百特醫療 (BAX) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Baxter International's fourth-quarter cash flow and earnings conference call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. (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 would now like to turn the call over to Ms. Mary Kay Ladone, Vice President Investor Relations at Baxter International. Ms. Ladone, you may begin.

Thank you, Crystal. Good morning and welcome to our Q4 2005 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International and John Greisch, our Chief Financial Officer. Before we get started, let me remind you that this presentation, including comments regarding our financial outlook, new product development and regulatory matters, 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 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. 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 the our website. Now I would like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning, everybody. We are pleased this morning to again report very solid progress in the fourth quarter on the key operating and financial parameters on which we have been focusing our efforts over the past 18 months. Not only did we exceed our EPS guidance for the fourth quarter, we continue to make progress on improving the profile of our P&L with year-to-year improvement in both gross margins and operating margins for the fourth consecutive quarter. As John will discuss with you later, this is a trend we project will continue throughout 2006. Generation of free cash flow continues to exceed estimates attributed to the focus throughout the organization on aggressively managing working capital as well as capital spending. Our financial strength and financial flexibility have been enhanced significantly throughout 2005 as a result of these efforts and other balance sheet initiatives which we have discussed with you earlier.

Clearly our major challenge continues to be the status of the Colleague pump and I'm going to address this situation in some detail after John takes you through the specifics of both our fourth-quarter results and guidance for 2006. But before turning over to John, I do want to spend a couple of minutes discussing progress that we are making in accelerating new product launches and new product development.

In 2005, we steadily increased our investment in R&D with growth of 6% in the second half of the year. In going forward, we anticipate the trend of R&D spending growth exceeding revenue growth to continue. We are also encouraged that the pace of new product approvals and launches have increased from the previous year. In 2005, we also accelerated our business development activities resulting in 20 new partnerships or collaborations.

So just a quick summary of some of the fourth-quarter highlights. In the fourth quarter, the FDA approved Flexbumin, the first preparation of human albumin to be packaged in a flexible container. We also received approval for TricOs T, a bone void filler, which represents Baxter's first commercially available orthobiologic product in the US. We also received approval in the fourth quarter for Hylenex, the first proprietary recombinant human [hyaleribase] that temporarily breaks down hyaluronic acid under the skin allowing for increased absorption and dispersion of other fluids and injectable drugs.

As you know, we also launched Sevoflurane, the world's most widely used anesthetic in China in December and recently launched the product in Japan. We plan launches for Sevoflurane in the U.S. in the first quarter and phase launches in Europe throughout the rest of the year. As you all know, with the addition of Sevoflurane, Baxter is now the only company to offer all three modern inhaled anesthetics globally. Sevoflurane, Suprane, our proprietary inhaled anesthetics and Isoflurane. And finally, just yesterday, we received approval from the European Medicines Agency for KIOVIG, our liquid IVIG, which we will begin to launch in the first quarter throughout Europe.

We also in the first quarter received very promising results from our U.S. clinical trial investigating the use of adult stem cells for severe coronary artery disease utilizing our Isolex stem cell separation technology. And we will be initiating phase II trials in the first half of 2006 and I will tell you we have committed significant R&D funding next year to support the continued development of this exciting program.

And finally, we entered into in the fourth quarter a number of new partnerships expanding our development capabilities in our biosurgery business. These new partnerships include a major follow-on research and commercialization agreement with Kuros AG to develop and commercialize a portfolio of hard and soft tissue repair products and a new agreement with Innovata Plc, which provided us a global license for Adept, an adhesion reduction solution for use in obstetric and gynecologic surgery. All in all, I am very encouraged that we're starting to, as I call it, elevate our game into both new product and new business development activities across all of our businesses.

So at this point, let me stop. I'm going to turn the call over to John for a detailed review of our fourth-quarter results and also guidance for 2006.

Thanks, Bob. We have got a lot to cover this morning but before providing our outlook for 2006, I will start by reviewing with you our financial results for the quarter, including the impact of special charges that are reflected in our GAAP results and then discuss our adjusted earnings.

As you saw in the press release, our GAAP earnings per diluted share were $0.46, which include after-tax special charges totaling $85 million or $0.14 a share. The special charges reflect several items, all of which have been previously communicated and you'll find these charges, which are detailed on page two of the press release, include an after-tax charge of $13 million related to the decision to discontinue hemodialysis instrument manufacturing in our Tampa, Florida facility. This is expected to be the final charge related to this action with a cumulative after-tax charge now totaling $33 million in line with our previously communicated expectations.

Also included is a $34 million charge related to the withdrawal of the 66D multi-therapy ambulatory pump, which was announced on November 15. $10 million for the cost of early debt retirement during the quarter and $28 million for the final adjustment to the tax expense related to the repatriation of unremitted foreign earnings. Excluding these charges, fourth-quarter EPS on an adjusted basis, was $0.60, which exceeded our guidance of $0.56 to $0.58 per share due to the lower tax rate of 20% for the quarter. For the full year, excluding the impact of special charges and other items, adjusted EPS was $1.92.

Let me walk you through the P&L starting with sales. First, sales for the full year totaled $9.8 billion, a 4% increase, including two points from currency. For the quarter, sales were about $2.5 billion, a decline of 3% on an organic basis in line with our guidance and down 4% including currency. As expected, our fourth-quarter sales were negatively impacted by several significant items. Sales in med delivery were lower due to the impact of the Colleague infusion pump hold, the impact of generic competition for Propofol and the difficult comparison resulting from the $35 million government biodefense order in the fourth quarter of last year. In addition, the exit of several lower margin businesses, specifically the renal service business in Asia and the reduction of our third party plasma sales, impacted our fourth-quarter comparisons. In total, all of these items affected sales comps by approximately $175 million for the quarter and $270 million for the full year.

Offsetting these factors was solid growth in our bioscience business driven by continued patient conversion to Advate, the new American Red Cross agreement and continued pricing improvements for plasma proteins particularly following the introduction of liquid IVIG in the United States. Geographically our U.S. sales were done 11% as many of the factors I previously mentioned impacted our U.S. performance. Excluding these items our U.S. sales are up about 1 point while international sales increased 4% organically and 2% after currency.

Turning to the businesses med delivery sales for the full year were approximately $4 billion, down 1%. Organic sales were down about three points consistent with our expectations. For the quarter sales totaled about $970 million and were down about 14% while in terms of specific product categories infusion system sales of $194 million were down 25% as a result of the hold on Colleague pump mentioned earlier. Colleague sales were approximately $60 million in the fourth quarter of last year. Sales of our access systems or disposable sets which are reported in our infusion system's product category were up slightly more than 2% in the quarter and for the full year in line with overall market growth. So despite the Colleague hold we have maintained a steady level of disposal sales throughout the year.

In our IV therapy business sales of $316 million were up about 2%, while sales growth in this market leading segment was the result of strength in our U.S. IV solutions business where sales growth was up over 10% the strongest growth of any quarter for the year. Drug delivery sales of $196 million were down 22% as expected due to the impact of generic competition for Rocephin and a tough comp for last year with the $35 million biodefense order from the U.S. Government.

And finally anesthesia sales of about $250 million were down 14%. The impact of generic competition for Propofol was offset by growth of Suprane and our multisource generic portfolio. For the full year Propofol sales trended in line with our original expectations but were down approximately 50% in the fourth quarter. Suprane our proprietary inhaled anesthetic ended the year with sales of more than $200 million, an increase of over 15%. But despite the challenges with Colleague we have made good progress in med delivery during the year. We completed the capacity expansion for our syringe filling in Bloomington and launched Sevoflurane in China as Bob mentioned. We also continue to advance towards the commercial launch of Hylenex in 2007 with our partner Halozyme and we made further progress in our enhanced packaging product offerings CLEARSHOT and SOLOMIX that will be available in 2007.

Looking at renal sales for the full year we are approximately $2 billion, an increase of 3%. Organic sales here were flat consistent with our expectations due to lower HD sales and the exit of the lower margin RTS Asia business. Global PD sales are up 6% for the full year including 2 points of currency. In the quarter renal sales declined 2 points to about $510 million; in the U.S. sales of $96 million were comparable to prior quarters on a sequential basis but down 7% from the prior year due to continued industry consolidation and reduced lower margin HD sales. International sales were down a point as the impact of the RTS divestiture offset strong PD sales. International PD sales were up 5% in the quarter and 8% for the full year driven by strong patient gains in Latin America, Asia and Europe. So summary in renal had a very solid year as we exited several lower margin businesses. Going forward our primary focus will continue to be on strengthening our global market leading position in PD through partnering with many governments around the world to establish PD as the first line of therapy for patients with end-stage renal disease.

BioScience sales for the full year were up 10% to nearly $4 billion. Organic sales growth of 9% for the year exceeded our original expectations. For the quarter sales totaled about $1 billion with organic growth of 8% offset by 2 points of currency. Sales for our core bioscience business were $870 million an increase of 11% on an organic basis while sales of transfusion therapies were down 5% to about $140 million. The recombinant business delivered a very solid year with worldwide sales of over $1.5 billion, a 15% increase over last year. Much of this increase can be attributed to continued conversion to Advate with 2005 sales of just over $600 million in line with expectations. In the quarter recombinant sales totaled $394 million including Advate sales of approximately 174 million. Advate accounted for approximately 55% of our global recombinant Factor VIII sales during the quarter with a 75% conversion in Europe and approximately 40% conversion in the United States. Sales of recombinant products are up 22% in Europe, for the full year 2005, while sales in our U.S. recombinant business were up 7% for the full year but down 3% in Q4 from last year, off an unusually high comp.

Turning to the plasma business antibody therapy sales were up 35% to approximately $450 million. Sales in the quarter were up 75% to about $150 million driven by the impact of our new plasma procurement agreement with the American Red Cross, and improved pricing which was further strengthened following the introduction of liquid IVIG in the United States. Plasma protein sales were approximately $1 billion for the year, down one point compared to 2004 while sales in the quarter totaled $256 million, down 8% primarily due to lower plasma sales to third parties and the loss of contract manufacturing revenue from the American Red Cross.

Our biosurgery business, the portfolio products that include several wound management and tissue sealing products including Tisseal, [poseal] and FloSeal ended the year with sales of more than $260 million up over 16% from last year. So in summary BioScience had a great year exceeding our expectations; Advate conversion is very encouraging particularly in Europe along with steady gains in the United States. In addition plasma market dynamics have been consistently improving allowing for improved performance and double-digit increases in many of our specialty therapeutics including IVIG, Sevoflurane surgery business. With continued Advate conversion, the full year contribution from the American Red Cross agreement and the global launch of liquid IVIG together with continued double-digit growth in our specialty therapeutics, we are very well positioned to once again deliver strong results in 2006.

Turning to margins our adjusted gross margin in the quarter of 46.2% improved by over 3 points compared to last year driven by restructuring savings and higher margins in bioscience largely the result of the Advate conversion strength, improved IVIG pricing and improved mix. This is the fourth consecutive quarter we have achieved year-over-year improvement in gross margin and our Q4 margin represents the highest gross margin percentage we have seen in the last three years reflecting our commitment to continued margin expansion over the long-term.

SG&A for the quarter of $520 million was up 4% over last year. Savings achieved from our restructuring initiative which is now largely complete were more than offset by increased pension expense and increased spending in marketing programs primarily in our bioscience business.

R&D for the quarter totaled $134 million an increase of 5%. This growth reflects double-digit increases in bioscience primarily as a result of the new long-term research and development agreement with Kuros that Bob discussed earlier. As a result of gross margin expansion our operating margin of nearly 20% improved a full point compared to last year; again improving over the prior year for the fourth consecutive quarter. For the full year in line with our guidance operating margin of 17.3% was up more than a full point reflecting our focus on driving profitable and sustainable growth with operational discipline.

As expected interest totaled $23 million, a decline of $10 million from last year as a result of the reduction in debt and higher interest income and sundry which was an expense of $1 million was in line with the fourth quarter of last year. And as you know among other things this category includes expenses associated with the translation impact of foreign exchange which was $11 million higher than last year. This higher expense was offset by litigation settlements and several other items.

So to summarize our adjusted earnings for the fourth quarter and full year were $0.60 and $1.92 per diluted share, respectively. Turning to cash flow we had a very strong year. Excluding the $400 million U.S. pension contribution in the fourth quarter cash flow from operations totaled $2 billion, well ahead of our guidance of $1.7 billion. This also represents nearly a $600 million improvement over 2004. Capital spending totaled $444 million, down from about 506 million in 2004 while free cash flow of 1.5 billion excluding the fourth quarter pension contribution reflects an improvement of more than $650 million compared to last year. The most significant change throughout 2005 in our free cash flow performance is the continued focus on improved working capital management.

DSO of 55 days was comparable to last year; however cash flow from our securitization programs was reduced through the year with an outflow of approximately $150 million. Inventory turns were also flat to last year as improved performance in bioscience and renal was offset by higher inventory and medication delivery largely due to the Colleagues hold. We continue to be very encouraged by the reductions in our plasma business where inventory again declined over $175 million for the year. Cash flow from receivables and inventory represented an inflow for the Company of $266 million during 2005 compared to an outflow of $156 million last year, a turnaround of over $400 million from these two specific categories reflecting efforts across the Company at improving our returns on invested capital.

For the year debt was down by approximately $1 billion and we ended the quarter with a reported net debt to cap ratio of 36.7%. As you may recall in prior quarters our net debt to cap ratio reflected a pro forma adjustment for 70% of the expected equity issuance in February 2006. Since we retired about $1 billion of the debt associated with this equity security in November the pro forma adjustment is no longer made. We will however issue $1.25 billion in equity in February and adjusting for this mandatory offering, our December 2005 net debt to cap ratio would have been 18.3%, a significant improvement from this time last year.

Clearly we have made some great progress here with our working capital management and cash flow focus over the prior year and we are committed to continuing our capital allocation disciplines as we move through 2006. Finally let me conclude my comments this morning by providing our outlook for 2006. First as you saw in our press release given the uncertainty surrounding the timing of the resolution to the Colleague situation we have decided to exclude any pump sales for earnings contribution from Colleague in our 2006 outlook. Our outlook also excludes the impact of any charges for additional remediation actions or cost that may be required for the Colleague pump beyond those taken to date. In addition our guidance excludes the impact of stock option expense which we estimate will be approximately $0.08 to $0.10 per diluted share for 2006. Pro forma option expense for 2005 is expected to be approximately $0.09 per diluted share. So excluding Colleague and the impact of the expensing of stock options we expect organic sales growth for the full year between 4 and 5% and adjusted earnings per diluted share from continuing operations of between $2.08 and $2.16 per diluted share. We also expect to generate cash flow from continuing operations of approximately $1.9 billion with free cash flow of approximately 1.4 billion after roughly $550 million of anticipated capital expenditures.

With strong cash flows in 2005 and expected in 2006 we are in a very strong position to pursue acquisitions and share repurchases as we move through 2006. More specific let me get back to our earnings guidance starting with sales. We expect currency to negatively impact our reported sales growth for the full year by approximately 2 points based on current rates. Obviously the majority of this impact will affect the first half of the year. By business we expect organic sales growth in bioscience between 10 and 12% with transfusion therapy sales expected to be flat for 2005. With our core bioscience business growing in the 12 to 14% range. This growth is a result of continued generation of Advate, global launch of liquid IVIG and the incremental benefit of the American Red Cross agreement.

By product category we expect our recombinant sales to once again grow in excess of 10% as we continue to see strong patient demand and we expect Advate sales for the year to be approximately $900 million. We also expect strong antibody therapy sales of approximately $700 million and continued midteens growth in our biosurgery business. Offsetting these growth drivers is expected flat growth in our plasma protein business due to the termination of the contract manufacturing earnings with the American Red Cross and the continued reduction in lower margin third party plasma sales. In med delivery we expect organic sales to be between flat and up 2% for the year; this again assumes no contribution from Colleague as that assumption negatively impacts our organic growth by about two percentage points in med delivery. As previously communicated, Colleague sales in 2004 totaled $170 million and sales in 2005 during the first half were approximately $85 million.

By product category we expect infusion system sales growth to be down in low to mid single digits due to Colleague and IV therapy sales will be up in low to mid single digits for the year. We expect drug delivery sales growth to be up in the mid single digits as the impact of generic competition for Rocephin in the first half of the year is more than offset by the accelerating demand for our syringe filling capacity in Bloomington which will have product commercially available by midyear. Finally, we expect our anesthesia and critical sales growth to be flat in 2006 given the impact of generic competition for Propofol which will be offset by continued growth of Suprane and Sevoflurane.

In renal we expect organic sales to grow between 1 and 3% for the year with mid single digit growth in PD offset by declining lower margin HD sales. PD growth will be driven by continued patient growth of between 5 and 7%. In terms of margins we expect gross margins and operating margins to accelerate and improve sequentially throughout the year. Gross margin is expected to improve by approximately 100 basis points driven primarily by lower costs related to our cash flow hedges and improved margins in bioscience given the Advate conversion and the continued introduction of liquid IVIG. The significant progress we made in improving our balance sheet earnings and cash flow in 2005 provides us with considerable flexibility to make select investments in marketing, particularly in bioscience and anesthesia critical care businesses and accelerate our investment in R&D as Bob mentioned during the year. We expect R&D to increase for 2006 by approximately 10% as a result of increased spending in our recombinant, biosurgery and drug delivery businesses.

Overall, we expect operating margins for the full year to be approximately 18.5%, reflecting a year-over-year improvement of over 100 basis points. In addition given debt reduction in 2005 and the expected equity issuance in the first quarter of 2006 and strong cash flow for the year we expect interest expense year-over-year to be reduced by approximately $50 million. So as I mentioned previously this results in earnings per share guidance for the full year of between $2.08 and $2.16 excluding stock option expense and any special items.

We will take a moment to summarize a couple of other additional points relative to our guidance. First, restructuring savings of approximately 10% for the year are partially offset by select investments in marketing and promotional activities, increases in pension and other benefit costs and higher R&D spending. It is interesting to note that our pension and other benefit costs have increased from approximately $15 million in 2002 to over an expected $220 million in 2006. An incremental impact of more than $0.20 per diluted share over this period. Second, given our success in driving Advate conversion particularly in Europe we are assuming a tax rate for the year of between 20 and 21% in line with the second half of 2005. Lastly, (indiscernible) in February 2006 we expect to issue approximately 35 million shares based on today's share price in conjunction with our equity unit security. The dilution from this issuance is partially offset by the lower interest expense I mentioned earlier and for the full year we expect diluted shares outstanding to be in the 660 to 670 million share range.

Finally for the first quarter we expect organic sales growth between 2 and 3% and adjusted earnings per diluted share from continuing operations to total between $0.41 and $0.43 a share. Again, this first quarter guidance excludes the impact of stock option expense which we estimate to be between $0.02 and $0.03 a share for the quarter. With that let me return the call back over to Bob.

Thanks John. Before we open up to questions this morning I would like to spend just a minute or two updating you all on the current situation with Colleague. We know you're all anxious to get some clarity surrounding the matter as are we and I think more importantly we are concerned about providing direction to our hospital customers as it relates to the timing of remediation efforts and also our ability to meet demand for new devices.

While unfortunately we're not in a position to lay out a specific timetable today let me take just a minute to update you on the progress that we have made since our last call. First of all, as expected, we did complete the validation of the two major remediation items, both the Y2A Crystal circuit boards that we discussed previously and also the Vista balance software and those were done during the fourth quarter. And in fact on December 27 we submitted a 510-K to the FDA for clearance of these two product modifications. And these submissions are currently under review by the agency.

We also continue in active discussions with the U.S. Attorney's office to resolve the issues that were related to the seizure action that was taken by the FDA in October. In addition we have had very constructive dialogue with regulatory bodies in Europe, Canada and Australia regarding the timing of our product remediation efforts and just to refresh your memory about 20% of our installed base, our Colleague, are in markets outside the U.S.

Finally, we have manufactured about 20,000 pumps to be staged and used as a conversion pool of sorts to support the remediation efforts and we are also in the process of adding over 300 new service personnel to support the activity once we get going. So as John mentioned in his comments, given some of the uncertainty which remains we have elected not to include the impact of any new sales of Colleague in our 2006 guidance. And I think all things considered this is a prudent tact to adopt at this time. To reinforce what I said to you the last call every effort continues to be made within the Company to address these issues as soon and as effectively as possible. I do feel we are gaining traction toward resolution and hopeful we will be in a position to communicate more specifics shortly. So with that Mary Kay why don't we open up the call for questions.

Can we open the call for questions please?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Rick Wise with Bear Stearns.

Let me start off with a couple of broad questions. Your guidance for '05 has an $0.08 spread. The same kind of range you gave us in '04 roughly, sort of $0.08 and it narrowed throughout the year ultimately you worked to beat it. I would like to ask you first will we see the same pattern in '06, but maybe the more helpful question is where could the upside come other than Colleague? Is it sales? Is it margins? Is it lower expenses? Maybe help us understand the moving pieces.

There is a lot of moving pieces I guess and for every upside I suppose we could talk about a downside. Your question implies that there's upside to the guidance and I think the appropriate thing to say is we think the guidance we are providing at this stage has a nice balance Rick, in terms of all those upsides and downsides as we look out through the year. Obviously our decision to take Colleague out for the entire year removes a risk factor, at least in terms of the financials for 2006. You know there are so many moving parts I am not going to get into detail. I think that I will just simply state that I think the guidance we are providing is well balanced. John I don't know if you want to add anything to that.

Just a couple of things. Obviously we're pleased with '05 having come in where we did relative to where our guidance was for the year. But your initial question of, can you expect a similar narrowing of the guidance throughout the year, I would rather not speculate on that. As Bob said we have given a range that we are comfortable with given all the puts and takes for the year and as you know there are a lot of moving parts here. So we will see how the year unfolds but we are confident with the guidance that we have laid out for the full year at this point.

And just two last questions. One, with the restructuring complete are there other meaningful cost-cutting opportunities? And last Bob, you talked of elevating your game in '05 with the partnerships and new products. How do we think about '06 and how should we measure success in '06 similar number, accelerating number? What should we expect to see?

Let me start with your second question first and then I will comment on the cost question. I would expect our pace of new product development to accelerate in '06 versus '05 as I commented that happened in '05 versus '04. A big piece of this is as we sit here today we still have new global business heads that -- Joy Amundson has been in her position the longest; less than 1.5 years. Pete Arduini joined us in the last year. Bruce McGillivray has been in his role for about a year and a half. So a big piece of this is getting the senior line management team in place. And the first order of business is to get your arms around the business dynamics but clearly a big part of what they do is look for ways to accelerate growth out in the future. And that is enhanced productivity and R&D internally augmented by the right kinds of business development deals.

And so the reason I commented on that in my prepared comments is I think it is very encouraging to see the pace that picked up in '05. Candidly I would expect that pace to accelerate as we continue to get a lot of these kind of legacy issues behind us. We deal with those obviously; increasingly we are going to focus on what are things we can do to possibly affect the top line. So that would be my comment on your second question.

First question, I mean I would like to think -- in fact I know that culturally the focus has intensified on cost-cutting in all areas of our business day in and day out. That is going to continue. In fact I think that's going to continue to intensify. If your question is gee, are there any more significant restructuring programs down the road -- nothing is planned certainly for '06 and I don't think anything of the magnitude in terms of overhead costs that we took out in '03 and '04. That was a major undertaking. We're pleased that we met our projections and we are more than pleased that we have that fundamentally behind us as we speak.

Having said that, I think a company like Baxter with as many operations as we have around the world manufacturing and the like, we're going to continue to look at ways to rationalize manufacturing and stay focused on our cost position. That is especially important as you know in the last year or two where a lot of our products are getting hit by worldwide oil prices that affect costs of resins and so on. We incurred more purchased price variance negatively of our raw materials in '05 than we have in years; we don't talk a lot about that. We basically covered that with other operating performance and hopefully that will get a lot of that behind us in our base as we move into '06. But in our manufacturing core we're going to continue to look for opportunities to make meaningful impact in ongoing cost reductions.

Glenn Reicin with Morgan Stanley.

I have a couple of question; I will just lay them all on the table here and you can answer them however you want. Firstly, with respect to pricing in bioscience you previously have stated that between the years 2002 and 2004 you lost roughly 200 million pretax from erosion of pricing of plasma. How much has been recovered since that low point? How much is left? Question one.

Question number two, flat anesthesia sales for 2006 looks conservative especially with the Sevoflurane launch. What are you anticipating in terms of share for Sevoflurane in 2006? And then finally just a housekeeping question, I see on your tax flows there was a large outflow in the fourth quarter, 283 million. Just want confirmation that that is really due to the pension contribution of 570?

Okay -- I will have John address the cash outflow in a minute. Let me take your first two questions I guess in reverse order here. Flat anesthesia. Obviously you have got mixed dynamics. We continue as you know to absorb the downslide of Propofol and that is a big number. That is a big number offsetting that of course is continued momentum with our inhalation anesthesia business. I think we're encouraged by the momentum that we are getting first of all on Suprane, our proprietary product as John mentioned up about 15% in global sales in 2005. I would also tell you that that is an area in both Europe and the U.S. we have invested in terms of expanded sales force indicating a couple of things. One, the opportunity that we think exists to continue to grow our proprietary product Suprane. But obviously inhalation anesthesia as an area of strategic focus for our medication delivery business.

As it relates to Sevoflurane specifically we're not going to get into the details and disclose share projections. We all know that is a significant opportunity and I won't be redundant with the launches that you already know about. Those will rollout throughout the year 2006 as we balance available capacity with launching and markets. And I think the one thing we're very sensitive to as we rollout Sevoflurane is to maintain a discipline so that when we launch in a market we are sure we can support the uptake of that product throughout the market. And it is not just the availability of Sevoflurane, but it is also orchestrating the vaporizer component of this which you are aware of. So we are really not to get into detail of anesthesia. But back to your question you know you get net effects, you got Propofol which is down, inhalation anesthesia which is up is going to continue to grow hopefully as we move into '07, I certainly would anticipate that. The upward arrows will more than offset the downward arrows and this will be a growth vehicle for us going forward.

And how big is Propofol now?

I don't know -- I mean I know but do we disclose that --?

'05 is just over 200 million. That's clearly the biggest factor in the guidance for anesthesia, the reduction there.

Likewise on the question on pricing and bioscience we're not going to get into quantifying specifically how much price change there has been over a defined period, both the downslide you quoted and the momentum that continues to evolve on the upside. Obviously it is and we anticipate will continue to be a contributor to growth in the plasma protein business as well as the overall bioscience business going forward, hopefully into '07 and beyond. And beyond that I don't really want to get into too much detail or talk about pricing. (indiscernible) cash flows, John, you want to address that?

You are right, Glenn that 283 other cash flow is driven by the U.S. pension contribution in the fourth quarter.

Okay. So you would have been flat to up year-over-year without that contribution? And cash flows?

For the quarter.

For the quarter.

Yes, roughly.

Mike Weinstein.

A couple of quick questions for you. The Wyeth supply of recombinant Factor VIII when do you expect that to work its way through the inventory?

Not until '07 Mike. I think as you know the delivery of the bulk that we got in '05 came late in the year and all of that will not be bled off during '06. So that will impact '07 to some degree.

And the current CSF contracts and principally on the euro (multiple speakers) in the second quarter?

I'm sorry Mike. What was your question; when did they run off?

Yes when did they run off.

Yes the impact in '05 was about $60 million. It will be half that in '06. It is pretty flat across the year so they end the old $0.92 euro hedges end in the fourth quarter and it is roughly $7 to $8 million a quarter.

And then last question with Colleague the remediation process and expense that will incur, how much of that is already taken in the charges you have taken for Colleague and how much of that will we see in the income statement this year?

The remediation that we are aware of that needs to be done as of now Mike we have taken completely in 2005. So the planned remediation was taken in that charge in the charge I believe it was in the second quarter. So everything that we are aware of that needs to be done to the pump has been covered.

I don't want get too much into your discussions with the agency but does the issue around Colleague principally resolve around your ability to sell new pumps during the remediation process and to whom?

We really don't want to get into that Mike, this morning.

That's fine. I appreciate it.

Glenn Novarro from Banc of America.

A qualitative and then maybe a quantitative question. Qualitatively can you talk to us about how with the Colleague recall, maybe how the relationships are going between you and your customers? And then quantitatively should we assume that it looks like in the first half of last year, you did what 85 million in revenues for the Colleague? Should we assume that that run rate comes right back when you come back into the market, or should we assume some market share loss. And then lastly are there any big hospital contracts coming up that the Colleague not being on the market would hurt you?

Let me address those in reverse order. Most of our long-term contracts -- most of our existing contracts for Colleague obviously involve IV solutions, IV sets, secondary delivery systems and the like as you know kind of this bundled approach. So Colleague and the associated disposable sets tend to be part of that contractual model. The majority -- I mean the vast majority of those contracts extend way out in the future so there is no major contracts that are coming up in '06 for renegotiation.

Quantitative, the quantitative part of your question yes, assuming that we can continue to secure the account base which I will expand on further in the first part of your question about the customer situation right now which has largely been the case todate, yes I mean in essence what this is is what I would characterize as deferred demand. It is not lost demand. But of course that is only a byproduct of our ability to continue to maintain our account base with Colleague. And of course that gets back to the issue of the timing of the remediation and so on. I would first of all say generally our customers have been very supportive, very understanding of the situation. We obviously are frustrated in our ability to -- inability to communicate a definitive timetable at this point. But we are doing our best. So I mean we have been treading water on this as you know for six months. As I indicated in my prepared comments hopefully we are approaching early quickly the first phase of this which is to initiate the remediation activity which I think will take a lot of the pressure off. Because there were actions which were taken in 2005 and the customers are logically sitting there saying, hey, these issues were communicated, you got issues, will you fix them. And when are you going to fix them. So that is clearly understandable and a reasonable expectation.

But at the risk of generalization that that is really what you have to do; I mean actually I would say our account base at this stage continues to be very stable, but I think the level of patients with every month that goes by continues to become increasingly diluted. So it clearly is not at a catastrophe stage or anything close to that at this point. Candidly I think there are a couple of accounts that we have lost. It hasn't been major erosion. So assuming we can continue to maintain the installed base, move forward with the remediation activities hopefully sooner rather than later, we ought to be in a position then over time to deal with that deferred demand at the appropriate time. But again back to our guidance, given everything that has to be done we took a position that we thought was prudent for financial planning for '06.

So in other words if let's say you get cleared to bring the Colleague back fully online in June of this year, putting 85 million in revenues into our model probably not a good thing maybe something in the 75 or 70 million --

I think we've got to be very direct with all of you. This remediation effort is a significant undertaking. Frankly, these are continued to be some of the details that we work through. We want to do it once and we want to do it right and we are aligned with the agency in terms of that as an objective. And I don't want to get into too much detail but anytime you talk about software changes and things like that it is not like you have got one product. You have got multiple products in the field, monochrome and the colored version of the pump. You've got different generations of the pumps.

What we don't want to do on this thing is move ahead prematurely until we've got everything buttoned down. There have been other examples with other companies that have moved that to do fixes in the marketplace and in the process created other issues. And so both the agency and of course we are very sensitive to that. I don't think that it's realistic to expect that we're going to be in a position to begin selling Colleague again, so we've made substantial progress first and foremost with remediation efforts.

So given the scope and the complexity of that activity that is the area that we're focusing on right now. And as a result, again, I think it would be premature to plan on sales in '06 for Colleague.

Brian, once we know the timing we'll come out with our expectations. But again, as Bob said, we've chosen not to speculate either on the timing or the impact once the timing occurs. But obviously once we get that agreed to and we know the timing we'll be able to answer your question more specifically.

okay, thanks. Very helpful, guys.

Ben Andrew with William Blair.

Just a follow-up on that specific question. So is it fair to say that the additional six-month delay that you're kind of assuming in the model relates to the need to, again, get a big chunk of that remediation in the field done before you begin selling it, I think that's what you said?

Well, Ben, frankly first I'm stating the obvious here. It depends upon getting a remediation plan agreed to with the agency so we can move ahead. That's the first order of business. Then obviously, as I said a minute ago, the complexity of that and the scope of that undertaking is fairly daunting. I mentioned in my comments we're adding 300 service people. We've got 20,000 pumps ready to go to use as a conversion pool.

And again, not to be redundant, but our focus is on the remediation and I really don't want to speculate as to the next phase which is, okay, when can we begin commercializing pumps again. And I think commonsense would say "fix the issues that exist before you get in the business of responding to existing demand" -- or new demand, if you will. So we're kind of doing this as a stage approach, first things first.

Sure. In terms of the remediation program, though, is it fair to say that's going to take you upwards of a year to get to all the pumps in the field.

I don't really want to at this stage define how long that is going to take. And really I don't know, we don't know at this stage exactly. We are obviously committing the resources both in terms of inventory and people to do it; we to want to get at it as quickly as possible. I can assure our customers and the agency want the same thing.

Katherine Martinelli with Merrill Lynch.

I hate to beat the Colleague issue to death but I just wanted to ask in terms of what you are conveying to customers; are they getting a similar message today that they should not assume that there will be any pumps out in the field through this year? I understand that you've got contracts that are tied up but I have to imagine that this would be something that could impact the validity for lack of a better word of those contracts.

You got a couple of pieces on this and the focus is on the remediation, the communication with our customers, Katherine through our sales force is totally consistent with what we're communicating today. We're keeping them apprised of our 510k submissions. How we are preparing resources to initiate the remediation activity and at this stage like this morning, our field force is unable to communicate to the customers when we might be in a position to meet expanded demand for the pump. And that is obviously a source of some of the frustration but it is the best we can do at this stage.

I think you had mentioned in November that you had lost three to four accounts. Any update you can give us on that?

Lost three to four what?

Three to four accounts because --

It's about the same. Yes, it is less than a handful.

And then with the assumption --

And when we say accounts I would say individual hospitals, by the way, not contracts.

And when you say in your forecast for this year exclude any Colleague what are you assuming then for sales of disposable sets?

Actually sales of disposable I guess was roughly flat to slightly positive -- yes, sales in '05 as I mentioned were up between 2 and 3% for the year and our expectation for next year is we continue to see similar levels of growth.

And then in terms of liquid IVIG can you give us a sense of what the conversion rate is at now versus the prior generation and is that kind of a 10, 15% premium.

It's a little higher -- premium or conversion rate?

That was premium.

-- converted in the U.S. John, is that about right?

Yes that's about right.

I'm sorry. Is that 25%?

25% converted in the U.S. to the liquid.

And then just one last question regarding R&D. Back at the analyst meeting Bob you had stated that if you had the extra dollars to reinvest into R&D at that time, the pipeline was really not there as you were kind of going through a rationalization program.

Right.

Has that meaningfully changed, that if you had better operating cash flow or the funds available that we should assume you could invest more in the R&D?

I think you can draw conclusion from the guidance we're providing with double-digit R&D growth next year. Obviously in excess of the top line as a probably an early indication that we are making good progress in our internal processes, productivity and the like. And frankly we have a number of very exciting programs to invest in, a couple of which I commented on in my prepared comments such as adult stem cell program and a number of our formulation technologies including the project we have on inhaled insulin and so on. So things have changed since the investor conference in terms of our -- I guess what I would just simply describe as our internal R&D productivity and also I think the opportunities that we have identified the target. So it is why I indicated that our guidance for next year of double-digit R&D growth or at least R&D growth in excess of top line is something that we would anticipate will continue now if not accelerate in the future.

Bruce Cranna with Leerink Swann.

A couple of things just kind of follow-ups I guess. Just quickly on that last question your comment on 25% conversion to liquid IVIG. Was that a conversion of Baxter accounts or the market or is that both?

That's Baxter accounts.

What do you think the markets in?

I don't know. I'm not sure, Bruce exactly where the market is today with Bayer obviously having the largest liquid position up until we got ours approved. But I don't want to throw out a number that may be off by 10, 15%.

And then just one recombinant question which is kind of I guess from an upper level, just if you could maybe provide some color if I kind of go back over the past couple of years and I look at franchise growth rates I think I get if my math is right, somewhere around 18% growth in '04 and it looks like about 15% or so.

That's about right.

Right.

And so you're '06 guidance it sounds like you want us to be thinking of 10, 12% type of growth for recombinant so the obvious question is is this just conservatism again on your part. Or do you think the space overall has slowed a bit and if so is that pricing or volume or maybe you can add some color there please.

I think it is fair to say that over time the rate of annual growth is going to slow down slightly year-to-year. So directionally we have got it right, I think in ;06 it is a matter of degree. So we will see.

I think what has driven the last two years high-growth rate for the market and for us firstly the market, the plasma conversion in Europe has certainly accelerated over the past couple of years. It is not quite up to the level where it is here in North America but it certainly a lot closer today than it was two years ago. And obviously for us with Advate with the premium price and some share gain that has accelerated our growth rate, our comment for '06 was we expect growth more than 10%. So pricing we expect to be relatively stable and we don't expect any significant changes in our market position for the year.

That's helpful. And then quickly on the -- at the end of '05 here I think the headcount reduction target was I think it was 4000 or something for the year. Can you just remind us is -- what is that I guess number one is, are you done? Did you hit the 4000 for this year and '06 for your assumptions is there more headcount reduction we are factoring in?

There is a couple hundred more and on a global basis Bruce. We are tracking right on the numbers. We're tracking right on the 4000. So we are moving and in essence we are executing I think in lockstep with everything we have communicated from the get go on this.

And then lastly John on the tax rate guidance again for '06; can you just give us some sense there it looks like it is down substantially from current rates. What has really changed there? I assume that is a little bit of geographic mix or maybe some product mix or --.

It is pretty well in line for the rate for Q3 and Q4 and I mentioned that the third quarter call the adjustment that we made for the second half of the year really was driven largely by the tax holiday we enjoyed for Advate sales in Europe. Which had a significant impact on lowering the rates for what had been for the last few years about 24% down into the 20, 21%. So our '06 expectation is in line with where it was for the second half of 2005.

Operator we have time for one more question.

Your final question comes from the line of Robert Goldman with KeyBank.

I have got actually two questions if I can on sales. I apologize if I missed some of the detail in your detail, the commentary in the beginning. On medication delivery in the U.S. it does seem to me that even adjusted for Colleague and Propofol that those sales were still down. Of course I might have missed something so I was hoping you could speak to that, and if in fact they are down give us an idea of what is going on there.

And the second question also on sales relates to PD, peritoneal dialysis. With low single digit kind of sales growth which I think is also your projection for next year I don't get the sense that you are really ramping into the international markets perhaps to the extent that I was hoping for and maybe you could speak to what efforts you are doing on the international front in PD.

Robert, let me take the PD question and then John can take you through the detail on the year-to-year change on med delivery. First of all, I know you understand we continue to work through the intensified focus on PD the collaboration with Gambro and decreased focus or de-emphasis on the HD side which is as you know much lower profitability. So in terms of sales we're going to continue to live with kind of decreasing sales on hemodialysis which is consistent with that strategy. But our focus on PD as you know today over 80% of our PD base is outside the U.S. John mentioned in his comments in terms of guidance for next year patient growth in the 6 to 8% range. And the reason that is growing at that rate is in fact a byproduct of our continued efforts with geographic expansion. I think we discussed this in some detail at the investors conference last spring or last summer.

We continue to get strong double-digit growth in markets like China and so on. So I think we are executing the strategy on renal with particular focus on PD in accordance with what we communicated all along and geographic expansion is and will continue to be a major element of growth going forward. And frankly I think we're encouraged as we look forward to next year to 6 to 8% patient growth in that business.

Robert, on your question on med delivery you mentioned the two big items which were Colleague and generic Propofol competition. The other two items affecting med delivery were one, the $35 million government order we got in the fourth quarter in our drug delivery business in 2004. And then generic competition for Rocephin also when we were making the product for Roche that contract terminated in the second quarter of '05. So excluding those items our IV therapy business growth as I mentioned was the strongest in the fourth quarter for the year and growth for the year in line with certainly the market growth and similarly with our disposable business in infusion systems. So those four items really are clearly one timers if you will for explanations of why the performance appears to be lower than it is. But other than those the organic growth of the business is very much in line with expectations.

And ex those items the U.S. medication delivery was up or down how much?

In the low to mid single digits ex those items.

Up?

Yes, up. Yes.

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