百特醫療 (BAX) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's first-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 that cannot be rerecorded 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 your host, Ms. Mary Kay Ladone, Vice President of Investor Relations at Baxter International. Ms. Ladone, you may begin.

Good morning and welcome to our Q1 2007 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Rob Davis, 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. 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'd like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning, everybody. We're obviously quite pleased with our first-quarter financial results that were announced this morning and also the outstanding start to what we believe will be a very good year for us in 2007. Not only were the expectations for all the key financial metrics exceeded in the quarter, but we're increasingly leveraging the strength of our diversified healthcare model, capitalizing on our strong global presence and also fulfilling our strategic intent of accelerating the pace of R&D spending.

Rob will expand in detail on our Q1 financial results and revised earning outlooks for the year in just a few minutes. But before turning the call over to Rob I'd like to emphasize just a few I think important points this morning.

First of all, organic revenue growth in Q1, adjusting for both foreign exchange impact and also the sale of our Transfusion Therapies business, approximated 10% for the quarter versus the prior year. While this is somewhat stronger than what we believe is the normalized rate of growth of our current business portfolio, I think it clearly validates the message that we communicated to all of you at last month's investor conference, and that is that we've successfully accelerated our organic revenue growth rate over the past two years.

This has resulted not only from the continued strong performance of BioScience, but building momentum in both Medication Delivery and Renal. Of particular note, and I mentioned this last quarter, is the performance of Medication Delivery which is in the early stages of a turnaround. We're also particularly pleased with the accelerating growth of the peritoneal dialysis segment within Renal which grew 8% on a worldwide basis for the quarter.

In the first quarter we also continued to make meaningful progress in improving the quality of the P&L. As you've noted I'm sure from this morning's release, gross margins improved to 47.3% for the quarter, a 360 basis point improvement over the same period from the prior year. This improvement was more than a business mix phenomenon of BioScience growing faster than the other businesses. Every one of our businesses generated improvement in gross margins from the prior year, a reflection I think of our broad based initiatives across the Company to build shareholder value through focused execution.

Despite a 15% year-to-year increase in our R&D investment operating margin increased to 19.6% in Q1, a 3.5% increase from the prior year. And we also continue to make very solid progress with key R&D programs and product approvals and launches.

Just to mention a few -- first, the FDA recently granted orphan drug status and approved CEPROTIN, a plasma-derived product used as a replacement therapy for patients with life-threatening blood clotting complications related to severe congenital protein C deficiency.

We've initiated a Phase III clinical trial of our H5N1 candidate vaccine in Europe. As you might recall, our Phase I/II study indicated that the vaccine is highly immunogenic at low doses and induces substantial levels of cross-immunity against widely divergent H5N1 strains. And the results of our Phase III trial are scheduled to be available by the end of this year.

Also in the quarter we announced the expansion of our relationship with Halozyme Therapeutics for HYLENEX to include the use of HYLENEX with Baxter's proprietary and nonproprietary small molecule drugs. As you know, HYLENEX can increase the absorption and dispersion of fluids and drugs throughout subcutaneous infusion, which offers a potential alternative to IV administration for patients with difficult venous access. Our expertise in drug delivery and Halozyme's expertise in recombinant human enzymes could lead to a number of future applications for this technology. We're currently planning a number of targeted launches for HYLENEX in 2007 and 2008.

In the U.S. in the Q1 we launched our new premium line of intravenous solutions called AVIVA which provides similar functionality and benefits to our existing VIAFLEX flexible container systems but are made without PVC.

And finally in the quarter, the Renal business has initiated a Phase II trial evaluating the use of our proprietary icodextrin solution in patients with congestive heart failure. This clinical trial will determine if adding peritoneal ultra filtration treatment to the current standard regimen improves clinical outcomes and reduces the amount of time that a patient spends in the hospital.

Lastly, let me bring you up to date on the situation with COLLEAGUE. As you know, on February 27th we announced a 510(k) approval on our revised submission which is a critical milestone on the path to recommercializing COLLEAGUE in the United States. The 510(k) approval followed the earlier conditional approval from the FDA for our corrective action plan. All arrangements have been finalized to commence with remediation efforts in the U.S. as soon as we receive the final go-ahead from the FDA.

The last requirement before recommercialization of the product is the certification of our quality systems by our outside expert and an inspection by the agency, if they elect to do so. We've told FDA that we anticipate being in a position to invite them in for an inspection during the third quarter. However, given the work which remains to be done, not the least of course is the substantial remediation efforts, as we communicated earlier this morning, we continue to feel that it is prudent not to project COLLEAGUE sales for the remainder of 2007.

Outside the United States we have completed all of our remediation efforts and the product is now being sold in every international market. The success of our recommercialization efforts outside the U.S. is evidenced I think by the 23% year-to-date increase in infusion system sales in Q1 in the rest of the world. As always I'll be happy to discuss COLLEAGUE further during the Q&A if you would like. So at this point let me turn the call over to Rob for a more detailed discussion of our Q1 results. Rob?

Thanks, Bob, and good morning, everyone. I've happy to be here today to discuss our financial results for this first quarter and provide you with an update on our financial outlook for the full year 2007.

As Bob mentioned, we reported strong sales and earnings to start the year. Earnings per share were $0.61 which favorably compares to the guidance we provided of $0.54 to $0.56. This performance is a result of strong sales, gross margin expansion and lower interest expense.

As you may have also noted, our results included pretax income of $23 million related to the gain on the sale of Transfusion Therapies less related charges, which is reflected in the other expense line on the P&L. On an after-tax basis, the impact of this gain was $6 million or $0.01 per diluted share.

Turning to some detailed comments about the P&L and starting with sales, our reported sales this quarter totaled $2.7 billion and increased 11% with currency contributing 3 percentage points of growth. Excluding foreign currency sales growth was 8% favorably compared -- or sales growth of 8% favorably compared to our guidance of 5% to 6%. As planned we completed the Transfusion Therapies transaction in February, so our results included $88 million in revenues representing two months of Transfusion Therapies' revenues and one month of transition service revenues.

Excluding Transfusion Therapies' sales from both years our organic sales growth was 13% or 10% excluding the impact of currency. As we explained last quarter, we expect transition service revenues related to the Transfusion Therapies business of approximately $30 million per quarter throughout 2007.

Turning to individual business performance, let me start with Medication Delivery which reported sales totaling $990 million, an increase of 8%. Excluding foreign currency Medication Delivery sales increased 6%, in line with our expectations. Medication Delivery posted strong international results with sales growth of 12% resulting from double-digit increases in anesthesia, infusion systems and IV therapy.

Globally anesthesia sales were particularly strong given strong sales of Suprane and sevoflurane as we transition to the fee for service model with distributors in the U.S. and as they alter their purchasing patterns. We also continue to benefit from our added focus and increased promotional efforts as we remain the only global supplier of all three modern inhaled anesthetics -- Suprane, sevoflurane and isoflurane.

In the global injectables business sales of $361 million increased 2%. Growth of almost 20% in our pharma partnering business was offset by the continued decline in propofol which was down by approximately $15 million in the quarter. Excluding propofol sales growth was 7%.

IV Therapy sales, which increased 5%, reflect strong international growth of our nutritional products. U.S. sales were down 3% due to a tough comparison in the nutrition business where sales increased by more than 15% in the prior year period.

And finally, infusion system sales were up 7% in the quarter as strong international sales of the COLLEAGUE pump offset a modest decline in U.S. disposable access sets.

In summary, despite past challenges in Medication Delivery, this business is poised for a turnaround in 2007. We're making solid progress and continue to expect sales growth, excluding the impact of foreign exchange, of 4 to 6% for the full year. This outlook includes growth in IV Therapy and infusion systems of low to mid single-digits, flat sales in the global injectables business, and sales growth of more than 25% for anesthesia.

Also, let me remind you that going forward the quarterly sales growth comparisons for the anesthesia productline may be somewhat volatile, as historical seasonality in the wholesaler channel is eliminated and we move to a fee for service model with these distributors.

In addition, in line with our focus on exiting lower margin products or businesses we've accelerated the transfer of marketing rights of propofol back to our partner Teva effective July 1, 2007 versus the end of 2008. While this is accretive to gross margin, the lost revenues in the back half of the year equate to approximately $35 million.

And finally, while U.S. sales of the COLLEAGUE pump could resume before the end of the year, as Bob mentioned, we've elected to exclude this impact from our current expectations.

Moving on to Renal, first-quarter sales totaled $525 million and increased 6%; excluding foreign exchange sales growth was 4%. Renal performance continues to reflect our renewed focus on peritoneal dialysis and the success of our back to basics approach which is strengthening our global leadership position in PD.

Global PD sales increased 8% driven once again by accelerating patient gains particularly in China, Asia, Central and Eastern Europe and Latin America. We also continue to see very solid patient gains in the U.S.

Hemodialysis sales increased modestly in the quarter demonstrating our continued emphasis on optimizing this business and improving its returns as we exit lower margin Renal Therapy Service centers.

In summary, excluding the impact of foreign exchange, we now expect 4 to 5% sales growth in Renal for the full year as we continue to promote the PD therapy, expand geographically and as governments, particularly in the developing world, focus on providing increased access to treatments for patients with end stage renal disease.

In BioScience momentum continued across all productlines with another strong quarter. Reported sales of $1.1 billion increased 22% including 4 percentage points from currency. Excluding the currency impact sales growth in BioScience was 18%.

Recombinant sales of $388 million increased 16%. We've now converted more than 90% of our patients in Europe to ADVATE, and conversion in the U.S. is approaching 50%. In addition, we've recently launched ADVATE in Japan and are on track for a second-quarter launch in Argentina.

In the plasma business sales of $225 million increased 17%. This growth continues to be the result of volume gains and improved pricing for albumin and plasma derived Factor VIII as well as strong growth in FEIBA, our Factor VIII inhibitor therapy. Antibody therapy sales increased 21% and totaled $222 million for the year driven by volume gains, improving pricing, particularly in Europe, and continued conversions to liquid GAMMAGARD.

In regenerative medicine, which you'll recall is a newly created business that includes biosurgery and cellular therapies, sales increased 19% driven by strong gains in both the U.S. and Europe.

And finally, sales in the other category increased by $58 million year-over-year primarily due to better-than-expected growth in vaccines. In Germany a warm winter and changes in vaccination recommendations by the government drove increased demand for our FSME, encephalitis and meningitis C vaccines.

Vaccine sales were also boosted by the planned shipments of our H5N1 candidate vaccine to various governments around the world for established stockpiles. These shipments contributed approximately $20 million in sales to the quarter.

Clearly BioScience is off to a great start in 2007. By product category we continue to expect recombinant sales in the high single-digits with full-year ADVATE sales exceeding $1.1 billion. We now expect plasma proteins to grow in the high single-digits, antibody therapy sales to total more than $900 million and regenerative medicine sales to grow in the midteens year-over-year.

While the other category is projected to show excellent growth in the first half of this year, this is driven by the seasonality in the vaccine business and the onetime H5N1 stockpile shipments in the first quarter that I mentioned earlier. In both Q3 and Q4 sales will decline due to the BeneFIX impact as we complete the planned transition of marketing rights for this Factor IX product back to Wyeth effective July 1.

As a result of increased ADVATE conversion, improved plasma market dynamics and strong vaccine sales we now expect BioScience sales, excluding the impact of foreign currency, to increase by more than 10% for the full year. This growth is after absorbing the lost BeneFIX sales in Europe, which impacts BioScience international sales by approximately $90 million in the second half of the year.

As Bob mentioned previously, gross margin in the quarter of 47.3% improved by 3.6 percentage points versus last year driven by improved margins in all of our businesses. In particular, the improvement relates to the improved mix in Renal and Medication Delivery, continued recovery in pricing for plasma proteins, liquid IVIG and ADVATE conversions and the strong performance in the vaccines business.

Now turning to SG&A. SG&A in the first quarter of $583 million was flat to the prior year as a percent to sales and increased 11% year-over-year. Approximately half of this growth can be attributed to foreign exchange, increased stock compensation and a $10 million voluntary contribution made to the Baxter Foundation, the philanthropic arm of the Company. Excluding these items SG&A increased approximately 5% in the quarter.

R&D spending of $159 million increased 15% and represented 5.9% of sales. Importantly, growth was a result of double-digit increases in all three businesses. Increased spending relates to many of the programs we reviewed with you at our investor conference, including investments in the regenerative medicine business as we continue to advance our pipeline with our partner [Cerus], continued progress with our stem cell program for chronic myocardial ischemia and development of a new cycler for peritoneal dialysis in Renal.

As we've previously mentioned, our focus on gross margin 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 in the quarter was 19.6%, an improvement of 3.5 percentage points even after an 11% increase in SG&A and a 15% increase in R&D.

As I mentioned earlier, other expense includes a pre-tax gain of $23 million related to the Transfusion Therapies divestiture. Excluding this gain other expense was basically flat compared to last year.

Our reported tax rate in the quarter was 23.8%. However, adjusting for the tax impact on Transfusion Therapies the tax rate would have been 21.5%, in line with prior guidance. Finally, earnings per diluted share were $0.61, an increase of 42%.

Moving to cash flow, cash flow from operations for the quarter totaled $215 million compared to $305 million in Q1 last year. The difference year-over-year relates primarily to some onetime items including -- the continued inventory build in Medication Delivery for the COLLEAGUE remediation efforts; a payment for the settlement of litigation with Genetics Institute; and the $178 million settlement of the net investment hedge liability, a portion of which impacts cash flow from operations. Excluding these items cash flow from operations in the quarter exceeded the prior year run rate.

Inventory turns of 2.6 turns are comparable to last year; and DSO of 55.3 days is slightly higher than last year as lower DSO's internationally were offset by an increase in our U.S. DSO due to the transition to the fee for service model with U.S. distributors in the anesthesia business.

During the quarter we repurchased $270 million of common stock or 5.5 million shares and remain committed to returning value to our shareholders with continued share repurchases and our quarterly dividend.

Given the expected improvement in our financial results and working capital for the rest of the year, we continue to expect cash flow from operations to total $2.3 billion for the full year with capital expenditures of approximately $700 million.

Finally, let me conclude my comments this morning by providing our revised outlook for the full year 2007. As you saw in the press release this morning, we now expect earnings of $2.60 to $2.65 per diluted share. Compared to our prior guidance this reflects our strong Q1 performance and better-than-expected sales, improved gross margins, a modest benefit in our tax rate and a lower expected share count.

For the full year we now expect sales, excluding the impact of foreign currency, to increase in the 4 to 5% range. This growth includes the impact of the Transfusion Therapies divestiture and the $120 million sales reduction in the second half of the year related to BeneFIX and the new Teva agreement for propofol. Adjusting only for the Transfusion Therapies sales in both years, sales growth would have approximated 8%.

In addition, we expect currency to contribute approximately 1 percentage point of growth for the full year. At current rates reported sales growth will benefit from foreign exchange more in the first half of the year and the favorable impact will diminish in the back half of the year.

We now expect gross margin as a percentage of sales to improve by more than 200 basis points versus 2006, which reflects the benefit from the Transfusion Therapies divestiture and execution of our ongoing margin expansion opportunities. Given our margin expansion we'll accelerate investments in R&D, resulting in double-digit growth for the full year.

Turning to SG&A, we'll aggressively control spending and realize expense savings related to the divestiture of the Transfusion Therapies business, resulting in SG&A growth in the low to mid single-digits. As we stated last quarter, we continue to expect our trend of year-over-year operating margin improvement to continue as operating margin in 2007 improved by more than 150 basis points. This equates to an operating margin of approximately 20.5%.

We expect interest and other expense combined to total approximately $75 million reflecting the Transfusion gain from Q1 and an increase in interest expense, as we've now elected to address a portion of the net investment hedges that expire in 2009 by the end of this year.

For the full year we now expect our tax rate to be in the range of 20% to 21%, as the high tax rate in Q1 driven by the Transfusion Therapies gain is offset by a tax rate of approximately 20% in each of the remaining quarters. This is a result of an expected tax grant in one of our favorable tax jurisdictions.

We expect a full-year average share count of 655 million to 660 million shares.

And lastly, as I mentioned previously, we continue to expect cash flow from operations to total approximately $2.3 billion and capital expenditures to total approximately $700 million.

For the second quarter we expect earnings per diluted share of $0.66 to $0.68 and sales growth, excluding the impact of foreign currency, of 3 to 4%. Excluding Transfusion Therapies sales in both 2006 and 2007, sales growth in the second quarter would approximate 8%. Now let me turn the call back over to Bob for his closing comments.

Just a quick closing comment or two before we open up this morning's call to Q&A. Most of you I know had the opportunity to join us in Chicago last month for our investor's conference. And at that time, as you'll recall, we referred to as our base case outlook to our five-year long-range financial plan which included compound annual revenue and EPS growth of 7% and 12% respectively.

While one quarter certainly does not make a five-year financial plan, I think we're certainly off to a good start on that journey. Our first-quarter results not only reaffirm that we're on the right track, but I think reinforce our confidence in the future. So with that, let's open up the call to Q&A.

(OPERATOR INSTRUCTIONS). Mike Weinstein, JPMorgan.

Thanks. It's actually Taylor Harris here for Mike. My first question is on the international business in BioScience because that was just particularly strong this quarter. And is there something in addition to the increased pricing gains that we've heard about in your plasma proteins business overseas? Is there something more broad than that I'd say, perhaps just building out the distribution in additional countries, that's explaining the strength across all of the product categories?

Let me comment on that, I guess there's several dimensions. And Rob or Mary Kay, you can pitch in here. You did hit on the pricing dynamic. Clearly overall plasma protein pricing is continuing to improve at a somewhat faster rate outside the U.S., specifically in Europe, than it is in the U.S. It's really what I would call kind of catch-up to equilibrate with what's gone on in the U.S. market.

Our vaccine sales, as Rob pointed out in his commentary, were particularly strong in Q1 and most of that was outside the U.S.

And then thirdly, consistent with our higher level strategic focus on geographic expansion, I think we're experiencing and would expect to continue to experience the benefit from that in emerging and developing markets. So it's really kind of the confluence of all those factors. Did I miss anything, Rob?

I just would add in addition to the fact that we did see above expected vaccine sales, again due to FSME and [Nistat] and some of the seasonality impacts, we did have the H5N1 contract as well that was in the first quarter and that was I think --.

About $20 million.

$20 million. So really the vaccines business drove a lot of that expanded growth. But also we've had good volumes. I mean, clearly pricing is good in the plasma business. But it's important to note too we did see volume gains in that business and we saw volume coming in the recombinant business as well. So overall it's a good mix of both volume and price across all the products really with the one surge item being the vaccines.

The other last thing I would say is there's still this long-term dynamic of conversion from plasma derived Factor VIII to recombinant. And the opportunity for that long-term conversion is more pronounced outside the U.S. and, again, that's part of the whole developing emerging market strategy.

And just one follow-up question if I could. On the anesthesia business, you mentioned some changes in purchasing patterns in your transition to the fee for service. Was there a stocking impact in the anesthesia business this quarter?

Actually not this quarter. If you recall, last quarter we highlighted that actually we saw a decline in anesthesia sales, and we pointed to the fact that that was because of basically a selloff in the inventory chain. So you're seeing a little bit of what -- the volatility I highlighted you will see going forward as we look at the year-on-year comparison of 2007 with a more steady pattern in the wholesalers versus 2006, which will make it look a little bit more lumpy.

Okay. And any comments on the ramp of sevo within that business or just the components of the revenue mix there?

Well, we've been, as you know, hesitant to get too definitive on sales of sevo and we're going to maintain that stance. But clearly our -- as Rob commented and I think we discussed at the investor conference, our unique position of having the full line of inhalation agents really puts us in a great position; and we continue to get very nice growth with our proprietary product, Suprane, and we also continue to pick up momentum on sevo.

Great, thanks a lot.

Glenn Reicin, Morgan Stanley.

Good morning, everyone. I can't resist. I never do this but the quarter was quite impressive, so congratulations. Don't quote me on that, though. Just actually some follow-ups to the last questions. Do you anticipate any additional vaccine revenues from avian flu for the rest of the year?

We're hopeful. We don't have a lot dialed in the forecast and the avian flu revenue, Glenn, really takes two different forms. One is where we actually manufacture stockpile orders such as that that we did for the UK government and was booked in Q1. The other is really these what we refer to as preparedness contracts, where we slot capacity and dedicate capacity for governments should they want us to manufacture; and we're paid in accordance with that.

We don't really have much dialed in if anything going in -- dialed in going forward. And really the reason for that is while we have dialog ongoing with a lot of governments around the world, given the timeliness or lack thereof sometimes as to how these decisions get made in kind of the bureaucratic process and so on, it's really a rather circuitous route. And so until they're done they're not done and there's no downside, let's put it that way.

Okay, so we should treat it as one timers (multiple speakers)?

Yes, I think that's right.

Again, I want to concentrate on anesthesia so I have a couple of questions. One is on the sevo ramp, which you didn't want to answer, but if I just did back of the envelope last year, Suprane, you did sales around $220 million and you grew that at 15% this year. The delta would suggest right now that sevo is approaching $100 million annually. Is that good back of the envelope kind of math here?

Approaching is a relative term. And again, you're not going to hook us into a number on sevo. Let me come at it this way. And we communicated this I think at the investor conference. We are being very disciplined about how we roll out sevo, which markets we select, the pricing we move forward with and so on, because it's more than evaluating the opportunity of sevo or generic sevo in a vacuum by itself it's really looking at that opportunity in the broader context of all the inhalation anesthesic agents.

This is, as you know, a business -- a strategic business, for Baxter that we're committed to long-term. We're very positive about the future growth of Suprane going forward and so we're orchestrating the generic launch of sevo very carefully. And it's for that reason from the get-go we've been pretty circumspect in getting too definitive there. So (multiple speakers)

Was 220 the right number to use (multiple speakers)?

(multiple speakers), but what's that?

Was 220 the right number to use last year for Suprane?

Mary Kay, do we --?

Yes, you're in the ballpark.

Okay. And then finally, can you just explain a little bit about the restructured Teva agreement? I didn't realize you restructured that agreement. Why you did it? And if you are going for a fee for service model, how could an injectable anesthetic agent like propofol not be a beneficial product offering with the inhaled anesthetics?

Glenn, we always had a contract with Teva or an agreement where the rights were going to go back to them at the end of 2008. So that was already planned and baked into our long-range financial outlook. We've accelerated that to this year. That will have a $35 million year-over-year sales comp issue in the back half of the year for the anesthesia business. I'll let Rob or Bob address the value of propofol.

If you look at the contract that we did, as Mary Kay said, Glenn, we knew we were going to be returning the product in 2008. Basically in discussions with Teva there was a little bit of a win-win here. Teva wanted to make sure that they had an orderly transition of the product back to them, that we helped them as they think about the customers that we were dealing with, how we dealt with the product between now and when we returned it to them.

And so what we effectively have done is entered into a contract where we return it earlier. We do lose the sales, but they're actually giving us an incremental payment which will benefit us over the next several years. Net-net this was an economically positive deal for the Company. And in 2007, while we lose $35 million in sales we actually gain $1 million in gross margin.

So it was neutral from a margin perspective to us this year; and we will continue to get benefits beyond what we would have otherwise if we had not done this deal. So it was a little bit of us seeing it coming, wanting to smooth it out, and Teva wanting to orderly transition and being willing to pay a little bit for our assistance there. So it worked out.

And frankly, Glenn, it's not like from a strategic point of view we can leverage more propofol sales because of our broad based position in inhalation agents. If we could have we would have done that.

But obviously given the erosion of both the volume and the price, candidly propofol is a commodity, the brand selection is based on price, and there really is not a lot of strategic synergy, if you will, to our inhalation franchise. And I think that's important to understand that distinction.

Got it. Thank you.

Larry Keusch, Goldman Sachs.

Good morning. Just a couple things, Bob and everybody there. First, I'll just rattle them off. First off, I'm not sure if I missed this, but ADVATE sales for the quarter?

Secondly, you made a comment I think that the plasma derived Factor VIII pricing was improving. If you could just sort of discuss what's going on with that.

And then the last part, just relative to the guidance, the improved guidance for the year, maybe you could just talk through what exactly changed since the fourth-quarter report that gives you that increased confidence. I just want to make sure I understand all the moving parts.

Maybe I'll address the guidance and, Mary Kay, you and Rob can think about the other questions; we'll kind of share these a little bit. I would, Larry, just generally say how we closed the year and how we started the first quarter, it really is about momentum. I don't think you can earmark it or target it to one particular component or another.

To have 10% organic growth at the sales line, granted part of that was favorably impacted because of the avian flu stocking order, so adjusting for that it is maybe 9%. That's slightly above the 7% projected compound growth that we communicated long-term at the investor conference. And when you adjust for TT going toward, our organic growth for the last three quarters is projected somewhere in the range of 8 to 9% and that also accommodates the BeneFIX loss in the second half of the year.

So we're pleased with really how robust the growth is across all of our businesses and all of our regions. I think as much as anything that's where we draw confidence from in terms of the guidance that we provided. There's a few puts and takes in terms of share count and the like that gives us some favorability, but most of the increase in guidance is really organic and derived from the core operations of the business. I don't know if you want to add to that, Rob.

I think the important point is there is an operating component, so in addition to over achieving our operating expectations in the Q1 results, we are carrying some further operating improvements for the full year that Bob highlighted.

And then clearly, the share count adjustments that we made, bringing them down from -- I think original guidance was 660 to 665 million down to 655 to 660 carried a couple pennies; as well as the tax rate. And the tax rate, frankly, was due to the fact that we didn't recognize at the time the full likelihood that we would get the benefit I mentioned due to this favorable tax grant. I don't want to say the jurisdiction, but we thought it was a lower probability we would get that this year. It actually worked out that we got it.

So a lot of this is we continue to have good results both in sustaining our tax position, getting favorable results on audits and getting favorable positions with governments as we look to manufacture around the world. So those components also drove a fair bit of it. So it's a mix of things.

Mary Kay, why don't you address the ADVATE and the plasma derived Factor VIII questions?

Sure. Larry, AVATE sales exceeded $250 million in the quarter. And another change in our guidance was last quarter we talked about the recombinant franchise, ADVATE sales approaching $1.1 billion. We now believe that ADVATE sales will exceed $1.1 billion for full year 2007.

BioScience sales, we also increased our guidance there. You might have noted that it was 8 to 10% last quarter and now we expect BioScience sales to exceed 10%, really driven by ADVATE, plasma proteins and vaccines.

And then the plasma derived Factor VIII pricing?

Oh, what was the question on PD Factor VIII pricing?

Just the reason for why it's improving.

It's improving around the world. Here in the U.S. and in developing markets we're seeing price increases across the board.

Part of it I think, an important point though is the volumes are still actually the driver for plasma derived Factor VIII. We saw pricing, but we saw more pricing in albumin. Albumin is really the story we're -- as people were highlighting I think even in the last quarter call, we are seeing pricing in albumin going up.

So I don't want you to believe that all of what was driving the plasma derived Factor VIII was pricing; it actually had some nice volume gains.

Okay. And Rob, just the tax rate -- so you are saying that is sustainable as you look forward now?

Yes.

Okay, great. Thanks, guys.

Thank you.

Rick Wise, Bear Stearns.

Good morning, it's actually Danielle in for Rick. Okay, a quick question -- I will do what Rick always does and ask a COLLEAGUE question. Just wanted to see if you guys could at all -- say COLLEAGUE launches December 1, 2007, what could be the potential impact there?

So Rick put you up to that?

He did.

We don't really want to get in a position to be definitive. And again, we've been consistent on this all along. At this point our ability to relaunch COLLEAGUE, as we said in the comments, is a function of having the outside expert review our quality systems, us inviting the agency back in, and then getting a clean inspection.

While we're frankly very pleased with the progress that we've made, and we think we're going to be very well positioned for those inspections, we can't control the outcome at this stage. And as long as we're in a position where we can't control the outcome, and frankly we're subject to decisions by the FDA, what we don't want to do is get ahead of ourselves.

The agency has got a lot of things that they're handling right now; we expect that they will respond in a very timely way. But it's really difficult to be in a position to predict that. And as a result that's why we haven't included any sales.

And furthermore, even to speculate, gee, if it was December 1, what would it be? That's really a function of a lot of things, Danielle. So you can tell Rick that you were not any more successful than he in getting specifics from us, okay?

Okay, thanks. Can I ask this question then? As far as your timeline and what you needed to do to commence remediation efforts, etc., would you say you're ahead of schedule or in line?

I think we're very much in line with our schedule that we established actually last summer. So I think we're hitting all the dates, we're pleased with the progress. And I think, again, confident but, again, we can't control necessarily all the decisions at this point.

Okay, great. And then one more question on the plasma protein side. Manufacturing yield improvements, are they continuing and what's the possible effect on gross margins? Is there upside to the 200 basis point '07 increase?

I don't know that there's upside for the rest of the year. We do continue to make improvements in our yields and manufacturing productivity. That has been over the past a contributor to our margin improvements and we think there's opportunity left going forward.

Obviously as we move products to our new L.A. frac facility and so on, that will represent upside opportunity longer-term. But as a practical matter there won't be any benefit from that in 2007, that's more 2008 and post 2008 benefit, Danielle.

Okay. And one more question really quickly. The Phase II IVIG Alzheimer's data, have you guys talked about where or when you're going to release that possibly?

We haven't. It will be before -- Mary Kay, do you want to comment on that?

Yes. It will be in the second half of the year, Danielle.

Second half. Okay, great. Thank you.

Dhulsini de Zoysa, Cowen and Co.

Good morning. I was hoping to push you a little bit on that. All the commentary around pricing, especially on the plasma business, is encouraging. And we understand that albumin is a big contributor. That 17% increase, could you break that down to the contribution from price and volume?

The 17% increase in critical care? Is that what you're referring to?

I'm sorry, the plasma wasn't it a 17% increase?

Plasma proteins, yes. It's albumin -- we've had, again, strong volume gains in the mid to high single-digits across the board.

Okay. So mid to high singles for volume.

In many of the proteins.

Okay. And the rest is all price?

And the rest would be price.

Okay, great. And then could you give us just a global view of plasma fractionation capacity, any changes you see at competitors, anything we should be on the lookout for?

This is Rob. I don't want to get into speaking to what competitors are doing and what's going on in the market. For us we continue to feel that we are in a position to grow our capacity for fractionation with demand in the market and are continuing along a strategy to do that because we think that's the best way to keep the market stable. But I think to get into guessing about competitors would not be a wise move for us.

Okay. Then Rob, maybe one you might be willing to answer. The gross margin benefit of losing Transfusion Therapies, of the 200 basis points is that about a quarter or a third of --?

It's about half of a point full year.

Half of a point for the full year, okay. I'll get back in queue. Thank you.

Ben Andrew, William Blair.

Just maybe a question on the med delivery side. On the disposable access set, business was down in the quarter. Is that a trend that you've seen of late and what do you think accounts for that, where do you think that goes with and without COLLEAGUE?

Mary Kay, why don't you handle that?

Ben, in the U.S. access sets are down due to the lost channels that we have of the COLLEAGUE pumps that we've commented on. I think we've lost about 2% marketshare points, and we commented that in prior calls. And now we're seeing the impact of that in the U.S. disposable set sales.

So if you think about the way that plays out, again, until COLLEAGUE comes back say Jan 1, should we look for that to go down faster and then take some time to come back up as you replace those channels, or is this going to be a flat to down business for maybe more like 18 months?

Ben, this is Bob. It will be a slight modest decline between now and when we relaunch COLLEAGUE. Financially it's not really that material. As Mary Kay just commented, from the inception up until now we've lost share, but it's less than 2 share points which we're not happy about. Candidly it's remarkable, I think, there's been as little erosion as there has been. And so that's why you see that, what is it, 2% decline in the U.S.

Conversely, if you look at the other number to the right, and I commented on this, where we've relaunched around the world we're up over 20% for the quarter. We're hopeful that when COLLEAGUE gets recommercialized you'll see the same. In fact we believe, we know, there will be the same kind of rebound in that category in the U.S. when COLLEAGUE is relaunched.

So I wouldn't anticipate -- there will be some modest erosion between today and when COLLEAGUE gets relaunched. It will not be financially material. The relaunch of COLLEAGUE however will be financially material when that happens.

Just to give it in perspective, we haven't quoted the numbers in a while so I think it's important to bring us back. That less than 2% is about $6 million to $7 million of pre-tax on a company with revenues of $10 billion. So it's something we watch and obviously we take seriously, but economically, as Bob said, it's not significant.

And maybe a quick question for Rob. You mentioned you're going to pull forward the '09 net investment hedges and settling those quicker. Can you remind us of the magnitude of that and the effect on cash flow in -- I think you said you're going to do it in '07?

Yes. If you look at currently where we're sitting it's the -- and just to remind everyone, what we're talking about here is we had mirror hedged or basically locked up about half of our position quite a while back. This is -- what we're talking about is the remaining unhedged portion.

The current mark to market on that is about $370 million and we're not going to take all of it out. I'm thinking we probably will end up taking maybe half. So you're looking at $150 million to $180 million of cash flow. But because of the fact that we do get favorable interest on those hedges that's the interest expense impact we were quoting.

Okay, thank you.

John, we have time for one more question.

Glenn Novarro, Banc of America.

It's [David D'Jeralmo] in for Glenn. Just a couple of quickies for you. First, regarding COLLEAGUE. At your analyst day you talked about smart technology coming up that you had in development. Any comments on where it is at this point?

Not beyond what we shared at the investor conference, David. Clearly we think that once we've worked through the recommercialization of COLLEAGUE and the remediation efforts, which are our highest priority, as I know you understand, we're actually quite bullish on the future prospects for the infusion systems business going forward. And again, we exposed the attendees at the investor conference to some of the reasons for that.

But in terms of a specific timetable for new developments, we're really not going to share those at this point. And while we've got a lot of folks working on that, again as you would understand, our priority is the remediation and then getting COLLEAGUE relaunched. So there will be plenty of time to talk about next generation products as they evolve down the road.

Okay. And turning to generic injectables, any comments on pricing in the quarter?

Actually I don't know specifically, other than I know it's tough because that's the nature of that business. Always has been, always will be. And it's why our strategic focus has been to take the generic therapeutics and convert them into enhanced packaging systems, again as we discussed at the investor conference, whether that's Mini-Bag Plus or premixes or frozen premixes or what have you.

And that continues to be our area of strategic focus where we believe we can get higher margins by putting the generic therapeutics in enhanced packaging for them. But specifically for the quarter, Mary Kay, I don't know if you have anything?

Specifically propofol really impacted that productline. I think we commented in our prepared comments that it grew 7% ex propofol. That's really driven though by our pharma partnering business which was up about 20%, David, in the quarter. And that's offset by flat to declining sales in the generic business.

Okay. All right, great. Thank you.

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