more fractions per litter than anybody, and just to drive the over all best economics. In the long term, the best economic player will do extremely well.

Secondly on Advate, what is the assumption as it relates to directionality of the price vise sa vie recombinant?

Harry Jansen Kraemer, Jr.: I'm sorry. What?

Are you assuming a modest, significant premium, modest significant discount in the pricing of Advate?

Harry Jansen Kraemer, Jr.: A modest increase in the price, given some of the attributes of the third generation product. Norbert, you may want to talk about that from the perspective of a clinician and a patient.

I think this is well within the context of what we spend quite a bit of time on doing in the conference. The benefits of Advate are really number one, and the product is manufactured, purified, and formulated completely without added protein to the process. That, of course, addresses the issue of safety in increased safety margins. The other piece that the doctor actually spent quite a bit of time on is the benefit of a full-length spector 8 like our Advate or recombinant. He pointed out to you a number of issues with respect to dosing, with respect to prophylaxis, and with respect to breakthrough bleeds, and so on. The benefit of that product having been in the market for quite some time is, of course, that we have more and more clinical studies done by hemophilia that really show to us as well as to the PLU that the full spector 8 molecule is indeed a better and more reliable molecule. The combination of the increased safety that we bring across with Advate and keeping a full-length spector 8 relative to some of the competitor products will position it extremely competitively in the market place. This is as you recall a very, very well informed community, a well educated community, one that is scientifically astute, and so I feel that this is the best, the very best treatment choice we could offer to a hemophiliac patient.

Thank you.

Harry Jansen Kraemer, Jr.: Why don't we take two more questions.

Glenn Reicin from Morgan Stanley is online with a question. Please state your question.

Good morning, all. Can you hear me?

Harry Jansen Kraemer, Jr.: I can hear you well, Glenn.

Okay. I have a couple of questions. Alpha, what are you assuming in terms for contributions in second quarter of the year?

Harry Jansen Kraemer, Jr.: The impact of alpha in the second quarter would be zero. For the full year in terms of everything, I think we said it would be in the $50 million range annualized.

Okay. Secondly, with respect to the inventory levels, can you talk about why they continue to build and what is in there, and I guess specifically I'm concerned that you are running the factories too hot. I don't understand why you don't slow them at this point.

The inventory levels within the device businesses are absolutely fine. In terms of improved turn and velocity, et cetera., within bioscience, the build up for Advate and Intercept and ALYX across that segment is obviously being done to support the launch. Within the plasma business, we do expect recovery in the back half in terms of increased volume. As I said before, the manufacturing process within plasma is a very long-cycled business. We are very vertically integrated from the point of collection of plasma through vaccinations. I agree with you that it would be nice to just turn it off like a spigot, but given the nature of the process and the long production cycle, it's not feasible in the nature of the business.

When do you actually generate cash from the line? Or is the answer never?

Generate cash from what?

Inventory. When you actually start liquidating inventories and generate cash?

I think clearly as we continue to grow, what I would say is the incremental inventory will decline. I don't see us in the near term bringing down inventory levels to where it's a positive number on the cash flow statement. We will continue to grow, as Harry, pointed out on med delivery growing at the rates it's growing. The rate of increase will slow as we launch these new products.

Also you mentioned -- and this is my last question. You mentioned you are well within the covenants that your banks have offered you. I'm curious. You never really told us what covenants are, specifically on debt-to-capital number. It sounded like in the second quarter, you would bring down debt to capital to get rid of the four share purchase agreements. I'm curious if you take a write off or something, you approach the 50% number, which has been sort of been bantered about as being a special number. Can you talk to that?

The debt to capital is definitely higher than 50% in terms of covenants. As I think I've said on numerous calls, we've gotten multiple relationships to manage, not the least of which is our bank group. In terms of how close we are to the covenants, we do have significant room to do the things that are contemplated in the equity forward, and overall cash flow will improve, and earnings will continue to grow over time. When you look at the total ratio throughout the course of the year, we will remain well below each of the covenants. Steve, you want to add anything?

The only thing I would say is that Q1 is definitely the high-water mark. The natural progression of earnings will bring it down significantly, and we don't see anything expecting a write off. The earnings alone let alone the cash flow will bring the ratio down besides the significant room we have today.

Harry Jansen Kraemer, Jr.: Okay, one more question.

The final question is from Steve Hamill from RBC Capital Markets. Please state your question.

Good morning. I wanted to follow-up with regard to your comments earlier that you think plasma pricing has perhaps stabilized here. This has been an area where you got surprises, particularly because of competitive moves over the last 12 months. What gives you that confidence at this point?

Harry Jansen Kraemer, Jr.: I would say, Steve, given the size of the price impacts, having a reasonable understanding of the economic impact of this on folks and the money they invested, and what the signs we are seeing from the customers over the last month, I think it's a reasonable assumption.

At this point, I assume that it was talked about earlier that they can afford to go too much lower without losing money in terms of their pricing. Is that a fair assessment?

Harry Jansen Kraemer, Jr.: I would say based on our analysis, that is a reasonable assessment.

Okay. And then in terms of the gross margins you need to achieve in order to hit the guidance you have given for the full year, you said earlier, Brian, you don't think you would do the 46-47% gross margins for the full year that you had in '02, but should we be assuming that you'll have get back to that level in the second half? It would seem that that is required for you to hit 210 to 220.

It will improve obviously with the product launches in the back half. The back half will definitely be stronger than the front half. The overall year will be mid-40s.

Okay. Then my last question, in terms of the destocking which talked about at the analyst meeting today again for recombinant Factor VIII, I'm curious as to whether or not there is any concern if there was a delay in terms of approval of Advate, whether some of your distributors would be at too low of levels of inventory. Have they gone from normal levels down to abnormally low levels of recombinant in expectation of a mid-year approval? Or did they have excessively high inventories at the end of 2002?

Harry Jansen Kraemer, Jr.: I think, Steve, given the increase in supply in the marketplace, they are continuing to make sure they are not carrying more than they believe they have to. I would not see a major increase in their inventory.

Thank you.

Harry Jansen Kraemer, Jr.: Thanks, everyone. I appreciate everyone's time and we will keep in touch. Take care.

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