百特醫療 (BAX) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's fourth quarter earnings conference call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. [OPERATOR INSTRUCTIONS] As a reminder, this call is being recorded by Baxter and is copyrighted material. It can not be 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 Miss Mary Kay Ladone, Vice President, Investor Relations at Baxter International. Miss Ladone, you may begin.

Thanks, Sean. Good morning, everyone. And welcome to our Q4 2006 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Rob Davis, Chief Financial Officer. Before we get started, let me remind that you that this presentation, including comments regarding our financial outlook, new product development and regulatory matters, contains forward-looking statements that involve risks and uncertainties and, of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more 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. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now, I would like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning, everybody. We are pleased to be able to again announce outstanding results for the fourth quarter . Not only did we exceed expectations in all key financial metrics for the quarter, but I believe we are very well-positioned as we move into 2007 to not only continue the increasing momentum of strong operating performance, but to focus an increasing amount our attention on R&D and other business development initiatives that will enable us to sustain this momentum in the coming years. Let me make several comments about the fourth quarter results, as well as some other highlights for the period. And then I will turn the call over to Rob for a more detailed discussion of financial results, as well as our financial guidance for 2007.

Clearly, we are pleased with the strong sales results for the quarter. As Rob will describe in a minute, this outcome was generated by not only by the continued strong performance of BioScience, but building momentum in the other businesses, as well. I think of particular note is performance at Medication Delivery, which is now in the early stages of a turnaround from the last three years in this very important business. Once again, we continued to make solid progress with the profile of our P&L, with gross margins improving to 47.6% for the quarter, the highest level in five years. While clearly a big part of that improvement came from the improving dynamics in plasma proteins, it is important to note that every one of our businesses and every one of our geographic regions is generating improved gross margins from the prior year, a reflection of our broad-based initiatives across the Company to build shareholder value through focused execution.

Our strong operating performance for the quarter also allowed us to accelerate the rate of increase in R&D spending, which for the quarter, as you saw, was up 35% from the prior year. This is consistent, as you know, with our strategic objective of increasing R&D spending as a percent of sales going forward. The most significant challenge we are dealing with continues to be the COLLEAGUE situation. Having said that, I am confident that we are making significant progress toward resolution. As we communicated to all of you in mid-December, we did receive conditional approval from the FDA for our corrective action plan. In addition, we submitted an updated 510K at that time which incorporated some additions and modifications that resulted from internal development work and very productive dialogue that took place with the Agency in the proceeding months. As you know, the FDA has a 90-day period to respond to our submission. While I won't speculate on the timing of approval, I can tell that you that the agency has been very diligent and proactive in their review, including around the recent holiday period. The dialogue and interaction with the FDA continues to be very constructive. As we have discussed before, we have resources staged to support the remediation efforts in the U.S. as soon as the 510K approval is granted.

Before closing my comments on COLLEAGUE, let me update you on two other matters. First of all, we have agreed to terms with FDA by which Baxter may now provide a limited number of [loner pops] under the Urgent Need Provision of the consent decree. We are appreciative of the Agency's support and cooperation in this regard. Lastly, in terms of market dynamics,there's been virtually no market share loss since we discussed this subject last quarter. And I think this speaks to a number of things, not the least of which is the relationship of our salesforce with our hospital customers, and I would like to think the trust our customers have in Baxter and Baxter products. Rob will discuss how we've elected to handle COLLEAGUE assumptions in 2007 when he discusses our guidance in just a few minutes.

Finally, we continue to make very good progress with new R&D programs and product approvals and launches. As we'll discuss this subject in detail at our upcoming March Investor Conference, I will provide just a few highlights for the fourth quarter. First, at the American Society of Hematology meeting held in December, we announced the initiation of a therapeutic program for the development of a blood-free recombinant form of von Willebrand factor, a protein critical to the normal clotting of blood. Preclinical results presented at the meeting suggest that our recombinant von Willebrand factor has similar properties to plasma-derived von Willebrand factor. In addition, we presented preclinical data at this meeting from ongoing research studies aimed at developing a novel longer-acting form of Factor VIII. This data suggests that our proprietary blood-free Factor VIII formulated with chemically modified recombinant von Willebrand factor using pegylation or glycosylation technologies may extend the half-life of the circulating Factor VIII two to threefold, potentially allowing for less frequent injections and therefore, increased convenience and compliance for patients.

Also in the fourth quarter, we entered into a preparedness contract with the Austrian Ministry of Health for an option to purchase 16 million doses of pandemic influenza vaccine, which is enough to vaccinate the entire Austrian population. The three-year agreement provides the Austrian Ministry of Health with access to our cell-based vaccine production capacity in the event of a Avian flu pandemic. We recently announced a Phase I clinical trial with our partner, DynPort Vaccine Company, for plasma-derived butyrylcholinesterase, or BioScavenger, which is being developed to prevent and possibly treat effects of exposure to certain chemical nerve agents. Also in the fourth quarter, we announced plans to establish a joint venture to produce and sell Parenteral Nutrition products in China. This joint venture will allow us to improve access to care by expanding the availability of Baxter's innovative Parenteral Nutrition products to patients, physicians and pharmacists in China, reflecting the importance of China to our continuing geographic expansion and growth.

Finally, we received approval and launched a number of new products in the fourth quarter, including the approval of Advate in Japan and Argentina, and the launch in Australia and Canada, the launch of Sevoflurane in Mexico, the market introduction of Adept in the United States. Adept is an adhesion reduction solution for use in gynecological laparoscopic surgeries. And also U.S. launches of Ondansetron, the generic version of GlaxoSmithKline's Zofran, in both the vial and premixed presentations. And finally, we launched the generic injectable antibiotic, Ceftazidime. So I will stop there right now. And again, we look forward to seeing you in March so we can spend more time on R&D and business development initiatives. But at this point, let me turn the call over to Rob. Rob?

Thanks, Bob. And good morning, everyone. I am happy to be here today to discuss our financial results for the fourth quarter and full-year 2006, as well as our financial outlook for 2007. As Bob mentioned, earnings per share in the fourth quarter were $0.66, which compares favorably to the guidance we provided of $0.60 to $0.62 per share. This performance is a result of strong sales, gross margin expansion, and lower tax expense. Both strong sales and gross margin expansion provided increased flexibility for the accelerated R&D, and other actions that position us well for 2007 and beyond. In addition, the lower tax rate will reflect -- reflects a one-time benefit of approximately $20 million or $0.03 per share for the settlement of prior year tax audits. Excluding this benefit, earnings per share were $0.63.

Turning now to the P&L and starting with sales, our reported sales this quarter totaled $2.8 billion, and increased 11%, with currency contributing 2 percentage points of growth. On an organic basis, sales growth accelerated sequentially by 3 percentage points, from 6% in Q3 to 9% this quarter. U.S. sales growth of 11% is the highest quarterly growth percentage this year, driven once again by very strong growth in BioScience, and a return to growth in our U.S. Medication Delivery business, where we have anniversaried the COLLEAGUE pump [hold] and the impact of generic competition.

International sales growth was also 11% on a reported basis, with currency contributing 4 percentage points of growth. Again this quarter, International sales were strong in each of our businesses and across all of our regions. For the full year, sales totaled $10.4 billion, and increased 5% on both a reported and organic basis. I do think it is important to note that organic sales accelerated in the second half of 2006 to 7% from 4% in the first half of the year. Our accelerated sales growth in the second half more accurately reflects the underlying strength of our business globally. As we have previously communicated, our 2006 sales were dampened by several items, including the exit of lower margin businesses, the COLLEAGUE pump hold, and generic competition. For the full year, the sales impact of these items, which was offset by a modest benefit from the new ARC arrangement, totaled approximately $300 million.

Turning to the individual business performance, let me start with Medication Delivery, where sales growth turned positive for the first time this year, with sales totaling over $1 billion, an increase of 7%. An on organic basis, Medication Delivery sales increased 5%, with foreign currency contributing 2 percentage points of growth. For the full year, sales totaled $3.9 billion, a decline of 2%, as generic competition and the COLLEAGUE hold collectively impacted sales by approximately $250 million. As you can see in the press release, Medication Delivery generated strong growth in the fourth quarter across IV therapy, infusion systems, and drug delivery, which provided us with increased latitude to manage historical seasonality in the wholesaler channel with our anesthesia products as we anticipate the move to a fee-for-service model. Adjusting for this, which totaled approximately $20 million, anesthesia and injectable drug sales increased 8%, and were in line with our expectations. On a reported basis, sales of $247 million declined by 1%, as a 7% decline in the U.S. was offset by International growth of 12%. The strong International growth in the quarter and the full year is a direct result of our added focus and increased promotional efforts in our inhaled anesthesia franchise, where Baxter remains the only global supplier of all three modern inhaled gases, Suprane, sevoflurane, and isoflurane.

In the U.S. Propofol sales were down by over 50% and quarterly sales now total less than $20 million. For the full year, sales of Propofol were approximately $100 million in 2006 compared to $240 million in 2005. Drug delivery sales accelerated yet again in the fourth quarter, with growth of 12% driven by easier comparisons and accelerated growth in revenues associated with our pharma partnering business, which were up in excess of 20%. IV therapy sales, which increased 8%, reflect strong International growth of our nutritional products and solid mid single-digit growth of IV solutions globally. And finally, Infusion system sales were up 14% in the quarter. International sales increased 25% with the relaunch of COLLEAGUE in all key International markets, and we saw solid growth in our sales of disposal access on a global basis. Despite the challenges in the Medication Delivery business this year, we made solid progress on several fronts, and are now well-positioned for the accelerated growth in 2007.

Turning to Renal, fourth quarter sales totaled $537 million, and increased by 6%. Organic sales growth was 4%, with foreign currency contributing 2 percentage points of growth. Full-year sales totaled approximately $2.1 billion and increased 3%. The growth in Renal continues to reflect a renewed focus on peritoneal dialysis and the success of our back-to-basics approach, which is strengthening our global leadership position in PD as the first line of therapy in many regions around the world. In the fourth quarter, global PD sales increased 7%, driven by accelerating patient gains globally. We have now seen PD patient growth accelerate from just 2% in 2004, to 7% in 2006, as governments, particularly in the developing world, are focused on providing increased access to treatment to patients with end-stage Renal disease. International sales of PD increased 8%, driven by patient growth in China, Asia and Latin America. PD sales in the U.S. increased 3%. I am pleased to say that this marks the first time in over five years that we have seen four consecutive quarters of positive growth in the U.S. Our back-to-basics approach on peritoneal dialysis is clearly yielding positive results, as evidenced by consistent quarterly PD sales growth of 6% which represents the strongest growth in a number of years. We plan to build on this momentum in 2007 as we continue to promote the PD therapy and expand globally.

In BioScience, momentum continued with another strong quarter. Reported sales of $1.2 billion increased 18%, including 4 percentage points from currency. For the full year, BioScience sales increased 14% on both a reported and organic basis to $4.4 billion, with strong growth across our recombinant, plasma therapeutic, and Biosurgery franchises. In the quarter, total recombinant sales increased 15%, with record Advate sales of $250 million. For the full year, Advate sales totaled $856 million, and represented more than 55% of our total recombinant Factor VIII sales. Global Advate conversion continues to go well, with year-end conversion of approximately 90% in Europe and more than 45% in the U.S. As you know, we recently launched Advate in Australia and Canada, and are on track to launch Advate in Japan and Argentina in 2007.

With the plasma business, sales increased 36% in the quarter and on an annual basis, sales totaled $881 million. The significant growth we have seen -- we've seen compared to last year is a result of volume gains, strong growth in FEIBA, which is our Factor VIII inhibitor therapy, and a general recovery in pricing for plasma products. Antibody therapy sales increased 41% in the quarter, and totaled $785 million for the year. Again this was due to increased volume, continued conversions to liquid Gammagard and a recovery in pricing. Conversion to the liquid product is progressing well, with U.S. conversion at year-end of approximately 45%, and in Europe of over 30%. Biosurgery sales increased 16%, driven by increased sales of Tisseel, FloSeal and CoSeal Clearly, the Biosurgery business had a great year as a result of increased Advate conversion and a recovery in the plasma business. The plasma market dynamics have been consistently improving, and we remain encouraged that the balance between supply and demand is sustainable.

Turning to gross margin, our gross margin in the quarter of 47.6% improved sequentially and improved by 1.4 percentage points versus last year. This year-over-year improvement is driven by the continued benefit of improved business mix, Advate conversion, and conversion to liquid IVIG. Increased volumes for higher-margin specialty plasma therapeutics and, as well as a recovery in pricing for the plasma proteins. Our full-year margin of 46.4% reflects an improvement of 3.1 percentage points versus 2005. This expansion is the continued result of specific actions that we are executing, including select price improvements where possible, upgrading our product mix toward higher margin products, realizing benefits from continued cost and yield improvements, a more concentrated and redirected promotional focus on higher value products, and selectively exiting lower margin, lower return businesses. While the overall pace of gross margin improvement will slow somewhat in 2007, we are very pleased with our gross margin progress to date, and are committed to achieving year-over-year margin improvements over our long-range plan.

Now turning to SG&A. SG&A in the fourth quarter totaled $612 million and increased 18%. SG&A for the full year increased 12%. Two-thirds of the growth in the quarter related to foreign exchange, the expensing of stock options and higher benefit costs, as well as increases in reserves for insurance and severance associated with selective organizational restructuring initiatives, primarily in our International operations. Excluding these items, SG&A growth was approximately 6% and was driven by increased focus and promotional activities on higher margin products, as well as spending on marketing programs and numerous new product launches. R&D spending accelerated to $181 million in the fourth quarter, and increased 35%. More than 50% of this increase is attributed to investments we made in our stem cell program and other investments in BioScience to advance our pipeline of specialty plasma therapeutics, hemophilia and other recombinant products, and as we invest to expand our Biosurgery product portfolio into the area of regenerative medicine.

R&D spending for the full year totaled $614 million, which represented 5.9% of sales, reflecting our continued commitment to reinvigorate innovation at Baxter. As we have previously mentioned, our focus on gross market expansion affords us the opportunity to accelerate investments, to grow our business for the longer term, while at the same time, allowing us to achieve our shorter-term EPS objectives. Our operating margin for the fourth quarter was 18.9%, and for the full year we exceeded our objectives, with an operating margin of 18.5%. This is after the impact of stock options, which for the full year totaled approximately $75 million or $0.08 per share. Adjusting for this, our operating margin of 19.2% is almost a 200 basis point improvement over our 2005 operating margin of 17.3%. As I discussed earlier, our tax rate in the quarter was approximately 16%. Adjusting for the $20 million benefit previously mentioned, our tax rate would have approximated 20% in the quarter and 21% for the full year, which is in line with our prior guidance. Earnings per diluted share were $0.66, and adjusted earnings for the full year were $2.23, an increase of 10% and 16% respectively.

Moving now to cash flow. Cash flow from operations for the year totaled $2.2 billion, and represented an improvement of more than $600 million compared to $1.6 billion last year, exceeding our expectation of $2 billion. The strong cast generation reflects our ongoing and disciplined focus on working capital management. DSO of 52.9 days improved year-over-year and was driven primarily by continued improvement in our International receivable collections. Inventory turns of 2.7 are higher versus a year ago, as we have seen improved turns across each of our businesses. In the fourth quarter, we repurchased $258 million of common stock or 5.6 million shares. For the year, we repurchased $737 million of stock or 18 million shares. As we end 2006, we are very pleased with where we are financially and the progress we have made in terms of capital allocation, capital deployment and deleveraging the balance sheet. As we move into 2007 and beyond, we will remain committed to balancing our investments that enhance our longer term growth, while returning value to our shareholders through a disciplined capital allocation framework.

Finally, let me conclude my comments this morning by providing an outlook for the full-year 2007. As you saw in the press release this morning, we expect earnings of $2.47 to $2.53 per share. This reflects accelerated organic sales growth in our base businesses, continued expansion of gross and operating margins, accelerated R&D spending, and select investments in marketing and promotional activities to support our growth going forward. More specifically, organic sales are expected to increase in the 3% to 4% range, which I will expand on in just a moment. For the full year, we expect gross profit as a percentage of sales to improve by approximately 200 basis points, reflecting the benefit of Transfusion Therapies divestiture and execution of ongoing margin expansion opportunities. Given this margin expansion, we have the flexibility to accelerate investments in R&D and, therefore, expect annual R&D growth in double-digits.

We expect SG&A to increase in low single-digits as we aggressively control spending and realize expense savings related to the divestiture of Transfusion Therapies. We expect to continue our trend of year-over-year [inaudible] margin improvement, as operating margins in 2007 improved by more than 150 basis points. This would equate to an operating margin in the range of 20% to 20.5%. We expect interest and other expense to be flat to 2006 levels, with no change to our annual operational tax rate of 21%. And finally, we expect a full-year average share count of 660 shares to 665 million shares. From a cash flow perspective, we expect cash flow from operations to total approximately $2.3 billion, and we expect capital expenditures to total approximately $700 million. I should note that this CapEx number includes approximately $140 million of spend related to our remediation plan for COLLEAGUE.

Now to expand on our sales assumptions for the full year. First, foreign currency will be neutral for the year, based on current exchange rates. Obviously, at current exchange rates, reported sales growth will benefit from foreign exchange in the first quarter, and that impact will diminish throughout the rest of the year. Second, as Bob mentioned earlier, we continue to make good progress with the COLLEAGUE infusion pump. While U.S. sales could resume before the end of the year for guidance purposes, we have elected to exclude any contribution from COLLEAGUE in our current expectations. Lastly, the most significant impact to our total sales growth guidance in 2007 is the impact of the Transfusion Therapy divestiture. On an apples-to-apples basis, excluding Transfusion Therapies revenue in both 2006 and 2007, Baxter's full-year sales growth would approximate 7%. On a reported basis, however, our guidance assumes that this transaction will close by the end of February, and that Baxter will continue to book revenues related to the ongoing support of these operations at least through 2007. For this reason, we expect Transfusion Therapies revenues to approximate $170 million for the full year.

Turning to the other businesses, we expect sales growth in BioScience, excluding Transfusion Therapies, to be in the 8% to 10% range, driven by recombinant growth in high single-digits. This includes Advate, with full-year sales approaching $1.1 billion. This growth is also adjusted for the impact of BeneFIX, as we will be transferring marketing rights back to Wyeth in mid-2007. As you may recall, full-year 2006 sales of BeneFIX were approximately $170 million. And going forward, these sales will be reflected in the other sales category within BioScience. We also expect plasma protein sales to grow in mid single-digits. Antibody therapy sales to total more than $900 million, and growth in our Biosurgery business to once again be in the mid-teens.

For the full year 2007, Medication Delivery sales are expected to increase in the 4% to 6% range. In 2007, we will report two new categories in Med Delivery as a result of integrating our anesthesia and drug delivery businesses into one global business that will be more aligned with our sales and promotional focus. The first category is anesthesia, which will include our proprietary inhaled anesthetic Suprane, and other anesthesia products. Sales for this category are expected to increase more than 25% in 2007 as a result of continued growth in Suprane and additional market launches of Sevoflurane. The second category will be referred to as global injectables, and will include our pharma partnering business, enhanced packaging offering, including premix drugs, and generic injectable drugs. Sales for this category are expected to grow in the low single-digits as strong growth in the pharma partnering business is offset by declining revenues in generic injectables due to tough year-over-year comparisons for Propofol. Lastly, infusion systems and IV therapy sales are expected to grow in line with overall market growth of low to mid single-digits.

Finally, we expect Renal sales to accelerate and increase in the 3% to 5% range, with PD growth of approximately 6% offset by declining HD sales. As a side note, reclassified historical sales related to the changes we just mentioned will be unveiled -- will be available on the Investor Relations page of our website after this call. Turning to the first-quarter outlook, we expect organic sales to grow 5% to 6%, with earnings per diluted share of $0.54 to $0.56 per share. I should note that our first quarter guidance excludes any impact from the divestiture of TT or any associated gain on that transaction. Now let me turn the call over to Bob for his closing comments.

Before we open up the call this morning to Q&A, let me just make a few closing comments. 2006 was a very successful year I think by any measurement. Not only did we exceed all of the key financial metrics for the year, importantly, we accomplished a number of things that will support continued improvement into 2007 and beyond. Our organization has become increasingly effective in operational execution. This is measured in many ways, most notably our ability to continue to improve margins and increase cash flow. We have made major strides in re-engineering our R&D processes, both on how we prioritize programs and also how we manage R&D projects. Our improved financial condition has enabled to begin accelerating our overall level of R&D spending, something we've committed to sustain in the future.

We have also made significant progress in re-engineering an array of other business and administrative processes that are essential to our future success. A good example of this is the overhaul of our quality systems throughout the Company. And finally, we are in the early stages of accelerating business development initiatives which are critical for us to enhance revenue growth and value creation in the years ahead. So we look forward to seeing many of you at our Investor Conference in March. At that time we will provide insight into a number R&D programs in all of our businesses that we have not shared with you in any depth to date. In addition, we will provide a longer term outlook on the financial performance of the Company, with particular focus on a reorientation toward certain strategic business segments that are critical to our future success. In the meantime, we begin 2007 very well-positioned for continued success. And we look forward to providing periodic updates to all of you throughout the year. So with that, we will now open up the call to questions. Thank you.

[OPERATOR INSTRUCTIONS] I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 30 days at www. Baxter.com. Larry Keusch, Goldman Sachs.

Just a couple of questions. I'll just rattle them off. Could you guys talk a little bit about the IVIG environment pricing in Europe? Obviously understand what is happening in the U.S., but if you could just touch on where Europe is going. And then, Bob, if you could perhaps touch on expected uses for your cash in 2007. I know that you are moving to a quarterly dividend, so that is going to use up some of that. But if you can talk about that. And then just lastly, do you want to set any expectations just for the R&D meeting? Is this going to be primarily earlier stage stuff that you are going to be showcasing? Or should we be thinking about some later stage things? And that would be great.

Okay, Larry, let me address the IVIG environment question. I will also answer your last question, in terms of our Investor Conference. I don't want to call it an R&D meeting. It is going to be more than that. But I'll explain that in just a second. And then thirdly, I will let Rob address your second question which is expected uses for cash. The IVIG environment in Europe continues to be robust, both in terms of volume growth, but also some degree of pricing buoyancy. As this supply-demand equilibrium is maintained around the world, what you are seeing is rationalization of global markets, if you will. And so what we have experienced in the U.S. over the last year or so with improved pricing clearly is cascading not only to Europe, but worldwide. So I think at a high level, Larry, what I would say is the environment for IVIG in Europe really has similar characteristics to what we have experienced in the U.S. with some continued latitude for some pricing improvement and ongoing volume increases.

Regarding our Investor Conference in March, there's really several things that we hope to cover. First and foremost at a high level, as I said in my prepared comments, we want to give you all a view of our long-term financial outlook for the Company. You may recall two years ago we projected a base case outlook over what we call our long-range plan. We want to revisit that. I will tell you it has improved from what it was two years ago. But we will be more specific when we get together in March. And we'll share with you why we're confident in our ability to minimally achieve our base case long-range plan. Then of course, the focus is how do we accelerate growth. That becomes a combination of things. Certainly accelerated business development activities. Potentially opportunistic acquisitions that we may do over time. Certainly internal R&D, where we are significantly ratcheting up our spending. And the fourth area is what I would call a reorientation to specific businesses, and really discussions that we haven't had before.

I will give you just one example, but there will be several things that we will visit in March. We recently moved our cell therapy program, which had historically resided at the Corporate level as really an incubator project, but this year represents the largest spending -- R&D spending of any program that we have. We moved that into the BioScience area recently and combined it with our Biosurgery business. In a new business unit which we call Regenerative Medicine. Much of the technology we have in Biosurgery obviously would fall under that general heading of Regenerative Medicine. Clearly our cell therapy program represents that. We think this is a wonderful opportunity for us long-term. We have never really discussed it in detail with all of you, and that is less about R&D pipelines than it is a reorientation of a business, plus obviously, an update on our cell therapy program.

We will, however, on the R&D front provide more detail in terms of both short-term, immediate and long-term pipeline than we have with you previously. And there are a number initiatives that we have had under way internally, frankly, if we've discussed it all, we've only generally alluded to. We issued a press release on this von Willebrand factor, as an example, a couple of months ago. I don't know that Mary Kay got two or three calls, if that, on it. It is a big deal. And we're going to explain that to you, and tell why we think it is a big deal. That's the kind of thing that will consume amount of our increased R&D investment to support clinical development and so on. So those are a couple of teasers, hopefully, that helps in terms of labor of what we're trying to -- we hope to accomplish in March. So Rob, I will let you address the cash question.

Good morning, Larry. In your question to cash, obviously as Bob has alluded to, we will expect to accelerate our business development activities going into 2007. And I think given now where we are with our balance sheet, we have the flexibility to opportunistically look at opportunities that present themselves. We are still in the midst of completing our share repurchase program. As I mentioned, we were a little over $700 million in share repurchases this year. As you recall, our total authorization is $1.75 billion. So we still have about $1 billion left of share repurchase to go, and we would expect to continue on pace to complete that over in total, a two-year period. So about another year or so of share repurchases. And then obviously, you did mention the dividend. And I should make sure that everyone understands that in addition to paying the annual dividend, which we paid a couple of weeks ago here in January, we will be moving to the quarterly, as you talked about. So in essence, there will be a double-up of our dividend payments this year, given both the annual payment and then moving to the quarterly payments. So with that, from the perspective of what we'll do beyond that, it really becomes what opportunities present themselves. I think it is pretty consistent with what we have indicated as we have gone through ongoing discussions with you over time.

Okay, terrific, thank you.

Glenn Reicin, Morgan Stanley.

Bob, I am going to give you a little bit of tough time, not that you deserve it at all. But -- .

Wouldn't be the first time.

No, not at all. You have done a great job re-engineering the Company and turning it around, and that effort is pretty much complete. But if you look at the strengths of the organization, you are a 510K Company. And Harry tried to push the Company into a PMA Company, and he wasn't particularly successful. So you are upping spending very dramatically on the R&D front. And what gives you confidence that you can actually do this successfully and productively? And I am wondering how that productivity compares with just taking it upside and investing it into potential M&A?

I guess the first thing, Glenn, I would say, I would disagree with the premise that we are a 510K Company. We are a 510K Company and have been in certain segments of our business. I clearly wouldn't characterize our BioScience business as a 510K company. In fact, I would characterize our BioScience business as a fledgling biotech -- not -- more than a fledgling, a significant biotechnology Company, that increasingly has opportunities for us to invest in R&D to accelerate growth. I will tell you when I came here, now almost three years ago, there were a lot of surprises, not all of them positive. But the most positive surprise when I became an insider to this Company was the quality of science that exists throughout the organization. Particularly, I would focus on the quality of our scientists that reside in our BioScience business. So I think as a diversified healthcare Company, but a Company who has a significant presence in therapeutics, we clearly are much more than just a 510K Company.

Now I would -- there's a couple other comments I guess I would make, Glenn. I think given the discipline that we have exhibited in how we have run all areas of the business over the last two to three years, just because our improving financial condition enables us to accelerate our spending on R&D, doesn't mean we're going to be any less disciplined as to how we spend those R&D dollars, than how we do anything else within the Company. And there are return thresholds that we will apply to everything that we invest in. But our accelerated R&D is not just internal spending, but it also is required to support accelerated business development efforts, whether that's end licensing a product's acquired R&D to expand our scientific capabilities with -- within the Company. I also would say maybe our traditional businesses that are more 510K-like, to your point, which is Medication Delivery and Renal, are also changing. I will just give you a couple of teasers for the March meeting. One of things we are going to present to you in March is the use of peritoneal dialysis as a way to treat congestive heart failure. It's a new indication for PD. It's not a 510K that requires traditional clinical studies to support an indication like that. We are moving into Phase II with that program right now. We have not talked a lot about that. It is still early. We don't know how big that could be. But that's the kind of thing that could help transform our Renal business over time.

In our Med Delivery business, our leading product today is Suprane, which is a proprietary pharmaceutical that just happens to be marketed in the hospital through our Medication Delivery business. Definitely not a 510K product. Anesthesia is a franchise, is an area we are committed to long-term, those are therapeutics and drugs. They are not devices. Hylenex, we haven't talked a lot about that. We will share more information on that particular technology in March. This is a therapeutic in many ways could -- has the potential of revolutionizing how intravenous drugs are administered -- injectable drugs are administered, from IV to subcutaneous delivery. So I will stop there.

I think in closing, what I would say is we are confident we have ample opportunities to be able to intelligently and in a disciplined way spend the increasing R&D. And I will come back to Larry's previous question, in terms of our expectations for our March meeting. I would like to think that at the conclusion of that meeting, folks will walk out the door saying, you know, this is not your father's Baxter, to paraphrase, right? And that this is a Company that is increasingly diversified, is more focused on therapeutics, who has elevated its science, and in many ways, gotten back to its roots as a Company 20 years ago, which was really as a leading innovator in the industry. Which over the last 20 years, really the Company has gotten away from. So time will tell, and that's why we are looking forward to the meeting.

Okay. Now that I have got you hot under the collar, how does a dollar of R&D compare to, say, a dollar of M&A investment? Do you look at things that way? What's the -- ?

-- other than both have to achieve a threshold because this is, as we continue to emphasize consistently, this is about value creation. And we are not going to go off the reservation and do things that are highly dilutive or highly risky for a lot of reasons, not the least of which is I don't think we have to do that. I think we have got plenty of opportunities to accelerate both our top and our bottom line growth off of our base case, which will be very attractive. And so, I think the key discipline, Glenn, is that -- and Rob is ensuring that this is inculcated throughout the Company, is that whether it is in an M&A or whether it's R&D, or whether it's frankly, advertising and promotion and so on, we have financial thresholds that must be achieved. So other than that, I am not going to get directly into comparing which is better, one or the other.

Okay, thank you very much.

Mike Weinstein, JPMorgan.

I apologize. I have been jumping a little back and forth between your call and the other call that's going on right now. And so if I -- if this is a little bit redundant, let me know. But in the plasma protein business, it seems like you are being a little conservative on the outlook for '07, given how strong the business is and how strong the market has been, particularly in the last few months of the year. I just want to, one, check if there is anything that we are missing in your conservatism. And, two, could you just talk about the dynamic that we have been seeing over the last, I would say four, five, six months, where the pricing, that story that we were talking about nine, 12 months ago in IVIG appears to have spread to some of these other proteins. And can you just give us a feel for how strong the business is between the commodity end of your plasma business such as Albumin, versus the more specialty end, such as FEIBA. Thanks.

Well, we continue, Mike, we continue to see buoyancy in all the plasma proteins, including those that you might characterize as more commodity-like, like Albumin, and we would anticipate that that's going to continue. Obviously, IVIG pricing will not accelerate in the coming year at the pace that it has in the last year. But yet, as we have discussed previously, we do anticipate that there will be continuing, again, as I characterize it, pricing buoyancy in all the plasma protein. So it really is becoming a bit of a class effect, if you will, across all the plasma proteins, including those that we might characterize as more commodity-like. And so stability is the name of the game going forward. And as we discussed previously, we are confident that that is going to be maintained, certainly for the foreseeable future.

Regarding outlook for '07, conservative, aggressive, however you might characterize it, I mean, as Rob indicated, I think we have a well-balanced plan for next year, with some balance of risk and opportunity. I think we took the right prudent position, in terms of our assumptions on COLLEAGUE. We don't want to be presumptuous in any way. We have still got a lot of brush to cut there, so to speak, before we can get the product recommercialized, although we are making great progress. And the prospects exist, I suppose, that we could be in a position to be selling COLLEAGUE before the end of the year. And of course, given the fact that it is capital goods, these are largely deferred sales. So we will see how that evolves. That is probably the biggest unknown relative to our plan. But beyond that, everybody has got their own view as to the degree of conservative. But it is still early in January, and we have got a lot of time to go. So we will see as the year unfolds. I don't know, Rob, if you have anything -- ?

Just one thing, and Mary Kay can add to this as well. But also, Mike, remember in that plasma proteins segment, we also carry our third-party plasma contracts, which are declining as we move away from that into the lower margin business. That also somewhat dampens what you see in that total segment.

Right. One of the things that we have been picking up, and it was a couple of weeks ago I was talking to a distributor who was talking about the dynamics that you're seeing, particularly in places like Russia and China. Like in Russia, I understand that now they are now paying for Factor VIII for adults or basically anybody over the age of seven, where they weren't doing that before. That is starting to suck up a lot of plasma Factor VIII product into Russia. And you're seeing some similar dynamics in some of these other markets that really weren't big markets before, but are really starting to absorb a lot of that plasma product that was previously [weighing] on the market. Can you talk about that?

Well, I think the dynamic that you describe is accurate. As markets -- emerging and developing markets continue to evolve and the affordability factor, Russia being a good example with oil prices and so on, allow access to therapies that previously they couldn't afford access to. Markets like that, of course, will import plasma, as opposed to -- or plasma-derived products, as opposed to many developed countries, as you know, want to be self-sufficient, and not import products. So that's an interesting dynamic to this business that in many ways either provides barriers -- well, provides barriers and so on. But I can tell you, through John -- John Greisch and his organization is working very closely with Joy in the BioScience group to evaluate, as we continue to identify opportunities to grow through geographic expansion, what's the prudent way to capitalize on trends in all of our businesses, such as the one you mentioned. But I think you fairly characterized that trend. It is happening in developing and emerging markets.

Okay. Thanks for taking the questions.

Rick Wise, Bear, Stearns.

Guidance is ex-COLLEAGUE, Bob, -- I know you don't want to give guidance. But when you say it may resume this year, do you think it could resume if all goes well in the third quarter? And how do we think about the possible impact of this year and next of a COLLEAGUE resumption? Can you help us -- ?

Rick, that is not one you are going to pin us down on this morning. And I understand why you ask the question. Let me tell you why, I guess, I am particularly sensitive not to be more specific in terms of timing. First of all, it is not in our control. And in no way do I want to get out ahead of what has been, and continues to be a very constructive relationship and interaction with the Agency. Okay? And I know you understand that. But the second piece of this is I am equally sensitive to our customers who, as a result of this COLLEAGUE situation, frankly, we have put in a situation where they have been inconvenienced over the last couple of years. The remediation effort within the U.S., despite building our competency in all the International markets, is no small feat to be able to get that done and get that done effectively. I think it would also be presumptuous to contemplate recommercializing product until we have made significant headway with the renovation -- or remediation, excuse me, activities in what is a very large installed base, as you know, in the U.S. for COLLEAGUE.

So our focus is really on two things. Get done what we need to get done, working with the Agency, navigate our way through the consent decree. And then secondarily, as soon as we get 510K approval, hopefully then we will be in a position to immediately initiate remediation activities and make significant inroads toward completing that. Then we will have earned the right, I guess I would say, to be in a position to then evaluate how we recommercialize the product. So a lot of moving parts, a lot of unknowns. And I want to always be ever vigilant and sensitive to the position of both our customers and the Agency in this regard. So that's really why. Kind of a long, rambling answer. But it's why I am just not going to get pinned down in any more specifics, because it is just not, I don't think, prudent to do that at this point.

Got you. And just a couple of follow-ups on the plasma proteins business. Can you expand a little bit on your comments about the strength of plasma proteins in the quarter? And maybe talk a little bit about pricing? I assume Albumin has to be rebounding, as well. Maybe you can give us a little more color there. And last, with advate penetration at 90% Internationally, Bob, where do you go for growth Internationally in that business, as we think about the recombinant franchise over the next couple of years? Thanks.

Well, the me address the Advate question and the hemophilia franchise. And then I will let Rob address the plasma protein, which has kind of been asked previously. So you will get his perspectives. I think they will be the same as mine, but maybe with a little different twist. Look, there's, I think, significant opportunity for ongoing growth in the recombinant hemophilia franchise. We have continued opportunity to continue Recombinate to Advate conversions in developed markets, most notably in the U.S., as you know. But as developed markets convert to Advate, it provides us more flexibility to support access to developing markets, not only with plasma-derived Factor VIII, but perhaps with Recombinate at that point. So there is a whole product mix, product life -- family life cycle thing that we'll be managing, frankly, over the next five-plus years, which will continue to provide growth in the category.

Then that becomes further augmented by next gen products. Ad I commented in my prepared comments this morning on the very exciting early work that we are doing in extended half-life, which, as we all know, would be a significant development if that could be accomplished. We have several different technology pathways to get to that point. This, too, will be a subject that we'll provide more visibility into in our March Investor Conference. And then, of course, we look for ways to expand the franchise further. As an example, the recombinant von Willebrands factor. So we will talk about the whole franchise in more detail when we get together in March. But I think there are a number of dynamics, both within the product family as it exists today, plus next generation products and new products in the category more broadly defined, which should enable us to have robust growth in the years ahead. So, Rob, why don't you address the plasma question?

Really, if you look at what is going on in our plasma protein segment for the quarter, price in total was only about 20%. It was actually driven more by volume. And the volume largely came in two places. One, we had a lot of tenders outside the U.S. for FEIBA. Our FEIBA [inaudible] was up significantly in the quarter, as well as plasma-derived Factor VIII, which is again, primarily outside the U.S. It gets a little bit to the earlier question about plasma-derived Factor VIII in the emerging markets. So, if you look at it, what was a very strong quarter, it was driven by really volume in those two areas, more than it was price. And we think a good outcome, because it shows that the products are having good breadth geographically. But I wouldn't read too much into it beyond that.

Thanks very much.

Matthew Dodds, Citigroup.

Quick question for you. When you talk about potential for things like the von Willebrands and other recombinant proteins down the road, I haven't been updated on this in a while. Do you have excess capacity still in recombinant protein manufacturing?

We do, between Thousand Oaks. Yes, primarily in Thousand Oaks, we have installed capacity, that depending upon what the product is, would allow us to utilize existing capabilities and facilities. We do.

Okay. And then a couple of quick ones for Rob. For Transfusion Therapies.

Yes.

Give us an idea what the gross margin is in that business, so we can figure out how much of the impact is coming from Transfusion on the increasing the GM?

Yes. If you look at it in total, it is about, for the full year, about half a percentage point or a little over a half a percentage point of benefits to our margin, if you exclude TT. To the gross margin, if you exclude TT.

For three quarters, because you still have in Q1. Right?

Yes, well, we have -- .

Two months.

Two months.

Got it. And then one last question, Rob. Did you say on the interest expense, it would be relatively flat in '07?

No, I said the combination of sundry and interest expense would be flat. As you know, our interest expense was significantly better this year versus last year. Obviously, that was the result of the debt paydowns we had, and the fact that we have more cash earning interest. But as you look forward, actually interest will go up a little bit next year, driven just by the fact that interest rates are, at least as we project them, are going to be up.

But there is nothing in sundry that is additive or unique in '07?

No. No, sundry is largely going to be flat year to year.

All right. Thanks, guys.

Ben Andrew, William Blair.

I just wanted to follow-up on a couple of things previously related to the acquisition opportunities. Are you seeing the sorts of targets that you previously -- the Company previously had gone for maybe four or five years ago, primarily private, perhaps International types of businesses that can add functionality to the Company, and really expand the franchise say in Medication Delivery. And are you targeting those sorts of things? Or is the focus much more on the biotechnology or BioScience type of acquisition opportunities?

I wouldn't say, Ben, it's any greater in any one business than the other in terms of focus. I would characterize our Medication Delivery business as probably a little more target rich in some ways. We are, I will tell you, undertaking as we assess opportunities, that process. We are undertaking that process, clearly, much more on a global basis than I think perhaps the Company did a few years ago. It's one of the charges that we laid on John Greisch and his team of regional presence. Is I am not sure the Company historically has done as good a job as it could have in identifying International acquisitions. Okay? And that is an expectation we have laid on our International organization, and not be solely dependent on our business development resources that reside here at Corporate offices or in Deerfield with our global businesses. So I think we have a broader geographic scope in terms of what we are evaluating. We are looking at things across all of our businesses. And, again, kind of a broken record here, but you know the nature of the kind of things that we are looking for, which are adjacencies, bolt-ons, and things that are complementary of businesses and technologies that we are in today. Not transformational things.

Okay. And just one other quick question. As you look at the plasma market, there has been a lot of questions about that. What really hurt that market five or seven years ago was when I think when demand was too tight relative -- or, too strong relative to supply, and we saw doctors pulling back on utilization. Have you seen the signals of that in any markets that would give you pause? And in a related question, how do you see ramping your plasma collections over the next couple of years?

I will let Rob address that.

Good morning, Ben. To your first question, actually it is the opposite. If you look at what is happening with demand, and we get this question a lot, what is driving the increase in demand? A big piece of that is actually we are seeing doctors prescribing more as they get more comfortable, I think both with the therapy. We are seeing expanded understanding and prescriptions around immune deficiency disorder. As well as I think really coming back to the product, given the fact they feel there is a equilibrium. So I would actually characterize it the opposite of the way you put it.

We are seeing a strengthening in the prescribing patterns of the product, versus weakening. As far as our activities towards expanding capacity, if you look at the industry as a whole, where they are capacity constrained is in really collections, not in fractionation right now. And we along with others, I believe, but focusing on Baxter, we do intend to increase collection capacity in a rational and very measured way to make sure we keep the balance of supply and demand. Most of that will come through yield enhancements we will get in our existing centers through either changing in our marketing programs, or remodeling or renovating centers. And then there is the opportunity that we might add a couple of centers. But it will be small. And again, I think the bigger focus is we are very close to monitor what is happening in the market and to make sure that we keep supply matched with demand for exactly the reason you say, which is we want people to feel that it is a stable market. So you are going to see that ramp up. But again, it is going to be very measured.

Okay, thank you.

Sean, we have time for one more question

Glenn Novarro, Banc of America.

David [DeGerolomo] in for Glenn. Just a few quick questions. First, I wonder if you guys could provide any additional color on the Sevoflurane launch to date?

Not a lot of specifics, and that's really by design. I mean, we're sensitive to getting into disclosing specific elements of the Sevo program. We will continue to launch the product selectively in markets around the world. I will tell you one of the reasons that we are very sensitive in disclosing specific data is we really view Sevoflurane opportunities as a subset of a broader anesthesia franchise. And so, the launch, the markets that we're picking, the pricing strategy we are adopting varies from country to country. We want to balance inroads with Sevo with our marketing objectives on Suprane, including pricing relationship and things of that nature. So I would just say at a high level, David, that anesthesia is an area of strategic focus for the Company going forward. One of the reasons, as you well know, is the breadth of products that we have in the inhaled side today, which provides us a lot of opportunity going forward.

But I would characterize our approach to date with Sevo as being very disciplined. It's not about trying to grab as much market share as you can in the short-term for that particular molecule, without being sensitive to the longer-term ramifications it has for what is a pretty important strategic business for the Company. So as a result of that, we are going to continue to make inroads with Sevo. We are going to continue to grow. But we are being very disciplined about how we do that for the reasons that I mentioned. And that is really one of the reasons we are probably even more circumspect than usual in sharing product-specific information on this particular product.

Got you. And one follow-up question on Ondansetron and sort of the generic injectable market, in general. Any commentary on your market share in the U.S. Ondansetron. And then the follow-up being, given that we assume it was about a 90% to 95% price discount for the drug, do you have any thoughts in terms of how pricing is going in the generic injectable market, whether or not this is a reflection of things to come?

Well, we are not going to get into specific market shares in Ondansetron and price erosion on that. Obviously, there is multiple companies that are in, and will come in that area. Our focus is to introduce the molecule in all packaging forms. But the real value creation for us is when we can put particular therapeutics in enhanced packaging systems, whether that is premixes or syringes or whatever it may be, where there is additional utility to the user and, therefore, additional value for us. The dynamics of this market, you know as well as we do, it's a tough market. Multi-sourced generic injectables in the vial form only is a very, very tough market, not only in the U.S., but around the world. We make money in that business. It also enables us, however, to really get access to the bulk active, and then bring forward a family of products, including those that we can introduce enhanced packaging. So that is really -- that is really the strategy there, as you know. But specifically on market share on Ondansetron, I really don't want to comment on that specifically at this point.

Hey, David, I would note though, that in the vial, I think there is 12 competitors on Ondansetron, and the premix, I think it is us and one other competitor.

Got you.

Which these, too, are focused on enhanced packaging. Less crowded.

Thank you, everyone.

Thank you so much, everybody.

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