百特醫療 (BAX) 2004 Q4 法說會逐字稿

Good morning and welcome to Baxter's International Q4 2004 earnings conference call.

[Operator instructions].

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 objections, please disconnect at this time. I'd now like to turn the call over to Miss Mary Kay Ladone, Vice President Investor Relations at Baxter International. Miss Ladone, you may begin.

Thank Kelly (ph). Good morning and welcome to our Q4 2004 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and John Greisch, Chief Financial Officer.

Before we get started, let me remind you that this presentation including comments regarding our financial outlook contains forward-looking statements that involve risks and uncertainties and of course our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more details concerning factors that could cause actual results to differ materially.

In addition, in today's call non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. These measures include gross profit, SG&A, operating profit, sundry and earnings per diluted share, each excluding special charges. In accordance with the SEC Regulation G, a reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now, it is my pleasure to introduce Bob Parkinson. Bob?

Thanks Mary Kay. Good morning everybody. We are pleased to be with you today to discuss our financial results for the fourth quarter, to provide guidance for next year for 2005, but also to update you on the progress that is being made on a number of other fronts. And as always at the conclusion of my and John's prepared remarks this morning, we will open up the call for Q&A and John, Mary Kay and I certainly will be happy to address any questions you might have.

First of all, as it relates to Q4 results, I am pleased to report that all key financial parameters came in at or above the guidance we provided you during last quarter's call. Beyond the obvious, and that being that our financial picture continues to improve, our Q4 results also reflect the impact of improving planning and operational disciplines through out our company. Let me first briefly summarize the key results and important milestones achieved during the quarter.

First of all, sales grew as you saw in the release this morning at 3% versus prior year, somewhat higher than our earlier guidance of flat sales growth. As we previously discussed our intent as you know was to exit the year with wholesaler, distributor and customer inventories at what I would just call appropriate levels, a goal, which we believe, was achieved.

Earnings per share of $0.57 came in at the higher end of the guidance range, and we continue to be quite encouraged by the sequential improvement of gross margin and operating margin percentages throughout the year and the sustainable progress we have made in our cash flow performance. John is going to expand on this in more detail in his comments.

Other notable achievements during the quarter which I want to comment on, very briefly the restructuring program continues on track and is achieving or frankly exceeding all critical milestones. As we exited 2004, over half of the targeted 4000 positions have been eliminated and the remainder have been identified for phase out throughout the year. We are highly confident this program will be completed by year-end 2005 as planned with the achievement of previously communicated financial milestones.

Next to Advate, our next generation recombinant Factor VIII product continues to gain significant momentum. Sales in Q4 were $123 million, a 45% increase over the third quarter. And for the year 2004 Advate sales totaled $286 million, well in excess of the $250 million guidance that we provided you earlier. And finally ,we continue to make significant progress in building Baxter's senior leadership team with additional key appointments during the fourth quarter.

Simply stated we are very pleased with the progress that's being made. Our focus on disciplined operational execution is clearly yielding solid and subsidive financial results. We're making great progress in forming a foundation that we will build upon in 2005 and beyond, and I'll expand on this a little bit later. But before I do that, at this point let me turn the presentation over to John, who will provide more details on Q4 results and also details regarding outlook for 2005. John?

Thanks Bob. Good morning everybody. As Bob mentioned, we continue to make great progress in addition to meeting our guidance for the fourth quarter and the full year as we laid out in July, I am pleased with the progress of all of our businesses and particularly pleased with improved quality of earnings and cash flow for the quarter and for the year.

We have got a lot to cover this morning, but let me start by taking you through the financial highlights for the quarter before we get into detailed guidance for 2005. Worldwide sales were $2.6 billion, an increase of 3% over last year. All of which was due to currency as strong sales and our recombinants and drug delivery businesses were offset by lower sales of plasma products, as we expected. Domestically sales declined to 1 point, while international sales are up 7 %, including 6 points from currency. For the full year, worldwide sales totaled 9.5 billion, an increase of 7 % over 2003, including 4 points from currency.

Turning to the businesses, medication delivery sales are 1.1 billion, an increase of 3% over last year, 2 points of which was a benefit of currency. Strong sales growth in drug delivery was partially offset by the impact of lower wholesaler inventories in certain segments, and the expected impact of the premier agreement across several of our medication delivery businesses. Drug delivery sales for the quarter totaled $241 million, an increase of 24%. Sales for the quarter benefited from our onetime order of approximately $35 million with the US Government for a product related to their bio-defense efforts. Excluding this one time order, sales increased 6%.

Sales in infusion systems and IV therapy products declined in the quarter primarily as a result of difficult comps to a strong fourth quarter in 2003, and the expected impact of the new premier agreement. Infusion system sales were 236 million, up sequentially from Q3 but down 7% from the prior year while IV therapy sales of $309 million increased 1 point, with currency contributing 4 percentage points of growth. For the full year, sales growth for both infusion systems and IV therapy products was 5% in line with the overall market growth.

In our anesthesia business, sales of 234 million showed an increase of 2%. Sales of Propofol and Suprane, one of our proprietary anesthetics, increased substantially, following wholesaler inventory reductions that occurred in the third quarter. Offsetting this growth is a decline in select multi source generic products, which face difficult comps to Q4 2003 when initial stocking orders replaced by wholesalers in anticipation of several new product launches. For the full year, medication delivery sales totaled slightly over $4 billion, an increase of 6%, half of which is due to currency.

In our renal business sales are $520 million , an increase of 4%. Sales in the US increased 3 points while international sales increased 5%, including 4 points from currency. Looking at our two major therapy areas, PD sales increased 4 percentage points, including currency which accounted for 3 points of the growth while HD sales were up 6 points including 4 points of currency benefit with the HD sales growth being led by strong Exeltra dialyzer sales here in the United States. For the full year, sales for renal totaled just under $2 billion, an increase of 8% over 2003, which was a 4% organic growth led by solid international sales PD sales and the increased dialyzer sales here in the US.

Turning to Bioscience, sales were 952 million for the quarter, an increase of 2%. Organic sales declined 2 points while for the full year Bioscience sales increased 7%. Transfusion therapy sales for the quarter were flat while sales for our core bioscience business excluding transfusion therapies increased 2%. Plasma sales excluding antibody therapy are $278 million, a decline of 6 points due to lower sales of Albumin and lower third party plasma sales in line with our decision to reduce this low-margin business.

As we discussed in the past, North American pricing levels for IGIV has improved throughout 2004. However, antibody therapy sales were $84 million for the quarter, down 12% over the prior year with organic sales down 15% as a result of lower unit volume related to our throughput reductions and very strong comps against Q4, 2003.

In our biosurgery business, we continue to see strong growth. This business -- just to remind you is comprised of several wound management and tissues sealing products. Sales for the quarter in biosurgery increased 16%, 4 points of which if from currency, while biosurgery sales for the full year totaled $228 million, an increase of 30% compared to 2003.

In our recombinant business, sales were $376 million, an increase of $35 million or 10% over the third quarter of this year and up 12% compared to last year. Sales growth excluding currency for the quarter was 9%. And as Bob alluded to earlier, recombinant sales included $123 million of Advate sales for the quarter, an increase of $38 million over Q3 as a result of accelerated conversion in both the US and Europe and again, sales for Advate for the full year were $286 million, comfortably ahead of our sales expectation of -- in excess of $250 million.

We've seen for the full year strong sequential growth throughout year both in Europe and in the US as well. In addition, we have now received reimbursement approval in all major European markets, including Belgium, Italy, and Spain, which were finalized in the fourth quarter, so we are well positioned for 2005.

In terms of margins -- gross margin for the quarter was 43.1%. As expected, the margin improved sequentially throughout 2004 from 40.4% in Q1 to 43.1 here in Q4. Our margin represents a 1.6% improvement over Q3, however, compared to last year the margin is down 1.7%. This decline is due to the impact of foreign currency and the impact of our hedging activities, which as in previous quarters collectively reduce the margin by approximately 1 full point.

In addition the benefits to margin of ADVATE conversion, and higher drug delivery sales were more than offset by sales mix and lower margins in our medication delivery business, reflecting the expected impact of the premier agreement. Looking at SG&A for the quarter, total SG&A was about $500 million, an increase of 3% over last year. Restructuring savings were offset by the impact of foreign currency and increased pension and other benefit costs during the quarter.

Excluding currency, SG&A would have been flat for the quarter compared to last year. And again throughout the year SG&A as a percent to sales has declined sequentially from 21.1% in the first quarter down to 19.2% in Q4. R&D spending for the quarter was a $128 million, in line with our 2004 run rate as we continue our efforts to reevaluate and prioritize our R&D spending across our businesses. Just a few key highlights in 2004 that -- but I would like to touch on here. Obviously, most notably during the year was the launch of ADVATE in Europe beginning in March.

This was followed by the expanded approval in Europe for pediatric use, which we received the positive indication for during the fourth quarter. We also filed ADVATE for regulatory approval in Japan, and we filed for our next generation liquid IGIV product for approval in the US and in Europe during 2004 as well. In addition, we recently submitted our file in the US for the expanded use of our ALYX automated and red blood cell collection system.

As you all know ALYX is already approved to collect two units of red blood cells and this expanded protocol will combine the collection of red blood cells together with plasma. Finally in 2004 we launched the 11 new products in our drug delivery business.

We now have more than 70 products in our portfolio with 39 products under development in collaboration with our partners and additional 43 products under negotiation. In terms of our operating margin, as a result of our gross margin improvement the SG&A leverage we are seeing and the restructuring initiatives benefits, our operating margin has improved sequentially throughout the year, increasing from 13.2% inQ1 to 18.9 in Q4 and for the full year was 16.2%.

Our interest expense for the quarter increased $70 million compared to last year as a result of $6 million lower capitalized interest cost, higher interest rates, and the impact of our new net investment hedging strategy, where we locked in losses on 58% of the net investment hedge portfolio during the quarter.

This was slightly higher than the 50% blocking commitment that we have discussed on the third quarter call. In terms of our tax rate, our tax rate for the quarter of 23% was lower than our run rate of 24 to 25% primarily due to favorable outcomes of certain tax audits. The full year rate however of 24.3% was in line with our expectations and consistent with 2003. So, in summary for the quarter we're very pleased with the fourth quarter performance. Our gross margin improved sequentially. We achieved the expected benefits of our restructuring initiatives, and we dealt with several underperforming asset issues while at the same time strengthening the balance sheet.

And again in line with our fourth quarter and full-year guidance, EPS was $0.57 for the quarter and $1.69 for the full year. Just a couple comments on the restructuring activities, Bob touched on this earlier but during '04, we successfully completed the restructuring plan laid out in 2003 and we made substantial progress in our 2004 restructuring initiatives, which delivered as expected savings of $0.05 a share for the year. Our actions have included closing all of the planned plasma collection centers, reducing our plasma fractionation throughput by 30% down to 2.6 million liters, as planned, and eliminating more than 2400 of the expected 4000 positions associated with the 2004 restructuring plan.

As a result we expect to complete the 2004 plan by the end of 2005, generating an incremental $0.15 to $0.20 benefit in 2005. I am sure you all saw in the press release also as announced earlier in the month, we did record a non-cash asset impairment charge related to our influenza vaccine program and other assets totaling $245 million or $0.40 per diluted share. Some comments on cash flow, again inline with our commitment in July, cash flow from operations for the year totaled 1.4 billion, compared -- comparable to last year.

This year's cash flow is after finding $195 million for restructuring payments compared to $79 million in 2003. In addition compared to last year, our cash flow from operations this year includes a lower benefit from our accounts receivable securitization program. Capital spending for the year was $558 million. This is down by more than $200 million or 30% compared to 2003, and the full-year total is nearly a $100 million below the guidance that we had out with approximately $650 million. Free cash flow before dividends totaled $814 million for the year, this compares very favorably to 633 million last year.

And excluding the incremental funding for the restructuring cost, this year free cash flow in 2004 improved nearly $300 million compared to 2003. We are extremely pleased with the sustainable progress we have made here and the quality of our cash flow is clearly improving. For example, let me just touch on a couple of items here. I mentioned the securitization program. Net cash inflows from our securitization program have been reduced by more than a $150 million during 2004.

This has however reduced, a negatively impacted excuse me our DSO year-over-year by approximately 5 days. Secondly, in constant currency, our plasma inventory has continued to come down and is now down by approximately by $225 million since July 2003 when we announced our throughput reduction plans. This includes a $34 million reduction in the fourth quarter and for the full year in constant currency reduction of a $170 million.

Our CIP Construction In Progress balance has declined by 32% during the year from 955 million at the end of '03 to 651 at the end of '04. And finally consistent with our focus on debt reduction, our net debt declined to 464 million for the year to approximately $3.2 billion while our net debt to cap ratio of 34.2% at year-end was down from 39.9 at the end of 2003. Again, this is exactly in line with our guidance.

In terms of our net investment hedges, the net liability of approximately $1.2 billion is more than $200 million higher than last year as a result of a weaker US dollar, particularly in the fourth quarter. I mentioned earlier in the fourth quarter we entered into offsetting hedges for about 58% of the portfolio, which has locked in approximately $630 million of this loss. Had we not executed this strategy, the net liability at the end of '04 would have been a $125 million higher.

I am very pleased as I mentioned earlier with the progress we're making on all fronts with our cash flow and with restoring our financial disciplines. We have improved the balance sheet as well as the quality of our cash flow and will conservatively dealt with several legacy cash flow issues. I'm confident we will continue to see sustainable improvement going forward.

Finally let me conclude comments this morning by providing a quick outlook for 2005, starting with sales growth. For the full year we expect organic sales growth to be within in the low to mid single digits or approximately 2% or 4% comparable to 2004 with currency contributing an additional 1 or 2 points of growth based on current rates. Although as the year goes on, the benefit of currency will be declining. As I will discuss in a few minutes, our 2005 organic sales growth is negatively impacted by approximately 1 points due to the decision to exit several low-margin businesses.

Looking at our individual businesses, starting with bioscience, organic sales growth here is expected to be up 2 or 4 points over 2004. Specifically by product category we expect recombinant sales growth to be approximately 10 points as a result of strong patient demand and further penetration of Advate, which are expected to exceed $500 million during 2005. We expect strong antibody therapy sales of growth in the mid to high single digits driven by improved pricing for IGIV, particularly in the US. Our plasma sales are expected to decline by approximately 10% as a result of our throughput reduction, and further reductions in our third- party plasma sales.

Finally transfusion therapy sales for 2005 are expected to be flat to up slightly, driven by continued penetration of ALYX in the US. Looking at medication delivery we expect organic sales to grow in 2 to 3% range for the year. By product category, IV and infusion systems sales growth is expected to be in the low to mid single digits inline with overall market growth.

Our drug delivery business growth will be flat for 2005 given the impact of generic competition and large US Government order in Q4 2004 that we discussed earlier. Excluding these two factors, drug delivery sales growth would be approximately 10% and as you all know we are expanding our capacity in our Bloomington, Indiana facility. That capacity should come on line towards the end of '05, which will position us well beyond 2005 for further growth.

Our anesthesia business sales growth is expected to be in the mid single digits. This assumes the entry of a generic Propofol competitor in the second half of the year. And finally, other sales in med delivery are expected to decline as we exit lower margin distribution businesses in several international markets.

For 2005, we expect renal sales to be in the low single digits, similar to 2004 on an organic basis. This growth however will be offset by the expected decline in HD due to our decision to exit several renal services businesses outside the US, which contributed approximately $75 million in sales for 2004. As a result of this -- exit of this low margin business, reported organic sales for renal is expected to be flat for 2005.

In terms of margin, expectations for gross margins and operating margins are to improved sequentially throughout 2005. As a result of improved gross margin and additional SG&A leverage as we realized the benefits of our restructuring and improvement other plans. We expect our operating margin to accelerate sequentially throughout 2005 and average between 17.5% and 18% for the full year.

Interest expense is expected to be between 30 and $35 million or between 130 and $140 million for the year, higher than 2004 as a result of locking in the losses on over half of net investment hedge portfolio, and our assumption of higher interest rates compared to 2004. As a result, we expect earnings per diluted share for the full year to be in the $1.82 to $1.90 range.

Just a couple of key issues to touch on before I turn it over to Bob. First, our sales growth for the year, again, is impacted by approximately 1 point due to our decision to exit several low-margin businesses. Secondly, restructuring initiatives are on track to achieve the expected incremental savings of 15 to $0.20 during 2005. And finally, higher pension expense and interest expense will impact our earnings by approximately $0.08 a share relative to 2004.

Our current guidance assumes current foreign exchange rates, but does not include the effect of any potential future decision to repatriate foreign earnings for purposes under the American Jobs Creation Act of 2004, nor does it reflect the effect of new accounting rules requiring expensing of stock options.

On a pro forma basis the expected impact of stock option expense on 2004 earnings is approximately $0.15 per share, a significant decline compared to the 2003 impact of approximately $0.25 a share. And for 2005, we do expect stock option expense to be lower than the 2004 level as we continue to revise our equity base compensation plans, and we will obviously discuss the expected impact and method of adoption of FASB 123 on our second quarter conference call in July.

Lastly, in terms of cash flow for 2005, our expectations are for our cash flow from operation is to be approximately 1.5 billion or free cash flow of more than $900 million, compared to 814 million for 2004 with capital expenditure is expected between $550 and $600 million for 2005. Lastly, first quarter guidance as you saw in today's press release we expect organic sales growth to be 3 to 4 points in Q1 '05 with EPS to be in the range of $0.33 to $0.35 a share. For the rest of the year we would expect quarterly earnings per share growth to be similar to Q1 growth and relatively constant in terms of growth over 2004 throughout the year. With that let me turn it over back to Bob.

Thanks John. I will comment a little bit further on 2005 guidance at the conclusion of my remarks this morning. But before doing so, I would like to first briefly summarize the progress that is being made on the number of fronts within the company.

First of all as John mentioned, we're very encouraged by the improving financial conditions specifically as it relates to improving our balance sheet. We're building momentum and increasing cash generation, and with an increased focus on optimizing how we allocate capital within the company, we believe significant progress is already being made on increasing value for our shareholders. New incentive systems have been installed to ensure that management's focus is totally aligned with this objective.

Second, tremendous progress has been made throughout the year in building the senior management team that will lead our company for years to come. As previously announced Dave Drohan, who has head of our global medical delivery business for a number of years has announced his retirement as soon as a replacement has been identified.

We have initiated an external search and our fairly along in identifying a new leader for this important business. We're hopeful a new appointment will be announced before the end of March. By the time Dave's replacement is announced, we will have named 10 out of 16 new corporate officer positions within the company, a blend of internal promotions augmented by an infusion of talent from outside the company. I'd tell you I am very pleased with this talented team of executives, which has been assembled.

As mentioned last quarter while we are committed to growing earnings at a meaningfully faster pace, then top line sales growth the reality is, we do need to look for ways to accelerate revenue growth in the years ahead. Our improving financial position will allow greater flexibility to make investments to do just that.

Our internal strategic planning process which I described before continues to gather steam internally and our refocused internal R&D is also beginning to produce a number of exciting developments. We look forward to discussing these with you at our spring investor's conference to be held in Chicago on May 25. Mary Kay and her team will provide additional details to all of you shortly.

Finally, we have recently completed the planning -- as you would have assumed for our 2005 budget. This in fact was the basis for the guidance that John just provided. As a management team I will tell you we feel that we have an achievable plan for 2005, one that has an appropriate balance of both challenges and opportunities.

While we continue to work our way through a number of what I would call legacy issues that will constrain us somewhat in terms of our EPS growth in 2005, the fact is the favorable impact of the restructuring program allows us to deliver meaningful earnings improvement in 2005, yet at the same time provide some latitude for reinvestment in our business. Effective execution of our plan over the next 12 months will set us up nicely for a solid 2006. at this point, as always we will open it up to questions.

[Operator Instructions].

Operator, is there any questions?

Hold a moment while we compile the roster.

Thank you.

Your first question comes from Rick Wise with Bear Stearns.

Good morning. First, just make sure I understood what you're saying on the EPS front. If you're going to get the $0.15 or $0.20 in restructuring savings, that gets you up from the '04 level to $1.89. John talked about the higher interest and pension expense. That takes out $0.08. Does the higher interest in pension essentially offset all operating improvements, or is your guidance range look conservative? Or should we view it as conservative?

I would not view it as conservative necessarily, Rick. There is a lot of factors here. John called out the incremental pension expense, of course. The reality is there is a number of legacy issues that we need to deal with and we go into 2005 so, I would be careful simplistically taking the base in '04 adding the restructuring savings and so on.

The other thing which we didn't comment on in detail is we are increasing our investment in R&D and our assumption in our 2005 plan, which is very encouraging I think as we have commented before the restructuring provides latitude to do two things. And in fact I touched on this in my closing comments. First, deliver what we have kind of euphemistically I guess characterized as meaningful earnings increase, the midpoint and the guidance is up double-digits versus '04.

Yet at the same time make reinvestment within the business, and so without getting into the detail of that as we constructed our 2005 plan, we felt confident that we were making sufficient progress on multiple fronts in terms of the financial strengthening of our company, that would allow us then to begin making these investments. Again dealing with and getting us to the point of dealing more effectively with the most important issue we have to recognize overtime, which is how do we accelerate growth.

Two other questions. First, maybe if you can touch on the inventories? You're clearly making progress towards a working capital efficiency, but inventory dollars are higher. I think I have read it correctly at the end of '04 versus '03. What are the major hurdles in terms of bringing inventories down or making them not grow? Maybe you can talk about that and as well your targets John on turns, which showed some improvements, and last Bob maybe you can give us some perspective on when we might see some output from these R&D initiatives. Thank you.

Let me answer that and then I will let John respond to the inventory question Rick. As indicated in my comments we now formally announced our investors' conference in late May. As I mentioned, Mary Kay and the team will forward additional details on that.

Frankly that will provide really the first opportunity for us to bore in on really new subjects that John and I have not had a lot of time to talk to about over the last 8 or 9 months for obvious reasons. But you know at that point you can expect us to come forward with more specifics on what I call product development fronts, areas of strategic focus in all of our businesses and for the company. So, that's how we are going to handle that.

Yes, Rick on inventory, the major impediment to getting the inventory down right now is a weak dollar. Year-over-year in constant currency our inventories did decline by about $30 million. And the negative impact year-over- year again this is the end of '03 to the end of '04 from FX is about $90 million. So, in terms of our expectations for '04, you know we achieved and in some cases particularly the plasma business exceeded what we were hoping to accomplish. We do expect to continue to see inventory turns improve throughout '05. But the biggest single impact on the absolute dollar increase from '03 to '04 was a weaker dollar.

Thank you.

Robert, I am sorry. Glenn Reicin from Morgan Stanley is on line with a question. Please state your question.

Can you hear me?

Hi, Glenn. Sure.

Okay. Just a couple of questions here. The first is can you give us an idea of the range in '05 what goes into the low-end of that range versus the high end of the range? What are the different issues involved? That's question number one. And then question number two, is really about margins. With it's really a two part question with the swing in FX your cost going up on the dollar basis in Neuchatel, is ADVATE still more profitable for the organization?

And then can you give us an idea you know ultimately in the '06, '07 timeframe, what is a reasonable operating margin for the company obviously hedging losses are substantial here. You have a lot of it what you call legacy issues they have impacted operating margins, but with the current portfolio, where do think you can bring your operating margins to without being too heroic?

Okay Glenn, let me maybe tackle the last question first. And them I will comment on your first question, which is the range of guidance and John will pick up on the Neuchatel issue and the ADVATE dynamics and so on. First of all, we are pleased that in '04 and based on our guidance for '05 we continue to demonstrate significant improvement on operating income as a percent to sales. This year I think the improvement versus '03 was what John?

Little over a point.

Little over a point. As we discussed before, we believe the portfolio of businesses that we are in today, we ought to be able to get to a point where we're generating 20% pretax. And with the guidance that we provided this morning, you can run the numbers, but assuming a midpoint of the range would again result in a fairly significant improvement in pretax operating income as a percent to sales into '05 as well.

So, can we get to the 20% in '06? I am not suggesting that we can but I think in the over -- what I recall the near to intermediate term the organization continues to be focused on getting to that number, 20%. And again, that's based on the portfolio businesses that we are in today.

Your first question, in terms of range of guidance, obviously there is a lot of Dynamics that go into that range. One of the uncontrollables and frankly a variable that we took a bit of a straddle position on was the assumption in terms of generic Propofol where we have assumed in our plan that we will receive generic competition in the second half of the year.

So, obviously that's a swing factor, either positively or negatively, based on just one singular event, which is reasonably significant. Beyond that I am not going to get into detail of all the ups and downs within the range, but that would be one that would be particularly notable.

And generic Propofol I think you previously stated it's a $50 million a year impact if it goes to generic you think or is that a half-year impact?

We don't try to quantify that Glenn. You know that's obviously going to be an impact on who and how many competitors come in and pricing dynamics at the time. So, rather would not try to quantify that at this point.

That's a sensitive one for the competitive issues.

Sure. Okay.

We prefer not to go there. John you want to comment on the second question?

Yes, the short answer to the question Glenn is Yes, ADVATE is still a more profitable product for us even with the weaker dollar.

Is that a fact -- that's a factor of manufacturing cost or price?

Both.

Okay. Thank you very much.

Okay. Thanks.

Katherine Martinelli from Merrill Lynch is on line with a question. Please state your question.

Thank you. Just in terms of ADVATE did you do anything in the quarter with respect to the free trial program that helped growth? And are expecting given some of the inventory levels to reinitiate that in the US in 2005?

No I don't think we have anything planned in our '05 plan Katherine, for a similar trial that we ran you know midyear the third quarter in '04, which was very successful. But at this point I don't believe our plan assumes a comparable program for '05.

We have done anymore at this point.

Okay and then your comments about getting out of their renal business or the portion of the lower margin side. The lower portion of the renal business --.

(Inaudible - multiple speakers) so be careful.

Sorry. But in -- was that following a complete review of all the businesses, or should we still consider certain aspects up for review in terms of possible for the divestitures? Just trying to get a sense if you feel like you have got your arms around that current complexion of the businesses and what the growth outlooks are and how we should view it going forward if we could expect further moves.

Well, let me answer that Katherine maybe on two levels. The kinds of things that John referred to in his comments, the kind of the one timers and dispositions of certain businesses in our '05 plan that equates to about 1% sales growth year-to-year, are what I would simply describe as kind of tactical and localized decisions, if you will not really a byproduct of some broader strategic assessment from a portfolio point of view.

I think its indicative of a lot of things that we are doing at the company which is to really scrutinize what the return on investment of various businesses in certain markets around the world. And this is a good example of when we make those decisions --the kinds of decision in the short-term it's going to have a slightly dampening effect on our top-line growth.

But these are both necessary and I believe both smart business decisions that will improve the quality of our P&L will enhance our returns and we are going to continue to look for these kinds of things throughout the company as we go forward.

The second part is really the higher level, which is kind of what I would just call the portfolio question. And we -- as we kind of move through what I will call phase 1 of our turnaround we will increasingly be spending more time on asking those more fundamental questions, those are the kinds of things that we are addressing as part of our strategic planning activities within the company.

But, we are going to evaluate all of our businesses in terms of the long-term prospects. But as I have said many times before actually, regardless of what the growth characteristics or the profitability characteristics today are of various businesses that we are in, it's our strong belief that we can enhance the value in the short term of every business that we are in, and that continues to garner most of our shorter-term attention.

Katherine, this is John. Just for the record on your question on the renal service businesses, you may recall we exited starting in late '02 and into '03 most of our international renal services businesses. We retain some at the time, which have been in our continuing operations. And the $75 million of revenue that we refer to now represents most of the remaining service businesses and is not at all a signal about anything relative to the renal business that you alluded to. So, don't read into that anything other than we're getting out of $75 million of business that contributes virtually nothing to the bottom line.

Great. Thank you.

Lawrence Keusch from Goldman Sachs is on line with a question. Please state your question.

Hi. Good morning. A couple of questions. I will quickly list them out for you. First sustainability of tax rate reduction going forward. So, for 2005, what do you thinking for tax rate?

I guess Bob, given your comments, about where you stand with the prioritization of your R&D efforts and your improvements in your debt to cap levels, I know that you were very I shouldn't say very but you were certainly not looking at acquisition in 2004. I just want to get a sense of your any of your appetite for '05. And then lastly, John, plasma inventory reductions for 2005 after you made some good progress in '04, again how are you thinking about those levels?

Let me Larry, good morning, let me address the acquisition question for '05 and then John can address both the tax rate and the plasma question the last question you asked. I think you can expect more of the same in 2005 by that, let me state that another way, I would not expect anything significant on the acquisition front at all. Our focus continues to be bolstering our financial position, the strength of our balance sheet as John and I both commented.

We're pleased with the progress that we're making, which has been substantive, but we don't want to do a touchdown dance here on the 5 yard line. We still have a lot of work to do. To improve the quality of our balance sheet that will continue to be - that's going to continue to be our focus. So, I wouldn't expect anything dramatic on the acquisitions front in '05. John, tax rate and plasma?

Larry, my precautions for the tax rate for '05 is about 25%, yes between 24 and 25%. I'd circle 25 as expectation. No major change from where we have been on a full-year basis recently. Plasma inventory we have to see -- saw a strong reduction in '04. I think you will see some additional reduction in '05, but substantially lower than what we have seen over the past 12 to 18 months. It is not going to be the $170 million that we saw during '04. Probably something less than half of that number, given that we have gotten you know the vast bulk of the benefit out it already.

Does that imply that as you work through that math reduction '05 then you start to feel comfortable with where those levels are?

Yes, I think we have talked in the past. In Plasma our returns have been in about the 1.5 range. And you know optimally, given regulatory requirements that currently exist, I think expectations beyond 1.8 times would be aggressive. That's kind of what we are shooting towards. And we will continue to make progress toward that turn level of 1.8 during '05, which obviously should be about a 20% improvement from where we are today. I do not expect to get all that in the bank in 2005.

Okay, great. Thank you.

Mike Weinstein from JP Morgan is on line with a question. Please state your question.

Thank you very much. Good morning guys.

Hi, Mike.

How are you doing?

Let's just start for a second. I just wanted to circle back on the plasma guidance for '05 the down 10%. How much of that is because of those contracts that are rolling off in Serotec, and how much of that is the manufactured product?

About half of it is third- party plasma sales.

Okay. But do you -- despite that the plasma being down 10% -- with the pricing antibody therapies ends up mid-high single digits?

Yes. That 10% decline is I think you know, excludes antibody therapies.

Yes, yes understood. There are so many moving parts in 2005. You got the benefit obviously of the restructuring helping your earnings, but there is a bunch of stuff you're having to do there to clean up the quality of the earnings among other things, (indiscernible) and some other items, you'll have some offsets as well.

As we start to think about '06, you are still very clearly in what Bob called module 1, which is trying to improve the operating efficiencies of the company. What are the some of the things we should be thinking about in terms of moving parts for '06, one of them is the (indiscernible) the faster cash flow hedges come off. What are similar things that might be plus and minuses that we should now at this point starting to consider?

Well, I would rather not try to start getting into specifics on '06 Mike at this point in time obviously. But I think our comments -- driving toward the 20% operating margin that Bob mentioned earlier over the next several years is certainly still a realistic objective that we are committed to. The hedges are obviously an issue that we have got to live with for another 12 to 18 months. With ADVATE and liquid IGIV and new products coming out of drug delivery, we have got a number of positive things occurring.

We also have got some you know dilution coming in '06 off of the equity units. And how that cash gets deployed will obviously impact some of the - the dilute impact of the equity unit. So, you know a lot of positive momentum I think will be built in '05 as we move into '06. But in terms of quantifying that, other than our commitment to the 20% operating margin over the next several years, I would rather refer that to later in the year.

Okay. The '05 cash flow?

All right you talked about free cash flow after CapEx was about 900 million.

Right. After that, that doesn't include the payments on the net investment hedges, right?

That's correct.

Okay. So, after payments on net investment hedges and dividends, where does that take you down to about --?

A couple of hundred.

A couple of hundred.

Yes, a couple of hundred million.

A couple of hundred million. And that residual cash flow would go just further debt pay down?

Yes.

Okay. And them last question here. Module 1, module 2, module 3, which you talked about Bob in terms of what you think about the stages or what's in front of the company here. You are absolutely starting to do some pruning at this point in the renal therapy business.

And I assume you will start to do consider more pruning that will move forward in the next 24 months. At what point do you feel like you will be in a position to think more strategically about the assets and the portfolio of the company other than what you just announced then?

Well, I think frankly Mike I think we are thinking about those things right now. It would be premature to suggest that we are close to any decision points and depending upon what those are, whether we have both the financial and the operational capabilities to move ahead or implement and so on, it is to be determined.

So I don't really want to get pinned down in terms of a specific timeframe other than to say I guessed at a high level. You know as I characterize this phase 1, phase 2, module 1, module 2, I am really pleased that we are making great progress kind of moving through phase 1 of kind of the turnaround of the company. And again, these are some of the things that we will maybe have some more insight on when we get together in May.

By the way nice improvement in the past inventory. Thanks.

Okay. Thanks.

Bob Goldman from Buckingham Research Group is on line with a question. Please state your question.

Thanks. Good morning.

Good morning.

I can appreciate that the product development discussion is going to be one for May 25. But as we conceptually think through our modeling beyond '05, should we start to think that the new products that you are going to be speaking about are of the type such as BLA, or NDA or PMA that are beyond '06 kind of projects, or are they of the type such as 5, 10 K so we should start at least conceptually thinking of them for 2006?

Well, I think it's probably about it's probably some of these. I mean given the nature of the company we are from devices to drugs. I do not think I can give you just a simple answer one way or the other. You know we will talk about some things that are further out in the future. But we will also talk about frankly avenues for growth independent of new product launches, starting fundamentally with how do we accelerate growth in some businesses that we are in. The other component of that, and I referred to this before is the geographic expansion.

You know one of the things we have done with our organizational structure in realignment in 2004 is to put in a more definitive regional leadership role in markets outside the US in our international operations. And for the kinds of businesses that we're in, there is significant opportunities to accelerate growth through geographic expansion and in developing emerging markets, China being a great example of that.

So I don't want to create an expectation for our May meeting that this is limited clearly to R&D new products and so on. As I commented before certainly we are going to provide more insight visibility into traditional R&D productivity, new products, and the like. But we are also going to talk about other growth factors as well like geographic expansion and so on.

Let me if I can as a follow up you give us some you know helpful guidance on operating margin you know reaching 20% over sometime -- years.

Right.

Could you speak relative to sales growth? I mean you don't really have much of any sales growth right now. But when do you think you could ramp that up to the mid higher single digits you with the kind of businesses you are now in?

Well, first of all let's check upon our guidance for '05 vis a vi the positions that we have consistently taken. And I have been very correct in describing the growth potential of the portfolio businesses that we are in today as low to mid single digits. Okay, if you look at our guidance for next year, organic growth of 2 to 4, which also reflects 1% reduction associated with businesses that we're getting out of.

You know that's a smart business decision. We're not making money. But adjusting for that the organic growth would be 3 to 5%. Obviously we have the impact assumption on the Propofol generic, as well. So, our guidance for '05 I think is very consistent with how we characterized our business, which is low to mid single digit growth. Okay. That's the businesses in the portfolio products that we are in today.

Now, having said that again, and I have commented on this frequently, and this is evidence as well I think in terms of our earnings guidance for next year, we believe for a fairly extended period of time before we get into new areas, new products, and so on, we should be able to drive bottom-line earnings at a meaningfully faster rate than top-line. Okay.

And again that's consistent with the guidance that we provided for '05. I would be confident that into '06 and beyond you will see more of the same. So, not suggesting that, that top-line growth of low to mid single digits is acceptable.

But I think it's important to remember that, given the kind of focus we are putting on to the business, you know it's not just about focusing on growth. The easy decision would have been said don't get out of these businesses deliver a percent higher growth guidance for next year. That's not how we are running the company.

Okay. So we are applying a discipline in financial parameter to the decisions that we make, which is clearly the right thing to do to add shareholder value. Now back to your question, that was all (indiscernible). Back to your question it's going to take some time to get into driving our top-line growth into top-line single digits. But it is driven by one fundamental question, which is -- is it going to be exclusively dependent upon productivity of internal R&D or, how much of that might be augmented through acquisitions on the outside of either companies or products?

Again as I have stated consistently today, we don't have the financial wherewithal frankly to be very proactive in that regard. But given the progress that we're making the momentum that we have in terms of increased cash generation and dealing with some of these issues that we need to deal with, before long we are going to be in a position that we are going to be able to be more proactive relative to the acquisition front as well.

And again, as I said before when I talk about acquisitions, I am talking about things that are more opportunistic, both on complements adjacencies if you will to businesses that we are in today either smaller companies or products or so on. So that is the other question mark at this point in addition to productivity out of the internal R&D. So that is the best I can frame it at this point.

Thank you.

Bruce Cranna from Leerink and Swann is on the line with the question. Please state your question.

Good morning. John I just want to spend a second medication delivery. I think your comment was in this quarter margins were a little worse. I know that Premiere is having an effect there. In Q3 the commentary was price and share was somewhat stable. So I'm just wondering, is there a bit of a change there or am I remembering your Q3 comment incorrectly?

This is Bob. Let me address that because I think I was the one who made that comment last quarter. So I had to pick up your question this quarter. Price and volume had stabilized obviously versus a year ago on year-to-year comparison. Price is down largely as a result of the re-negotiated terms and the extension of the contract with Premiere. So on a year-to-year basis, while pricing in the market is stable going forward on a year-to-year comparison, we continue to deal with the effect of Premiere. So that's the first variable.

The second variable, which is more prominent in Q4, is really a volume variable of which there is two components. The first is as you probably noted by companies that are in the antibiotic business, this was a very soft flu season. A lot of our IV solutions consumed in October, November, December timeframe are for hydration and hospitalization for flu and pneumonia and the like. It was a very soft blue season.

B. our comparisons versus prior year, this is an area whereas we commented about going out the year in quarter and quarter appropriate inventory levels, whether that be the distributor, the wholesaler, or in fact in this case the hospital customer, in the store rooms of hospitals. We had a strong comparison in terms of a lot of inventory that was in the channel last year. Those are the various dynamics both price and volume. Does that help?

Yes, that is helpful. Thank you. On pricing, IVIG pricing it looks as though pricing a little bit better in the current market. Were you saying that was specific to US or is that sort EU effect also? Thinking about mix going forward, when you think about IVIG in '05 can you tell us roughly what you think you might have for a break out? I am thinking of course about liquid versus non.

The improvements that we have seen and we expect to see are generally in the US. European pricing has been relatively stable. We do not anticipate any major changes there. The improvement we have seen throughout '04, as you said has been very positive, and we expect that to continue through 2005. As you know we filed for the liquid approval in June here in the state's and in Q3 in Europe and our expectation for '05 is the approval of liquid will not occur before the end of the year.

Okay, so the improving it in the US in '05 is really not related at all to liquid.

Yes, it is not related to the liquid.

Okay and then lastly on the recombinant, I do not know if you want to comments in general about -- looking at the franchise in '05, I guess we're talking about 1.5 billion or so and around 500 million in Advate. So when you look at the guidance for '05, across the franchise should we be thinking of some pricing here still in other words a mix shift in Advate premium?

Yes.

Care to quantify that?

No.

Okay, and then just quickly on capacity, is 500 million in sales is that still all Neuchatel, or do have to start thinking towards the end of this year about some thousand of conversion?

We're still running Neuchatel at 50% capacity, so we have got plenty of capacity in Neuchatel really beyond '05.

Can you remind me, has Advate they filed in Japan?

We have filed approval. Yes, we have.

And when do expect that?

Do not know yet. Certainly not '05.

Thank you.

[Operator Instructions].

John Calcagnini from CIBC World Market is on the line. Please state your question.

I wanted one point of clarity, I wanted if the 140 million for interest expense, is that interest in other? Or what is the other component going to look like in '05? I guess my question is can you give us interest expense net and other net for '05?

The interest expense of 130 or 140 is interest only. Its net interest expense, net of whatever interest income we have. The other tends to be mainly FX issues and a myriad of very small non-operating issues. Expectations for '05 would be relatively consistent with '04 for the full year.

One quick follow-up. You mentioned -- can you just walk us through the mechanics of the hedge portfolio? Are we to assume you that you have something like another 400 million in unrealized losses there, and how is that going to flow through the P&L in the future?

I will try to briefly answer that. Otherwise this could be a two-hour conference call. The net investment hedges do not impact the P&L currently and will not impact the P&L going forward. So that $1.2 billion liability is a liability on the balance sheet, but changes to that liability upwards or down do not impact the P&L, they go through the CTA account in equity.

So, the only impact on the P&L is really the increase in our interest expense as a result of our offsetting hedge strategy to lock in 58% of the liability. Just to quickly run through that, of the 1.2 billion net liability that exists at the end of 2004, about 350 of that will be paid off during '05. And the majority of it, about 40% of which we have locked in, will mature largely in 2008 and 2009. To the extent the rest of that liability moves with the dollar movement, is not a P&L issue.

Thank you.

We have time for two more questions.

Matthew Dodd (ph) from Smith Barney is on line with a question. Please state your question.

Couple of questions on plasma. First can you update us on the timing of the Aralast, the new facility, when you expect to be up and running, when you might get approval for the facility if those are different? Are there any issues with the transfer from Probitas in terms of the rights to manufacturing it? And then for biosurgery, it looks like that product is slowing as we exited the year. Is there some competition that's shown up in Europe or outside the US that is causing that?

First question on Aralast Mat, the expectation for the approval I think you're referring to our Vienna facility. That is probably beyond 2005 at this point in time. We're working through all the regulatory requirements to get that facility approved. At this point time in time we do not expect our own facility to be up and running before next year.

The third question, I'm sorry? The biosurgery, yes. It is a fragmented market, so the competition out there is relatively diverse. But we've got some unique capabilities with our Tisseel product. The growth has continued strongly throughout the year. It slowed down slightly as we invested heavily in 2003 in a sales force that started hitting its stride early in '04. We are in the process of expanding that sales force as we speak to continue to drive growth in that business, which the we think is a pretty attractive opportunity for us in '05. We certainly expect double digit again there in '05.

The only piece of Aralast you did not answer was, is there any transfer issues like Probitas down the road when you get the rights back? Or is that even been decided?

We're working through that. I do not think there are any issues. Our expectation is that we will get that transfer accomplished as planned when we acquired the asset.

Thank you.

Last question?

Your last question is from Theodore Huber from Wachovia Securities. Please state your question.

Could you quantify the fourth quarter impact revenue of this lower wholesale inventory? Also John what bottom line EPS impact was there from currency in the P&L?

If you look for the whole business quarter to quarter it was slightly more than a point of sales between a point and 2, in terms of how much our comps were difficult to meet. FX for the quarter relative to Q3, just to give you a run rate was a negative 15 to 20 million bucks.

In net income?

Largely because, again the hedges that we've got. Well in net income it would have been -- call it 10 million bucks.

That is the fourth quarter number?

Yes.

Okay great. And then as follow up, on the heels of this write down in your vaccines business, of capacity in the pipeline, can you profile for us where you are at in that business in terms of the current pipeline, how that stacks up with your capacity, and what's your plans and outlook for investment there? At one point this was pitched as a real high player for Baxter and I would love an update on where you think that is at.

Ted, this is Bob. Let me tackle that in three pieces. I thought -- I can give you as definitive answer as you like. First of all, we continue to evaluate the impact of terminating the flu trials. In other words, really analyzing and understanding what are the implications of that going forward. I will tell you, we continue to be very enthusiastic about the underlying Virocell technology that's involved in the manufacture of that product. That is a work in progress to assess what are the technical issues and how do we address that going forward.

On a broader scale relative to our characterization of the business, we continue to be enthusiastic about certain dimensions of the business. It is kind of the diverse business in some ways. Two of the macro trends that are quite interesting is governments' interest in getting involved and having the capability to address various pandemic outbreaks and so on. The whole area of bio terrorism and the like.

So, those are very different businesses than the flu vaccine, which has its own set of issues associated with it. There's a lot about this business that we like in terms of the underlying technology. Some of the emerging market trends, a couple of which I just commented on. But you can conclude that -- as we do our internal strategic planning and so on, we are evaluating this business going forward.

Is it fair to say though that are - -the near term pipeline there -- I do not think there is one.

There is not a lot in the near term pipeline.

And you do have a lot of capacity to put your work there if you can find the right products. Is that fair?.

We do. Yes that is right. That gets back to my comment later in terms of interest from governments on capacity for pandemic outbreaks and so on. There are a lot of things going on in this business right now, which we are assessing.

If the yield curve flattens in '05 like some folks are thinking, how does that affect this interest forecast you gave us?

We try to take into account what reasonable expectations are based on all the inputs we've taken. So, I think with the range we gave covers the yield curve changes that are book ended by everybody out there.

Great, all right. Thanks gentlemen.

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