百特醫療 (BAX) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Baxter International first-quarter cash flow and earnings conference call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. (OPERATOR INSTRUCTIONS) This call is being recorded by Baxter and is copyright material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

I would now like to turn your call over to Ms. Mary Kay Ladone, Vice President Investor Relations at Baxter International. Ms. Ladone, you may begin.

Thank you. Good morning, everyone, and welcome to our Q1 2005 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; John Greisch, Chief Financial Officer; and Susan Lichtenstein, Baxter's new General Counsel.

Before we get started let me remind you that this presentation, including comments regarding our financial outlook, contain 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 detail concerning factors that could cause action results to differ materially. Now it's my pleasure to introduce John Greisch.

Thanks, Mary Kay. Good morning, everybody. Let me start by saying that we are very pleased with our first-quarter results and the progress we are making on numerous fronts, particularly with continuing to meet or exceed our financial commitments, and with the improved consistency in our quarterly cash flows, the key objective as we move through 2005.

Turning to our results, worldwide sales were 2.4 billion this quarter, an increase of 8 points over last year, 3 points of which were from currency, with each of our three businesses delivering solid performances. U.S. sales were up 2% while international sales increased 13% including 6 points of currency.

Contributing to our first-quarter performance were approximately $20 million in sales from a majority-owned renal service business in Asia, which we divested on March 31. Our guidance for the quarter did not include any sales from this venture, as this was one of the low-margin businesses anticipated to be divested this year. Excluding these sales, organic sales growth in the quarter was approximately 4%, in line with our guidance. The divestiture of this business had no impact on our earnings for the quarter.

Turning to Medication Delivery, sales in the quarter were $978 million, an increase of 6%, including 3 points of currency. In terms of specific product categories within Med Delivery, our Infusion Systems business sales were up 22% as a result of very strong domestic revenue, which increased 23 points during the quarter. IV Therapies sales were 296 million, an increase of 5%, as strong international growth was offset by lower U.S. sales of MicroMix, our nutritional compounding machine. We continue to be encouraged by the performance of our base IV solutions business in the U.S., where sales increased for the fourth consecutive quarter.

Anesthesia sales of 231 million were down 5% compared to last year, as wholesaler inventory levels continue to be below last year's levels.

Finally, our Drug Delivery business generated sales of $204 million, an increase of 9%. Strong U.S. sales benefited from an expected $10 million add-on order from the U.S. Government for a product related to their biodefense efforts. Although we faced tough comps later in the year in Drug Delivery, particularly in the fourth quarter, we continue to be very excited about the long-term growth prospects of this business. As we have discussed previously, we are currently in the process of increasing capacity at our Bloomington facility and are very well positioned in the market, given our ability to leverage our capabilities in recombinant manufacturing, formulation technology, fill and finish, packaging, and distribution.

In summary, Med Delivery sales in the quarter were in line with our expectations, and we continue to expect organic sales growth for the full year to be in the 2% to 3% range.

In our Renal business, sales totaled $503 million, an increase of 6%, including 4 points of currency. Lower U.S. sales were offset by strong PD sales internationally. As you know, we continue to focus on driving value in this business through international expansion, as ESRD treatment rates in markets outside the U.S. continue to increase. Clearly, as our performance in Q1 indicates, we're achieving positive results in this area. In the first quarter, $314 million or more than 60% of our total Renal sales were international PD sales, which increased 11% for the quarter, as a result of strong patient gains. Foreign currency also favorably impacted international PD sales growth by about 5 points.

HD sales were up 2% in the quarter and down 3% in constant currency. As I mentioned earlier, our HD sales included approximately $20 million from the divested dialysis center business in Asia. In subsequent quarters our HD sales will be down from 2004 due to this divestiture and consistent with our focus on reducing or eliminating lower-margin activities.

Given Renal's first-quarter results, we continue to expect organic sales growth to be flat for the full year in line with our previously issued guidance. Excluding the Renal service business, Renal organic sales growth for the full year would be up in the low single digits.

In our BioScience business, sales were $902 million, an increase of 11%, with currency contributing 3 points of growth. Our Transfusion Therapies business had sales which were down 5%, while sales for our core BioScience business excluding Transfusion Therapies increased 15%. The core BioScience sales growth was driven by a very strong quarter internationally, where sales increased 18% in constant currency, driven by strong performance in Europe, where we had weak comparisons in 2004.

Looking at the recombinant business, we had a very solid quarter with sales of $344 million, an increase of 18%, 4 points of which were due to currency. We continue to see an accelerated demand for ADVATE in both the U.S. and Europe, with sales of ADVATE totaling $117 million for the quarter, about two-thirds of which were in Europe. ADVATE sales were down slightly from the fourth quarter due to strong sales in Q4 to certain customers, who purchased to meet their contract commitments. However, underlying demand continues to increase sequentially for ADVATE.

We have now launched ADVATE in 13 countries and recently received approval in Australia, as you probably saw earlier in the quarter. During 2005, we expect receive approval and/or launch ADVATE in seven additional markets across Europe. We continue to be very encouraged with our ADVATE conversion which is occurring across all patient groups, and we continue to expect ADVATE sales for the full year to exceed $500 million.

Turning to the Plasma business, our Antibody Therapy sales were $89 million, an increase of 11%, driven by improved pricing for IGIV, particularly in the U.S. Plasmas sales excluding Antibody Therapy increased 9%, driven by the timing of certain international tenders that were expected later in the year and strong sales of several specialty Plasma therapeutics including FEIBA.

Our Biosurgery business, which is comprised of several wound management and tissue sealing products, had another strong quarter, with sales increasing more than 20%.

As you can see BioScience is off to a great start and we continue to expect organic sales growth to be in the 2% to 4% range for the full year. In addition, as you may have seen, we have made several exciting announcements in the BioScience business over the course of the last several months, including, first, signing a new long-term plasma procurement agreement with the American Red Cross effective July 1, which allows us to utilize existing capacity for plasma processing and continue to supply our customers and the market with adequate supply of product.

We also announced that we have assumed exclusive U.S. marketing and distribution rights for Cangene's WinRho, both the lyophilized and the liquid product. WinRho is a plasma-based product used to treat clinical blood clotting disorders. We have been the exclusive distributor of this product in Europe and began disturbing it here in the U.S. during April.

Finally in our Transfusion Therapies business, we received expanded approval of the ALYX platform for the collection and separation of red blood cells and plasma.

Our gross margin for the quarter improved to 40.7%, compared to 40.4% last year. This is the first quarter in over two years that we have seen gross margin improve on a year to year basis for continuing operations. As in previous quarters, the impact of foreign currency and our hedging activities reduced our gross margin by approximately 1 full percentage point. Driving the improvement were higher margins in BioScience, particularly driven by the benefits of ADVATE conversion; and these improvements were partially offset by sales mix and lower margins in our Medication Delivery business, primarily due to lower anesthesia sales.

SG&A for the quarter was $483 million, an increase of 4% over 2004. Our restructuring savings were more than offset by the impact of foreign currency and increased pension and other benefit costs. Excluding foreign currency, SG&A would have been flat for the quarter to the prior-year. As a percent to sales, SG&A declined to 20.3% compared to 21.1% last year. Our restructuring initiatives remain on track. At the end of the first quarter, we have now eliminated over 2,900 of the 4,000 expected positions. As we have stated previously, we expect to complete this program by the end of this year.

R&D spending for the quarter totaled $133 million, up about 4% from the fourth quarter, but down slightly from the first quarter last year. We expect R&D spending to increase approximately 5% to 7% for the full year.

Looking at our operating margins, as a result of our strong sales growth, improved gross margins, and our restructuring initiatives, our operating margin improved 1.6 points to 14.8% in the first quarter. As with our gross margins, this is the first quarter in over two years since we have increased our operating margins on a year to year basis, something we're very proud of. As we previously communicated, we expect our operating margin to improve sequentially throughout the year and average 17.5% to 18% for the full year.

Our interest expense as planned increased $10 million this year in the first quarter as a result of higher interest rates and the impact of our net investment hedging strategy. Our tax rate of 25% was in line with our expectations. As a result, earnings per share, as you in the press release, was $0.36, slightly ahead of our guidance.

Looking at our cash flow, cash flow from operations for the quarter totaled $271 million, versus an outflow of $53 million in the first quarter last year, an improvement of $324 million. Our operating cash flow includes a number of items that I would like to highlight. We contributed 100 million, up $100 million to our U.S. pension fund in the quarter compared to a $54 million contribution for the same period last year. The $100 million contributed this quarter represents a full-year contribution for 2005.

Restructuring payments for the quarter consumed $43 million this year, compared to $37 million last year. Lastly, an inflow of $58 million is included in our operating cash flow for the settlement of certain mirrored (ph) net investment hedges; and I will elaborate on this in a moment.

Capital spending totaled $65 million, down from $90 million last year. This reduction was driven by the timing of expenditures. We continue to expect CapEx for the full year to total 550 to $600 million.

Free cash flow this quarter was $206 million compared to a free cash outflow of $143 million last year. Again, an improvement of $349 million. The most significant change in our free cash flow this year is really improvement in our working capital management. In the first quarter this year, working capital outflows were less than 50% of the outflows last year even after the higher pension contributions. As I mentioned on several occasions, we have intensified our focus on this area and we are very encouraged by our results in the first quarter.

DSO of 59.2 days was an improvement of 2.2 days over last year; and accounts receivable represented an inflow of $44 million this year compared to an outflow of $96 million last year, while cash flow from our securitization programs has again been reduced, with an outflow of $52 million during the quarter.

Inventory turns also improved to 2.6 turns this year compared to 2.3 last year. We continue to make substantial progress in reducing our plasma inventories, which declined by approximately $30 million in constant currency since the end of 2004. This now represents a cumulative reduction of approximately $250 million since we began our plasma inventory reduction efforts in June of '03. We will, however, see plasma inventories increase somewhat later this year as the new American Red Cross agreement takes effect.

Net debt of $3.5 billion is $668 million lower than Q1 last year. However, it did increase $308 million from the end of the year. During the quarter, we paid out our annual dividend, which totaled $359 million; and we settled $254 million of our net investment hedge liability. We ended the quarter with a net debt-to-cap ratio of 34.9% down from 42.4% last year.

Finally, let me provide a quick update on our net investment hedges. The net liability at the end of the first quarter was $893 million, a reduction of 279 million from 12/31/2004, as a result of movements in currencies and the $254 million settlement. We paid off a portion of the liability maturing in 2005 as well $23 million that was due in 2007. The remaining 2005 maturities of $125 million will be paid off later this year.

Tracking the $254 million hedge settlement on our cash flow statement is a little complicated. I just want to remind you of the fact that we entered into an offsetting hedge strategy in the fourth quarter last year to reduce the liability risk; and GAAP requires cash flows associated with the settlement of these offsetting hedges to be reported in the operating cash flows, while cash flows associated with the settlement of the original hedges are reported in the financing section of our cash flow statement. Thus in the first quarter, we have an inflow of $58 million in the operating cash flow section and an outflow of $312 million in our financing cash flows, for a net settlement of $254 million.

In summary, we are very pleased with the year-over-year cash flow improvement. We are clearly making progress in terms of improving the quality of our cash flow from operations as well as free cash flow. And by maintaining our focus and discipline in this area we are confident we will continue to see improvements in our cash flows.

Finally let me conclude my comments this morning by providing our outlook for the second quarter and full-year 2005. As you saw on the press release, we're confirming our full-year guidance. For the full year we continue to expect organic sales growth to be in the low to mid single digits or approximately 2% to 4%. By business, we expect BioScience organic sales growth to be in the 2% to 4% range, as lower third-party plasma sales are offset by strong recombinant demand and continued penetration of ADVATE, as well as increased Antibody Therapies sales as a result of improved pricing, the launch of WinRho in the U.S., and the benefit of the American Red Cross agreement in the second half of the year.

We expect other plasma sales to be down more than 10% as we exit third-party plasma agreements and terminate the contract manufacturing agreement with the American Red Cross later this year. We now expect Transfusion Therapies sales to be down over the prior year for the full year.

For Medication Delivery we expect organic sales to grow in the 2% to 3% range, with low to mid single digit growth in IV Therapy and Infusion Systems; flat Drug Delivery sales; and a decline in Anesthesia sales, with the entry of a generic propofol competitor assumed in the second half of the year.

Finally, we expect organic sales in the Renal business to be flat as strong international (inaudible) sales are offset by the expected decline in HD due to the divestiture of the Asia renal service business.

As I mentioned earlier, (technical difficulty) margins and operating margins to improve sequentially throughout the year. As a result of the improved gross margin and further SG&A leverage, as we realize the benefits of our restructuring and other improvement initiatives, we expect our operating margin to accelerate sequentially throughout the year and to average 17.5% to 18% for the full year. As a result we continue to expect earnings per share for the full year to be in the $1.82 to $1.90 range on a fully diluted basis.

Our 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. We will communicate our plans on this issue later this year.

With respect to cash flow, we continue to expect cash flow from operations for the full year to be approximately 1.5 billion, or free cash flow of more than $900 million compared to 814 million last year. As I stated earlier, we continue to expect CapEx to be between 550 and $600 million for the full year. As I am sure you saw in the press release, we expect organic sales growth for Q2 to be 2% to 4% and earnings per share to be in the range of $0.43 to $0.45 per share. With that, let me turn the call over to Bob.

Thanks, John. Good morning, everybody. Over the last several investor calls I have provided you all with an update on really three key priorities. The first is to restore our investor credibility. We understand that ultimately the best way to improve our credibility is to consistently meet the expectations we set and improve our financial vitality necessary to fuel future growth.

The first-quarter results that John just summarized reinforce the fact that we are making solid progress in getting our Company back on track. While it is encouraging that EPS guidance was achieved, frankly I am even more encouraged by the cash flow generated in the first quarter and what these results represent. Over the past year I have consistently talked about the need to improve discipline and processes throughout the Company, a need to focus on crisper execution. I think more than any other financial metric, cash flow is the best indicator of the progress being made in reorienting our operating culture.

I can tell you that today there is a much clearer focus on managing inventories and receivables. There is much more rigorous assessment of all areas of capital spending, and there is a better understanding of the notion of capital allocation and its correlation to the goal of increasing shareholder value. We also continued to make progress in Q1 in dealing with a number of legacy issues, financial and otherwise, that will allow us to spend more time in the months ahead on value-creation activities.

Our second priority has been to intensify our efforts on quality, both the quality of our products and the quality of our business processes throughout the Company. We have implemented new corporate-wide quality and regulatory approaches that standardize activities across all of our operating units. These efforts, too, are a matter of focus and discipline.

Having said that, as I am sure you're aware, earlier this week, the FDA posted a warning letter that was recently received in response to observations in the agency's Form 483 from an inspection of our Tampa manufacturing facility last October. This facility mainly supports our Renal and Transfusion Therapies businesses, specifically in the area of instrumentation. The warning letter addressed several process improvement requirements, most of which we have been addressing over the past year. Some have already been resolved to the agency's satisfaction; and we're committed to resolving the remaining items noted in the warning letter as soon as possible. On a broader, Company-wide scale, we continue to improve our corporate-wide quality and regulatory processes where necessary.

The third priority that I have been discussing is organization, both structure and people. As you know, recent changes have been made in the senior management ranks in the Company. Recently we were pleased to announce two additional key senior management appointments that are critical to our long-term success. As you know, Peter Arduini was named as President Medication Delivery, succeeding Dave Drohan. Peter has spent the last 14 years at GE Healthcare and is a great addition to the Baxter team.

Also recently announced was the appointment of Susan Lichtenstein as Baxter's new General Counsel; and Susan is with us here this morning. Susan is a distinguished attorney who brings a wealth of diverse experiences to her new role, including both the private sector as General Counsel at Ameritech and Tellabs and in public sector, most recently as Counsel to Illinois Governor Rod Blagojevich. With these appointments, the overhaul of Baxter's senior management team is largely complete. Over the past year, 12 of the 16 most senior corporate officer positions have changed, including virtually every senior line management position in the Company. We now have our team in place that will lead our Company in the years to come.

In addition to the aforementioned priorities, let me take a moment to discuss several other accomplishments in the quarter, including a number of business development initiatives. First, as John previously mentioned, we did announce a new long-term plasma procurement agreement with the American Red Cross that will allow us to enhance our manufacturing efficiencies and further leverage our manufacturing capacity.

Second, we announced a partnership with Cangene to distribute WinRho in the U.S. Given our marketing capabilities and existing customer relationships in the U.S., this collaboration will allow us to further leverage our immunotherapy sales force.

Finally, we announced an expanded relationship with Halozyme which includes a supply and development agreement for Hyalonax (ph), a recombinant enzyme used as an anesthetic in cataract surgeries. Pending approval we will manufacture and market this product.

In addition to those, I am also pleased with the milestones we achieved with several key R&D initiatives. Some of our first-quarter highlights include the recent approval for ADVATE in Australia, as John mentioned a couple of minutes ago, and the expanded approval of our ALYX automated red blood cell collection system. Second, we received 510K clearance from the FDA to market our wireless pump connectivity interface that enables hospitals to connect our COLLEAGUE CX infusion pump to our Patient Care System. This will improve productivity and enhance safety, specifically in reducing medication errors in the hospital setting.

Thirdly, during the first quarter we launched Accusol, a bicarbonate buffered dialysis solution, which is used during acute renal replacement therapy in the U.S. We expect to launch Accusol in Europe in the second half of 2005. Fourth, we submitted our file in Europe for the approval of Flex-Albumin (ph), a product that leverages our packaging expertise, offering albumin in a flexible plastic container versus glass. Finally, we initiated Phase I clinical trial for our next generation Tisseel, a product that combines Tisseel with a calcium phosphate to aid in bone regeneration.

Two longer-term opportunities that were recently announced include, first, the award from the Department of Defense to Computer Sciences Corporation and Baxter for the development of a plasma-derived human butyryl-cholinesterase. This product is being developed for its potential to provide protection from the effects of certain toxic agents. The initial contract includes process development and manufacturing of the plasma-derived product for a Phase I clinical trial; and it could lead to a significant opportunity in the future.

Lastly, we are encouraged by the preliminary findings recently released from an initial Phase I clinical study suggesting that IGIV therapy improves cognitive function in Alzheimer's patients. The data is extremely preliminary; however we are currently evaluating our options of moving forward with a Phase II trial. Obviously, approval for IGIV in this indication would not occur for several years.

So in addition to our improving financial performance, I am pleased that momentum with business development and R&D programs is also beginning to accelerate.

Before opening up to call to Q&A, let me comment briefly on our upcoming investors conference and establish some clear expectations as to what we hope to accomplish in that session. First of all, a number of you have asked me what the theme of the conference will be. So in reflecting on that, I thought I would answer the question in the negative, if you will, as to what the conference will not be.

This will not be exclusively an R&D conference. That is not to say we won't spend considerable time on key R&D projects, both of near-term and a longer-term nature. The conference will also not be a growth conference focused exclusively on how we plan to grow the top line. As the Company has learned in recent years, growth for growth's sake without rigorous assessment of the quality of returns, or objective analysis of technical and operational risks of new ventures, not only can fail to great value but can actually dilute value.

In fact, if anything can characterize the theme of the conference, it is truly about value creation, with the first priority being the attraction of value which resides in the Company today. Having said that, a number of new growth initiatives, the right growth initiatives, are also very much part of our value-creation plans going forward.

So specifically, this is what we plan on addressing at the conference on May 25. First of all, we will present to you what we have come to internally refer to as our base-case long-range plan. That is, what is the longer-term financial outlook for our current portfolio of businesses and products? As we discussed previously, we believe our existing portfolio will generate top-line growth of low to mid single digits, with growth of operating income at a meaningfully higher rate.

What we will spend more time talking about is how we plan on achieving that kind of bottom-line leverage in a sustainable fashion, beyond the impact of the restructuring program. Much of this has to do with improved operating and financial disciplines, and an unrelenting focus on value creation in every area of our business.

We will also show you the impact (technical difficulty) long-range plan cash flow will have in transforming our balance sheet. You will see that not only will we be in a position to deal with a certain number of current balance sheet issues in, frankly, reasonably short order -- I would say within the next couple of years or so -- but we will before long be dealing with various alternatives to deploy excess cash, whether that is pay down debt, buy back stock, or more aggressively pursue the right kinds of acquisitions, or some kind of combination of all of the above.

We will then discuss opportunities to accelerate growth beyond the base case in each of our businesses. A number of these opportunities are near-term and more quantifiable; others are somewhat longer-term in nature. Many of these opportunities you will see are the result of a new or different focus of our marketing, R&D, and business development efforts going forward.

Finally, and I think very importantly, you will have the opportunity to meet personally with our newly assembled management team. At the end of the day, our ability to revitalize and grow our Company and to provide increasing value to our investors is a function of the quality of our people throughout the organization and certainly at the top of the organization. I believe having met our new senior leadership team you will have a high sense of confidence that we can effectively execute against our stated objectives.

So hopefully this explanation of what you might expect in May is helpful, and so with that, we are now prepared to open up the lines for Q&A.

(OPERATOR INSTRUCTIONS) Rick Wise with Bear Stearns.

Several questions. First, Bob, can you expand on the comments on gross margin? Clearly BioScience contributes; Medication Delivery, Anesthesia dragged it down. Can you help us understand how to think about when Medication and Anesthesia start to be less of a drag, or more of a positive contributor to margin? Just give us a little color there.

Rick, I didn't catch the last part of your question regarding anesthesia.

Just, again, Medication Delivery and Anesthesia seem to be the drag. When do they get better?

Obviously there's a lot of dynamics in terms of margin change. I think at a high level the point that John made is very significant, which is it's the first quarter-to-quarter improvement in gross margin percentage we have had for the Company overall in over two years. Okay?

Now you obviously have a lot of puts and takes. Clearly the BioScience business, which performed very well in the first quarter, especially in the area of ADVATE at higher margins, has had a positive effect.

The other comment that John made, and I will let him expand on this further when I am done, is that we had some softness in Anesthesia sales in the first quarter which actually are typically higher gross margins. So it was even more positive, I think, the gross margin percentage for the quarter in light of that fact. That was largely the result of continued winding down of inventories at the wholesaler level.

We took price increases in December on a number of our anesthetic products, and you know how the dynamics work in the wholesaler chain. So that has continued to drive volumes in the distribution channel down. So that had somewhat of a depressing effect, actually, on the gross margins. John, I don't know if you want to expand on that. There's a lot of puts and takes here.

Yes, just looking across the portfolio of particularly Med Delivery, as Bob said, the margin drag -- to use your term -- for that business relative to BioScience contribution is really one of mix. There is really no fundamental margin erosion that we see coming from those businesses, other than the entry of a generic competitor to propofol, which obviously will impact us. But it is really a mix issue in the first quarter.

Just another quick follow-up, product specific. Can you just talk in a little more detail about IGIV and ADVATE? IGIV pricing seems to be improving. Can you talk to us about the outlook for further pricing improvement there? And ADVATE, again, a little more color if you can in terms of the ADVATE penetration or cannibalization of recombinate? Thanks so much.

Sure, Rick. In terms of IGIV, yes, we would -- first of all we're very encouraged by the more stabilized pricing environment. We would anticipate that would continue through the end of the year. What that translates into going forward beyond the end of '05, not really prepared to comment on it at this point.

Relative to ADVATE, and again John can expand on this further, we are very encouraged by the first-quarter performance on a worldwide basis, but certainly in Europe where conversions moved ahead very positively. We have I think over 60%, north of that, of our total recombinant sales in Europe are now in ADVATE. So that is a very positive development.

The conversion, as you know, is less than that in the U.S.; but we continue to make progress with the conversions in the U.S. as well. John, do you want to expand on that?

No, that covers it.

Thank you.

Mike Weinstein from J.P. Morgan.

A couple questions. One, the guidance you're giving over the balance of the year suggests that we will see a little bit of growth deceleration organically on the top line. Some of that is in the Med Delivery business, and I just wanted to get your updated visibility on generic competition for propofol, the odds of that actually happening. Then maybe just touching on a couple of the other drags, like generic orsezin (ph) that might be weighing on the growth in your model in the back half of the year. Thanks.

Let me first of all comment on propofol. We became aware last evening that Bedford has received approval for a generic propofol; it was posted on the FDA website. So that is kind of late-breaking news. Frankly the timing of that is pretty much in accordance of what our planning assumptions were for the year. Beyond that, I really can not share any insight into what that translates to in terms of time to market and so on. That as I said is just a recent development.

Do you have any insights or thoughts on what they are pricing or (multiple speakers) ?

No, that is why I said what I said, Mike. In terms of beyond knowing that it got posted last month we really have no additional insights on a lot of different dimensions at this point. Obviously, we are very curious and we will develop those in the coming days.

Relative to be IV business, as John referenced in his comments, we are encouraged by the -- this is really the fourth consecutive quarter of increased sales in the basic IV solutions business. That is really subsequent to kind of rebasing the running rate as a result of the implementation early 2004 of the Premier contract, as you know.

But relative to your question on margins on the IV business going forward, certainly stable. There is not a lot of change in the pricing environment right now. We certainly don't see any further erosion in pricing. Hopefully, some improvement, frankly, in pricing in base IVs.

We are, I will tell you, getting impacted by material costs driven by oil prices, which translate into resin costs and so on. But Mike Gatling and his manufacturing team continue to do an outstanding job with cost reduction programs which offset much, if not most, of that. So we would envision pretty stable margins there going forward. Does that answer your question?

Fairly well. Let me just switch gears (multiple speakers) with one follow-up to John. John, as we look at 2006, there is a number of one-time positive elements that start to move in your favor. The Biofolk (ph) contract coming off for the factor XVIII among them (ph) and a bunch of other items.

One drag next year is obviously this FD building to (ph) and equity units that are scheduled to convert in February '06. Could you just make sure we are all on the same page there in terms of how you're thinking about that event, and what the dilution will be to '06 earnings?

Yes, Mike, we're still evaluating how to deploy that cash that we're going to receive in early '06. But the best way to think of the dilution from that security is the fully diluted EPS dilution will be in 3% to 4% range when you consider the impact of the additional shares to be issued, which will be between 35 and 42 million shares. And then we are receiving 1 billion 250 in cash which obviously will benefit our interest expense. So net-net relative to '05, that item alone will have a 3 to 4% dilutive impact in 2006.

Is it fair to say that even with that 3 to 4% dilutive hit to next year's earnings, you guys still feel like you can deliver a double-digit earnings year?

I think as Bob mentioned earlier, we are committed to the low to mid single-digit top-line growth and meaningful bottom-line growth on the back of that. We haven't come out with a specific number for 2006 and won't do that till later this year, early next year. But our commitment to deliver what we have been talking about pretty consistently for the last six to nine months certainly is still there for 2006.

Okay, great. Thank you, guys.

Glenn Reicin from Morgan Stanley.

Good morning. Several questions. I will just lay them all out and you can answer them in any order. Just a simple one on ADVATE, I'm a little bit puzzled by the very high penetration in Europe given the presence to be in that market. Maybe you could shed some light there.

Question number two, on the anesthesia declines in this quarter, could it be that those declines were in response to the anticipation of a generic coming rather than price increases that you took in fourth quarter? What are you assuming in terms of the impact of a generic? I know when you came out with your generic, it wasn't really a generic and you were able to expand the market. So I am trying to understand a little bit about what kind of hit you're modeling for.

Then the third question. On IGIV right now, are we seeing all price increase? Is that the cause of the sales increase? Or is there still volume increases in DF (ph) capacity for those item increases? Thank you.

Okay. Why don't we start with the propofol and anesthesia softness in the first quarter. To provide a lot more clarity, Glenn, or insight on the impact of propofol in advance of understanding, one, when product is going to be available from Bedford, what their pricing strategy is going to be and the like. Clearly, it's pretty difficult. When we pulled our operating plan together this year, as you know, we took really a straddle position on this in terms of timing which in retrospect, if things materialize with Bedford, was the right thing to do. I am not going to get into the specifics of how aggressively we forecasted the decline in volume and prices, other than to say I think we were prudent in the assumptions we made in both share and price decline.

We also had assumed in our planning assumptions that there would likely be a second generic competitor in the market by the end of the year. So I think net-net, at a high level what I would tell you is we feel, even with the news from last night, that given the construct of our plan, the various assumptions that we made, that we are pretty well positioned to incur the impact of generics within the parameters of our plan.

What did John say with respect to the extent of the decline this year on Anesthesia? Did you say anything?

I'd say I expect it to be down.

So you didn't say by how much.

No.

Okay. Do you want to?

No.

Your speculation on the inventory at the wholesalers in anticipation, you might be right. I don't know. I will tell you we clearly have had our antenna up for this event, and until last night we are not aware of anything. So I am not saying our intelligence is perfect, but I don't know that I would be so quick to assume that they have had some kind of information and assume that.

I think largely it's a result of, as I mentioned in my comments, the price increases that we took in December, with the loading ahead of time and then the offload which the wholesalers typically do. So that is Anesthesia, that is propofol. IGIV and ADVATE, John, why don't you comment on each of those?

Just to frame your question on Anesthesia, finally, Glenn, the decline is not going to be any more than low to mid single digits; and that is even with propofol generic risk assumed. That is just to put it in context.

Great.

IGIV volume was up during the first quarter, as well as price improvements, which we continue to see. To your question about whether we have capacity for more volume, the answer to that is yes. However, recall we brought our production levels down to a specific level to optimize the profitability of this business; and we have no intention, right now, of bringing that production capacity up. Because IGIV alone is not going to make it worthwhile to do so.

We will, as we get into the second half of the year, as you know, have more IGIV available for our own distribution as a result of the Red Cross transaction. Offsetting that revenue increase will be the lost contract manufacturing revenue that we're getting from them currently.

So volume and price were both up in Q1. I would expect volume until the Red Cross agreement kicks in to be up less in subsequent quarters than it was in the first quarter. But as we get yield improvements we will have additional volume available to us.

ADVATE in Europe, I think from day one when we launched last March we saw a more rapid conversion rate there. I think it's largely driven by, one, a more heightened sensitivity to the latest-generation product in Europe; and also obviously, particularly in the UK and other countries, the prevalence and sensitivity to mad cow disease has further heightened the attraction of ADVATE in Europe relative to the U.S.

But the consistency of ADVATE acceleration here in the U.S. continues to occur (technical difficulty) in Europe. But that is really -- those two things are really driving the more rapid acceleration in Europe vis-a-vis the U.S.

Can I touch on one item? We were recently at some PPTA meetings and there was -- someone had speculated that IVIG demand with price was up in the midteens industry-wide. Is that totally out of the realm of possibility here?

Sounds high.

Okay. Thank you.

Matthew Dodds from Smith (inaudible).

Just a couple questions on BioScience. John, how much was shifted into Q1 on the plasma sales that you said should have occurred in the back half of the year? What products were that?

There was about $10 million, Matt. Last year we had those tenders later in the year, and it's largely plasma-derived Factor VIII. A little bit of FEIBA; but primarily plasma-derived Factor VIII.

One more clarification on BioScience sales. For vaccines other, that jumped about 20 million year-over-year. I assume that is vaccines -- is there something unique in this quarter? Or is just getting stronger?

It's a couple of things. Some of our biosurgery products are included in that area. As I mentioned earlier biosurgery in total was up 20%; so we saw strong growth in our non-plasma biosurgery products, which are included in that other category.

The second piece is the vaccine product Nysvac (ph) is also tender driven; and the timing of tenders Q1 this year versus last year resulted in more favorable comparisons.

Last one on BioScience, John. On Transfusion Therapies, a lot of the collection center shutdowns occurred late '03, early '04. I haven't seen a lot occurring since middle of last year. It sounds like ALYX is growing. So why isn't that business going to grow in the back half, if that is kind of the market thesis?

A couple things. I think not all of the plasma center reductions, including our own, occurred early last year. Part of our restructuring that we announced last April included the closure of additional plasma centers. I think there's been certainly some consolidation by CSL and Aventis after that combination occurred. So that is one thing.

You also may have seen we lost a segment of our business that we had with ZLB to a competitor that was announced earlier in the year. That is going to have some impact on our Transfusion Therapies business later in '05. So a major customer shifted from us to another competitor.

I should think about this business rebounding in '06, early '06?

ALYX is going to be the driver of growth and improvement in this business. So as ALYX accelerates, that is correct. There will be some follow-on into '06 as a result of the ZLB customer loss; and ALYX will offset that.

Thanks, John.

Ben Andrew from William Blair.

Ben, are you there?

Theodore Huber from Wachovia Securities.

I wanted to ask a couple higher-level questions on the plasma business, because on the margin it's just been so important to Baxter over the last several years. First, could you comment on where you guys see us in the whole global supply and demand balance in this marketplace? There has been a lot of capacity taken out. Are we at a point of equilibrium? Or is there still excess supply in the business? Any forecast there would be helpful.

In addition to that, any comments you can give us on what the economics of a unit of plasma being processed for Baxter is today, versus where we were in, say, last year would be helpful. Because there's so many moving parts between all of your different products and collection center economics and whatnot.

Okay. I will try to give a brief plasma economic answer to your second question. But first question, in terms of where are we in terms of supply and demand, clearly there is a better balance today than there was a year and two years ago. I think based on the pricing improvements that we are seen, certainly with IGIV and others, we think we are in a good position.

I don't know if I would say it is equilibrium. It is hard to be that specific, Ted. But I think relative to the improving economics that the industry needed and that we were driving, I think we are certainly closer to equilibrium than we have been for the last couple of years.

John, is pricing up in albumin and Factor VIII on balance, or just stable at this point?

It is primarily IGIV, primarily IGIV. Equilibrium for plasma-derived Factor VIII and albumin is certainly not the current state. As you know the demand for both of those products has not been growing. My comment was really specific to IGIV.

The plasma business, real simply, we took our production level down to a point where the revenue we are going to generate off of every liter that we process is going to drive profitability into the business. Plasma-derived Factor VIII and albumin are two products that are good examples of demand being well short of supply two years ago; and it just wasn't profitable for us to continue to run liters at that level of demand.

It is hard to answer your question specifically in the time allowed. But as we grow demand for IGIV, as we grow demand for FEIBA, as we see demand growing for Tisseel, and are getting attractive pricing, particularly on those specialty therapeutic products, the economics in this business will continue to improve.

But just to maybe paraphrase, it sounds like your expectations for the improving economics focus on your new products, less so on really rebounds in albumin and Factor VIII pricing.

That is correct.

Quick follow-up. You mentioned seven markets in Europe that you expect to launch ADVATE in. Could you give us some highlights on who these are and how important these markets are?

They're smaller markets like Ireland, Norway, not as small, but a couple of Central and Eastern European markets. So we have launched in all of the major Western European markets.

All right. That's helpful. Thanks, guys.

Larry Keusch from Goldman Sachs.

Just a couple things. I will just list them off. John, I am wondering if you can just help us think a little bit about what happens to efficiencies, and sort of perhaps relative margin expansion, or anything that you can help us, when you bring on these new manufacturing processes in your L.A. plasma facility. I think next year they come on. So that if you can sort of help us in any way on that, that would be great.

Secondly, any insight on the flu vaccine clinical trial results and sort of plans on that going forward? Lastly, an easy one. Restructuring savings, are you still on track for that incremental $0.15 to $0.20 in '05. Maybe if you can, help us quantify what occurred in the first quarter.

I will take the first and the last one. As I said, the restructuring plan is on track and we expect to be on track for the full year. You cited the commitment that we have made. That is going to be accelerating throughout the year, so the first-quarter benefits were something less than 25% of that total.

In terms of the new fractionation facility in Los Angeles, the timing of that coming onstream is obviously going to be dictated by regulatory approvals. I think we have commented previously that the net cost benefit to the business is relatively modest. It is clearly going to give us the newest and best facility in the industry, and regulatory improvements relative to our existing facility.

But as it comes onstream, as we get through the initial phase, the cost benefits -- given the cost invested in the plant itself -- are going to be relatively modest. So that the improvements to do the plasma business are really going to be more largely driven by the growth of the specialty fractions that we hold very strong positions in, and good pricing is attached to those.

Flu vaccine? Go ahead, John.

Flu vaccine, we are continuing to analyze the data off of the clinical trials that we suspended late last year, and we will get further clarity around that as the next few months play out here. I think as Bob mentioned on the last call, we are continuing to look at the value that that technology brings to the Company and the vaccine business overall.

Would we hear anything further on that at the analysts meeting?

Perhaps.

I know this is dependent on the regulatory timeline, but just the L.A. facilities, the new fractionation process, is that an '05 or an '06 event, do you think?

It won't be '05.

Okay, thank you.

Robert Goldman from Buckingham Research.

I have two questions. The first is on peritoneal dialysis. I know it is a relatively minor product for you in the U.S. But there is some thought that PD sales in the U.S. could benefit from the Medicare pharmaceutical reimbursement changes that were put into place in the beginning of the year. Perhaps you can speak to that.

The second question is on international. I heard a good amount of detail product by product on what was strong in the international markets. But since international across the board, certainly relative to my model, was strong, I am wondering if you could speak to perhaps some macro trends that might be going on; or perhaps some realignment of your own sales force or marketing activities. Thanks.

Robert, I would be happy to address both of those. Relative to PD in the U.S., we do expect some favorable impact due to improvement in reimbursement. But to be very candid, the higher leverage issue is really refocusing our sales and marketing efforts in the U.S. in ways that will allow us to grow PD share and regain that kind of position over time.

As you know, we appointed a new head of our global Renal business, Bruce McGillivray, midyear '04. Bruce had previously run the Renal business in Europe, and frankly did an outstanding job in terms of moving the needle if you will relative to PD conversion versus hemodialysis and so on. Bruce is extremely knowledgeable and passionate about the business. He's a very, very good marketing executive.

It is one of our biggest challenges. If you look in the first quarter PD results obviously down versus prior year. That is really a continuation of what has been rather soft performance in the U.S. market over the last couple of years. I will tell you -- and actually Bruce will expand on this at some length at the investor conference in May -- this is a very high priority, is how do we regain our footing and frankly get back to the basics in the U.S. market that were instrumental in enabling us to build the PD franchise in the U.S. going back well over 20 years ago.

So your observation in that regard is on target. Hopefully the reimbursement change that you cited, Robert, will be helpful. But this is one that very much gets back to again what I call good old-fashioned blocking and tackling. I'm confident we have the right leadership in place to do that.

Your second comment on the higher-level dynamics in international, obviously we are encouraged by the first-quarter performance in international markets. The geographic dimension of expansion of our businesses is something also that we will expand upon in the May investor conference.

An example is John I actually were in China a couple weeks ago for the better part of the week, meeting with our team in China. I use that as one example. It's obviously a very popular example nowadays. But the potential in China for the basic core businesses that we are in, in meeting basic healthcare needs, is tremendous. It's tremendous over time.

The notion of geographic expansion is a very important element of our growth strategy going forward. I have commented previously in these forums and to many of you one-on-one that I think oftentimes it gets overlooked that the most effective in the nearer term sale to make is products that you have today that you have not fully exploited in markets which are not highly penetrated.

I will use the example of PD outside U.S., where you have got less-developed infrastructures on hemodialysis centers and so on, like markets like China and India. We plan -- we are there first with PD; we are investing in the opportunity to establish peritoneal dialysis as the therapy of choice.

And a good model of that is actually what has happened in Mexico. Today over 70% of dialysis patients in Mexico are on PD, largely because we got there early before there was an established infrastructure in hemodialysis. That is a very large and profitable business for us today in Mexico. We think that that is an indication of what we can do in other emerging markets.

So again I will stop here; we will expand on this further in May. But suffice it to say that the element of geographic expansion, globalization of our businesses of medically necessary products, is a very important aspect of our growth strategy going forward.

Thank you.

Operator, we have time for one more question.

Katherine Martinelli from Merrill Lynch.

One just quick housekeeping. Just want to make sure I have tallied it up right. It sounds like about 40 million of onetime sales if you will or timing of sales that got pushed into the first quarter, between the Renal sale, the government order, and the plasma tenders. Is that correct?

Yes, that is about right.

Just wanted to go back to your comments on Renal and specifically some of the new home hemodialysis technologies that have emerged. Are you guys reevaluating that market? Or is the focus going forward going to continue to be primarily on PD and driving those penetration rates versus a re-evaluation of the home hemodialysis market?

Actually the answer to both those questions is yes, actually; and they are not really conflicting. We believe long-term movement to the home, whether it's HD, obviously PD, but by definition is going to be a fundamental underlying global trend of dialysis therapy. Obviously, given our franchise and our strong global position in PD, we will ride that trend going forward.

Having said that, I will say we are going to intensify our focus in our core PD business going forward. Again Bruce will expand on this in May. Having said that, this segment of the emerging home therapy including HD in the home is something that we are evaluating very thoroughly at this time.

Great, thank you. Just lastly, you touched on it on the call, Bob, regarding the warning letter. Could you just give us a little bit more color? Because it sounded like it wasn't so much the steps that you had taken in terms of corrective action, but rather documentation issues. How comfortable are you that it is fixed? Or when you talk about legacy issues not tied to the P&L and the like, is that some of this documentation that you guys feel like you have more work to do on? Just want to get a comfort level about the warning letter.

I don't want to expand too much on the specifics of the warning letter. First and foremost, I am stating the obvious. Clearly we're disappointed to get a warning letter from the FDA. But I think the reality is there really are not any issues that the agency cited that we have not already been working to address.

I will tell you from day one when I started last spring it was a priority broadly throughout the Company, just because it's the right thing to do. I think we have made progress on quality and regulatory processes, as well as, frankly, processes, business and administrative processes of other types.

As some of the issues got to the warning letter in the Tampa facility specifically, Katherine, a number of the issues frankly have already been fully resolved to the agency's satisfaction, which they actually referenced or indicated in the letter that they sent us.

The other ones clearly we're in the process of addressing. I would say the ones that are still open are more a result of more systemic types of initiatives. But again I think we're making great progress there. It goes without saying we're going to collaborate very closely with the agency, the Orlando district office, where the Tampa facility resides, to make sure all these issues are appropriately addressed.

So you can be assured it is front-burner issue with me and the Company, and I am confident we're going to move ahead to get these issues addressed.

Thank you very much.

Thank you, everyone.

See you all in May.

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