百特醫療 (BAX) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's second-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 cannot be recorded or rebroadcast without Baxter's permission. If you have any objections please disconnect at this time.

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

Thanks, Sean. Good morning, everyone, and welcome to our Q2 2007 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 you that this presentation today includes comments regarding our financial outlook, new product development, and regulatory matters, and may 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 details concerning factors that could cause actual results to differ materially.

In addition, in today's call non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. 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. With that, I would like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning, everyone, and thanks for calling in this morning. We are quite pleased with our second-quarter financial results, which were reported earlier this morning. Not only did we exceed expectations on virtually all of the key financial metrics, I think more importantly we continued to improve the quality of our earnings and also strengthened our overall financial position.

While Rob is going to provide a more detailed explanation of our financial results in just a few minutes, I do want to take a couple of minutes to provide what I think are a few important highlights at the outset of our discussion this morning.

Beyond the obvious, that being EPS exceeding consensus and growing significantly from prior year, I am particularly pleased that sales growth for the quarter -- after one adjusts for both FX and the TT divestiture -- grew a very solid 7%. In fact year-to-date sales growth, again adjusting for both FX and the sale of the TT business, was 8%. In fact, if you look back over the last four quarters, our organic revenue growth has approximated 8%.

I emphasize this, this morning, because as you recall during our March investor conference we did raise our -- what we call our projected base case revenue growth to 7% over our five-year long-range financial planning period. Given our recent results, I think we are clearly tracking well against that projection, while not yet generating any meaningful incremental impact from our wildcard opportunities as well as new business development initiatives.

Another aspect of our Q2 results that I want to highlight upfront this morning is the continuing improvement in the profile of the P&L. Gross margins, as you saw, improved to 49.2% for the quarter, which is our strongest showing in many, many years. Likewise, on an adjusted basis, operating income as a percent of sales achieved 21% for the quarter. I think the last time that Baxter's operating margin was this high was over five years ago.

The drivers of our improving margin position are what I think you have all come to expect -- improving product mix and business mix; an intense focus on pricing opportunities throughout all of Baxter's businesses; disciplined control of our manufacturing costs; and improvement in productivity throughout our global manufacturing footprint; all supported further by the continued pruning of underperforming or lower-margin businesses and product lines, of course most notably the recent divestiture of the TT business.

The last financial highlight for the quarter, which frankly is really more of a strategic highlight I think, that I want to comment on is our R&D spending. As you saw, our strengthening financial position has allowed us to accelerate overall R&D spending, which you all know is a strategic priority for us going forward. R&D investment for the quarter increased 21% from Q2 the prior year, and year-to-date 2006 is actually up 18% versus last year.

In the vein of R&D, let me take just a minute to update you on a few new product, clinical, and regulatory milestones that were also achieved during the second quarter. First of all, we have expanded our R&D capabilities with the acquisition of MAAS Medical LLC, which is a design firm specializing in infusion systems technologies. MAAS Medical brings expertise in technology integration that we believe will create value across a number of our infusion system platforms.

Secondly, in the quarter we initiated clinical trials with our partner, Halozyme, comparing the safety, tolerability, and the pharmacokinetics of various injectable therapeutic agents administered subcutaneously with and without HYLENEX, and also intravenously. As you know, we are very excited about the HYLENEX opportunity and have planned a number of targeted launches over the next 12 to 24 months.

In addition, in the quarter, we achieved a number of milestones in BioScience that I would like to just quickly summarize. First of all, we received FDA approval for the self-manufacturing of ARALAST, our plasma-based therapy indicated for chronic augmentation therapy for patients with hereditary emphysema.

We also launched a frozen version of our surgical sealant TISSEEL, which is a ready-to-use version that certainly simplifies the delivery and reconstitution of that product.

We also began the manufacturing of albumin and lyophilized IVIG at our new plasma fractionation facility in Los Angeles.

Finally -- and we issued a release on this earlier in the week, or last week, I think -- we received FDA approval for a new 3000 IU dosage form or dosage strength of ADVATE, which will launch in the US during the third quarter, which further expands our -- what is really the broadest line of dosage forms available for recombinant hemophilia products.

Before turning the call over to Rob, I do want to comment on last evening's announcement that was associated with the recall of roughly 4,500 triple channel COLLEAGUE pumps that had been placed earlier as part of our overall COLLEAGUE remediation efforts in the US. As I think you all know, in May we received the final go-ahead from the FDA to commence with remediation efforts in the US. About six weeks into the remediation programs, we identified a processor anomaly in the triple channel devices. Without getting too technical, basically we found that a failure could occur when the software mailbox -- or what some people refer to as the buffer -- which stores data until it can be processed, becomes filled when users program complex commands. I would emphasize this situation does not occur in single channel devices.

Since we identified this issue, we have removed all affected devices from the marketplace, and we provided customers with alternative pumps. Stating the obvious, this is clearly a disappointment. Patient safety, as you know, continues to be our number-one priority, and this situation represents another inconvenience to which we have subjected a number of our hospital customers, who frankly have been very patients and supportive as we have managed through this matter over the last year, year and a half.

Let me take a minute just to share a few facts with all of you regarding the implications of this action and our plans moving forward. As I said, the problem we identified is only associated with the upgraded triple channel COLLEAGUEs, not the upgraded single channel COLLEAGUEs.

Also, as I think you know, about three-quarters of our installed base of COLLEAGUEs in the United States are single channel; and the remediation continues with those devices. Just to give you an update, as of this week, we have remediated approximately 11,000 single channel devices; and these upgraded single channel COLLEAGUEs are, in fact, performing very well in the market.

We have also identified the fix to the triple channel COLLEAGUE issue that we described -- that I described earlier. We are in the process of testing the change, so then we can move forward, discuss it with the FDA, and then subsequently submit a supplement to the COLLEAGUE corrective action plan.

I should also point out that we will be completing all of the work associated with our quality systems as part of the consent decree, so that we can invite in Parexel, who is the outside expert, to evaluate our improvement. We think we will be in a position to invite them in before the end of July.

While the situation with the triple channel devices has delayed our timetable somewhat, we still believe that we will be able to complete the remediation efforts in the US consistent with our original timetable. We are also hopeful that we will receive our certification from Parexel in a time frame that would allow us to invite the FDA in during the third quarter for their inspection.

As we previously communicated, we believe it remains prudent not to reflect any sales earnings associated with re-commercialization of COLLEAGUE in our 2007 guidance at this time. Certainly, I would be happy to address any other questions or issues on this matter that you would like to discuss during the Q&A.

But not to belabor that, let me now turn the call over to Rob for a more detailed discussion of our Q2 results. Rob?

Thanks, Bob, and good morning, everyone. I am happy to be here today to discuss our financial results for the second quarter and to provide you with an update on our financial outlook for the rest of the year.

As Bob mentioned, we reported strong results today, which favorably compare to the guidance we provided. The quality of our performance is primarily due to solid revenue gains and strong operational performance, led by continued gross margin expansion, allowing us the flexibility to selectively invest in sales and marketing programs as well as R&D.

You may have noted that our GAAP results included an after-tax charge of $46 million or $0.07 per diluted share. 75% of this charge is cash and primarily relates to the consolidation of certain commercial and manufacturing facilities outside the United States, which will yield future cost and operational benefits. Excluding this charge, our adjusted earnings per diluted share were $0.72, an increase of 26%. These results compare favorably to the earnings guidance we previously provided of $0.66 to $0.68 per share.

Turning to some detailed comments about the P&L and starting with sales, our reported sales totaled $2.8 billion, an increase of 7%. Currency contributed 4 percentage points of growth on the top line. So, sales growth excluding foreign currency was 3%. As Bob previously mentioned, excluding Transfusion Therapies from both years, reported sales increased 10%; and excluding foreign currency, sales growth was 7%.

Turning to individual business performance, let me start with Medication Delivery, which had sales totaling over $1 billion, an increase of 3%. Excluding foreign currency, Medication Delivery's sales were flat to the prior year. International sales increased 10% as a result of strong performance in our anesthesia and nutrition businesses, while US sales were slightly below our expectations and were down 3%.

The two main drivers affecting our US performance, as we have discussed in the past, are the continued decline of propofol and the expected volatility in our anesthesia business as we transition to a fee-for-service model in the US. Adjusting for these factors, US Medication Delivery sales increased in the low single digits.

By segment, anesthesia sales totaled $96 million in the second quarter, an increase of 1%. Strong international sales, driven by the continued success of SUPRANE and SEVOFLURANE, were offset by a decline in the US related to the volatility I referred to a moment ago. We are encouraged that underlying fundamentals in this business remain very strong, as reflected by the solid end-user demand we have seen year-to-date.

With our first-half anesthesia sales totaling $185 million, an increase of 24%, we are comfortable that our full-year sales will increase in line with our expectation of more than 25%.

The global injectables business generated sales of $381 million and increased 1%. Strong growth in our pharma partnering business, which was up by more than 30%, partially offset the decline in generic injectables and propofol.

IV therapy sales were $346 million, and increased 7%, with currency contribute 5 points of growth. Solid international sales driven by the nutrition franchise were offset by a modest declines in US sales, given a tough comparison to last year, when sales increased by 10%.

Infusion systems sales totaled $208 million and were similar to the first quarter. Growth in the US of 3% is in line with overall market growth. International sales were flat to the prior year due to the initiation of commercial sales outside the United States in the second quarter of 2006.

As of now, we have met the pent-up international demand for COLLEAGUE pumps. Therefore, as we return to more normalized growth outside the United States, we will face difficult comparisons through the second quarter of next year.

In summary, while we face competition on our multisourced generic business and deal with the tough comparisons for propofol and COLLEAGUE outside the United States, we continue to be encouraged by a number of positive trends across our Medication Delivery business, including the solid fundamentals in our IV therapy and anesthesia businesses and the growth prospects in pharma partnering. As a result, we continue to expect Medication Delivery to contribute to sales growth, excluding the impact of foreign exchange, in the 4% to 6% range for the full year.

Moving now to Renal, second-quarter sales totaled $553 million and increased 7%. Excluding foreign currency, sales growth was 3%. Global PD sales increased 9%, with currency contributing 4 points of growth. This performance is once again the result of strong international growth, given accelerating patient gains particularly in China, the rest of Asia, Central and Eastern Europe, and Latin America. In the US, while PD patient growth was up in the low single digits, sales were flat, as one of our larger customers exceeded their contract threshold number of patients, triggering more attractive pricing.

Finally, in the hemodialysis, reported sales increased modestly but were down year-over-year excluding the impact of foreign exchange, due to lower sales of dialyzers.

In summary, excluding the impact of foreign currency, we continue to expect 4% to 5% sales growth in Renal for the full year. The success of our back to basics approach is strengthening our global leadership position and we will continue to expand our presence geographically.

BioScience reported another outstanding quarter with sales of $1.2 billion, an increase of 20%. This growth includes 5 percentage points of benefit from foreign currency; and excluding this benefit, sales growth in BioScience was 15%.

Recombinant sales of $431 million increased 9%, with strong international growth of 17% and 2% growth in the US. The US growth rate was affected by last year's initial orders of our ultra high potency 2000 IU dosage form of ADVATE, which totaled approximately $15 million.

We continue to see accelerated conversion to ADVATE, with ADVATE sales now comprising almost 70% of our total recombinant sales. Conversion in Europe remains over 90%, and we have now converted just over 50% of our patients to ADVATE in the United States. We continue to expect ADVATE sales to exceed $1.1 billion in 2007, driven by continued demand and recent market launches.

Turning to the plasma business, sales of $243 million increased 14%. Contributing to this performance is accelerated volume growth of FEIBA, our factor VIII inhibitor therapy; the continued success of our FLEXBUMIN launch; and improved albumin pricing, as well as growth of ARALAST.

Antibody therapy sales increased 20% and totaled $238 million, driven by continued conversion to the premium priced liquid GAMMAGARD as well as price improvements in the US and in Europe.

Sales of our regenerative medicine business increased 10%, driven by strong international growth. Finally, revenues in the Other category totaled $191 million and increased by more than $80 million year-over-year, primarily due to the better-than-expected growth in vaccines. As we discussed last quarter, a warm winter in Germany and changes to vaccination recommendations by the government drove increased demand for our FSME encephalitis and meningitis C vaccines.

Vaccines sales totaled more than $100 million in the quarter and increased by approximately $50 million year-over-year. Recall that while we have generated revenues of approximately $350 million in the Other category during the first half of this year, this performance was due to vaccine seasonality from onetime H5N1 stockpile shipment in the first quarter and other unique factors that we have described.

Sales in the Other category in the second half of the year will be down compared to the prior years, as we complete the planned transition of marketing rights for BeneFIX back to Wyeth and vaccine growth is more normalized.

Clearly, BioScience has reported excellent results in the first half of 2007. Given strong ADVATE conversion, we continue to expect recombinant sales growth in the high single digits, with full-year ADVATE sales exceeding $1.1 billion. We expect plasma proteins to grow in high single digits and antibody therapy sales to total more than $900 million. Regenerative medicine sales will grow in low to mid single digits for the full year.

We now expect total BioScience sales, excluding the impact of foreign currency, to increase 11% to 13% for the full year. Sales comparisons in the back half of the year will continue to get more difficult as we absorb the (technical difficulty) BeneFIX sales in Europe, which totaled $90 million in the second half of last year, and as vaccines returned to more normal sales levels.

I would like to make one other clarification. Regenerative medicine sales will grow in the low to mid teens for the year. I apologize for that misstatement.

Turning now to gross margin, gross margin in the quarter of 49.2% improved sequentially by 1.9 points as a result of higher gross margins in each of our businesses. Gross margin also improved 2.7 points versus last year's gross margin of 46.5%, primarily due to improved business and product mix.

In the second quarter, SG&A of $621 million was flat to prior year as a percent of sales and increased 7%. This increase is due to continued investments in select marketing programs across the portfolio. Benefits derived from the Transfusion Therapies divestiture were more than offset by foreign exchange and increased stock compensation expense.

R&D spending of $177 million includes an $11 million write-off of in-process R&D for the MAAS Medical acquisition Bob mentioned earlier. Excluding this write-off, R&D increased 14% with double-digit increases across all three businesses.

Our operating margin in the quarter was 21%, an improvement of 2 percentage points even after increases in SG&A and R&D. Other expense of $17 million was similar to last year; while interest income of $1 million compares to interest expense of $10 million last year due to higher interest rates and a building cash balance.

Our tax rate in the quarter was 17.5%, which is lower than our original expectation due in part to a settlement of an international tax audit accounting for approximately $0.01 of EPS benefit. In addition, as we have discussed last quarter, we were granted an extension of tax incentives in one of our favorable jurisdictions outside the United States, a portion of which is reflected as a onetime adjustment to our rate. Including these items, our operational tax rate was approximately 20% and in line with our expectations.

Finally, earnings per diluted share of $0.72 increased 26% compared to adjusted EPS of $0.57 last year.

Moving now to cash flow, cash flow from operations for the quarter totaled $731 million and improved by almost $200 million compared to $543 million in Q2 last year. Year-to-date, cash flow from operations was $946 million and improved by approximately $100 million versus last year.

Inventory turns of 2.6 turns are slightly lower than 2.7 turns a year ago. This is primarily due to the continued inventory build in Medication Delivery for the COLLEAGUE remediation efforts.

DSO of 56 days is higher than last year primarily due to a shift in our geographic mix of sales, partially offset by lower DSOs in the United States.

In the second quarter, we repurchased $544 million of common stock, or almost 10 million shares. Year-to-date, we have repurchased $814 million or 15 million shares. We remain committed to returning value to our shareholders with continued share repurchases and our quarterly dividend. In fact, we expect to continue on pace with our program and repurchase at least $1.5 billion of stock during 2007.

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, given our strong Q2 results we now expect earnings of $2.65 to $2.70 per diluted share. For the full year, we continue to expect sales, excluding the impact of foreign currency, to increase in the 4% to 5% range; and at current rates we now would expect currency to contribute approximately 2 percentage points of growth for the full year.

Our sales guidance includes $120 million in sales reductions in the second half of the year related to BeneFIX and the transition of propofol back to Teva, as well as the impact of the Transfusion Therapies divestiture. Revenues related to the transitioned services provided to the Transfusion Therapies business are now expected to total more than $200 million for the full year. As we have previously communicated, adjusting for foreign currency and Transfusion Therapies in both years, our fully organic sales growth would approximate 8%.

We continue to expect gross profit as a percentage of sales to improve by more than 200 basis points and operating margin to improve by more than 150 basis points. We now expect interest and other expense combined to total less than $70 million, with interest expense trending higher in the second half as we address a portion of the net investment hedges that would otherwise expire in 2009, before the end of this year.

For the full year, we now expect our tax rate to be approximately 20%. We expect our full-year average share count to be approximately 660 million shares. Lastly, we continue to expect cash flow from operations to total approximately $2.3 billion and capital expenditures to total approximately $[700] million.

For the third quarter, we expect earnings per diluted share of $0.64 to $0.66 and sales growth, excluding the impact of foreign currency, of 3% to 4%.

In summary, we're very pleased with our operational performance through the first half of the year. We have generated solid revenue growth, consistent with our long-range expectations, and our proud of the improved profile of the P&L, as Bob mentioned. As we stated in the past, 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 meet or exceed our shorter-term EPS objectives. This is best evidenced by our accelerated growth in R&D year-to-date and the significant growth we have achieved in earnings per share.

These results validate the strength of our diversified healthcare model and also reinforce our confidence in our future prospects. Thanks for your attention. At this point, I would like to open the call up for Q&A.

(OPERATOR INSTRUCTIONS) Glenn Reicin, Morgan Stanley.

Good morning, folks. Just a couple straightforward questions here. Number one, on the share repurchases, the $1.5 billion, is that a gross number or a net number?

That is a gross number.

Okay, and what do you think the net is?

Right now, it is probably about 1.1, $1.2 billion.

Okay. Then, can you talk a little bit about the restructuring program? Also talk a little bit about the mechanics of what is happening in anesthesia and why that is going to change in the back half of the year.

Sure. With the restructuring program, obviously, until we have had the opportunity to basically inform all of the individuals inside and make some final decisions, I don't want to get too specific. But basically what we are looking at is rationalizing some of our manufacturing and commercial footprints, mainly in Europe. Which is largely the result of legacy business development deals that are done in the past and we are just taking the opportunity to clean some of that up and improve our efficiencies and how we operate. That is the largest portion of it.

If you look at the breakdown of the total charge after-tax, it was about $45 million. On a pretax basis it is about $70 million. That is made up mainly of severance, with a lesser amount for asset write-offs.

So that is the program. It will be executed over the next couple of years. We would expect to see about $0.02 of improvement going forward; but we are probably not going to reach that full benefit until end of '08 or clearly 2009.

So it is out a little ways, but clearly we felt it was the right move. It continues our efforts to improve our operational efficiency, and is just another step as we look to make sure we have the optimum portfolio both in terms of the mix and how we structure it.

These are Medication Delivery facilities?

Yes, this is all Medication Delivery and Renal operations. There are some small admin and bio, but there is no manufacturing involved in BioScience.

Got it. Okay, and then anesthesia, can you just explain how this whole model works and why it would impact this quarter's sales but not future sales?

Yes, well, what we're looking at is -- I think we have signaled as early as the fourth quarter of last year, we started to see our stocking positions in the wholesaler channel change, both as the wholesalers anticipated us moving to this fee-for-service model. Then moving through the first quarter, you will recall we actually had, I think it was 68% growth in the US, which was again the stocking effect.

But as we move through the rest of the year, I think you can -- you will see this. Next year this should be totally out, because what we're watching for really now is for wholesalers to get to what would be a normalized, expected stocking level, which is it about 30 days. They're not completely there yet, but that is really what has driven it. And it will be out of our volatility, out of our comparisons, as we move into next year.

This has nothing to do with changes in the way you bill your customers for these products?

No, no. If you look -- and I highlighted in my comments end-user demand. Because that is really what we look to, to try to look at and exclude this noise created by the stocking volatility. We continue to see very strong end-user demand in the United States. It is growing as expected, and it is very consistent. So that tells us this is a stocking issue, not anything with our actual end-users of the product.

Glenn, I would also point out that last year, if you look at the sales, Q2 to Q3 we saw a significant decline sequentially. So Q3, we really have an easy comp in terms of our growth.

Right. Okay. Thank you very much.

Mike Weinstein of JPMorgan.

Thank you; good morning, everybody. Actually that was a good explanation on the anesthesia piece. That was obviously one people were going to ask.

I would like to focus maybe just in on the BioScience side. You commented about the vaccine business (inaudible) first quarter and then here in the second quarter; and you gave your commentary for the back half of the year. But I would like to get your thoughts on this business, which obviously is a high-margin business for the Company, and its potential as a growth driver beyond 2007, as you think about some of your opportunities in '08, '09.

Secondarily, if we could just focus on the market for Alpha-1 Antitrypsin. Now that you have brought that manufacturing in-house, how should we think about that opportunity? My understanding is the market is relatively sticky for existing patients. So I assume some of that is going to be trying to increase supply availability and attracting new patients. But that would seem to be a pretty attractive opportunity based on some of the numbers that [our] company posted out there for that product line's sales.

Would you comment on those two, and then circle back? Thanks.

Sure, Mike. This is Bob. Let me maybe -- you have touched on a lot of things. Let me kind of kick it off, and then Rob and Mary Kay can augment. You know, at a high level, we continue to be very bullish about not only the short term and the intermediate term but frankly the long-term prospects of the BioScience business. And all components of that, starting with the hemophilia franchise.

Secondly, the plasma proteins as a category we have talked about before. We certainly anticipate stable market conditions continuing. In fact, we anticipate there will still continue to be opportunity for pricing on plasma proteins. We see across the array of plasma proteins, certainly mid if not high single digit growth, led by demand for IVIG.

We are seeing wonderful contributions from what I would describe as specialty proteins, FEIBA being a great example -- an older product, but one that with additional promotional focus over the last couple years has grown strong double digits. We anticipate that will continue.

Certainly a product like ARALAST, as the last part of your question, would fall under the category of a specialty protein. Being able to self-manufacture it has obvious applications in terms of enhancing our margin. You know, if we look at the longer-term potential for this product, clearly this is -- and I think we got into this a little bit in the March investor conference -- this is certainly a $200 million to $300 million kind of opportunity for us longer-term.

We also see then in the last two segments, being vaccines, continued increasing vitality in the vaccines business, as evidenced by our first half. We continue to be encouraged by the prospects, intermediate- and longer-term, with not only our pandemic technology in pandemic flu vaccine, but leveraging that to seasonal flu vaccine as well. So the long-term ramifications of the vaccines business -- I think our outlook of the vaccines business is also very encouraging.

Then finally regenerative medicine, led by our biosurgery business, but augmented by one of our wild-card opportunities, which is our self-therapy program, which continues to advance very nicely.

So I covered a lot of things there, but whether it is the core hemophilia franchise, the immunology franchise, the array of plasma proteins including specialty proteins like FEIBA, like ARALAST, and increasing strength throughout vaccines, and very exciting prospects for the future for regenerative medicine, I think one can conclude that BioScience as a total business is one that not only has driven a lot of the turnaround at Baxter over the last two years, but is going to continue to drive growth in the future.

So that was a lot of stuff, but your question included a lot of stuff. So I don't know, Mary Kay or Rob, specific things you'd want to share just to augment my comments, or --?

The only thing I would add, Bob, and I think for a lot of you guys are already aware of this, but the ARALAST opportunity is not only a revenue growth opportunity that Bob mentioned, but it is also a margin expansion opportunity. Because once we are fully up and running in-house, we will be avoiding the royalties we used to pay.

So in other words, we look at it both as a margin expansion at no revenue growth, as well as on top of that the potential to really expand this business going forward. So it really gives us a benefit on both aspects.

Just two quick follow-up then I will drop. The share repurchase commentary, that was a higher number than you talked about before. Is that accurate?

It is. There is really -- what I wanted to make sure and I think Glenn picked this up when asked the gross and net question. But what we were really trying to let everyone know is, as we continue to see our stock price rise, as we continue to see option exercises, we have actually seen a nice cash inflow, higher than expected due to the size of options. That it has afforded us the opportunity -- as well as just the strong cash flow operationally in the business -- to pick up the share repurchase at a pace that we think we can continue going forward.

That is why I wanted to make sure that people understood we are above the $1 billion we had communicated going forward. That being said, we are bringing in a fair bit of cash and expect to continue to do that due to these option exercises. So it is a good problem to have.

Yes. Just to clarify on that, so the use of that additional cash from the option exercises to repurchase rather than invest in acquisitions or product and licensing, can you just talk about that. Then I will drop back.

Yes, as you recall at the investor conference we laid out our capital allocation strategy. That had not assumed the significant inflow of cash due to option exercises. So clearly, as we make the decision to plow that back into share repurchase, we still believe we have more than enough flexibility to drive the growth in external investments. So nothing has changed from that perspective.

And we are still generally operating consistent with that capital allocation we had laid out. So in that sense, this does not in any way change our strategic focus on trying to grow the business as well as return shareholder value through the form of the repurchase.

Great, thanks.

Larry Keusch from Goldman Sachs.

Good morning, everyone. Two questions. First, for Bob, your cash position is building here. You are almost $2.5 billion now. Can you walk us through again just how you're thinking about uses of that? In particular, acquisition activity. Could we see something this year? And perhaps kind of target and size again?

Well, to pick up on what Rob said, in addition to our share repurchase objectives and dividend strategy, we feel we have ample cash to support business development efforts of a variety of ways, ranging from opportunistic bolt-on kinds of acquisitions to in-licensing and so on.

As we discussed at the March investor conference, we are going to remain very disciplined in how we subject prospective deals to defined financial return thresholds. In addition to that, any deals that we do -- as we said again in March -- have to fit within an acceptable, what I call a strategic template that we defined for our various business development teams.

Having said that, I will tell you internally momentum is building with these efforts. I'm actually confident that we will begin to finalize a number of transactions of various types as we proceed through the third quarter. So we look forward to discussing those in greater detail when we get together for the next earnings calls.

But again, I want to clarify for everyone the kinds of acquisitions that we are talking about are not the big transformational things that we have discussed, but things that are complementary to businesses that we are in today. So you can't talk about things until they are done deals; but the quick punch line is momentum is building. I think we are going to get various kinds of deals done in the third quarter, and we look forward to discussing them with you.

Similar to MAAS Medical, that is not a deal we had really hyped in any way, but we see that as an important addition from a -- bringing in good developmental talent as well as some good technology that will work across a whole range of platforms within the Medication Delivery business. So that is one example of activity; and as Bob mentioned, there is more to come.

Okay, and then just two other quick ones. Second quarter in a row that you guys have talked about firming albumin pricing. So I'm just wondering if you can give us a little flavor for what is happening in that segment.

Then a clarification for Rob. You mentioned a 20% tax rate for the year. I just want to make sure that I'm understanding that that is inclusive of the reported lower tax rate that you reported for the 2Q.

Yes.

Well, the albumin pricing dynamics continue to be the same. They do firm, probably more notably in Europe where they were actually lower. We would anticipate, Larry, that that is going to continue.

So you know, to be specific as to how high it will go and when and so on, we won't get into that. But we don't see anything in the marketplace that would deviate from this firming trend that we continue to see. Rob, why don't you --?

Yes, and to clarify, Larry, we are saying that our full-year tax rate will be approximately 20% now. That is the guidance. That includes the onetime benefit that drove the rate lower in the second quarter.

If you recall, last quarter we signaled that we would have this favorable change in our tax grant in one of our tax-favored jurisdictions that affects us on an ongoing basis. It effectively lowers the rate on an ongoing basis. We had reflected that in our guidance last time.

In fact, we ended up getting a onetime catch-up benefit a little bit bigger than we expected from that, as well as I noted we had an audit settlement in another jurisdiction that I think I had even signaled in various either calls or conferences, that we know those are out there, there are potential for those; we just never really know the timing. Because it really is determined by the resolution with a foreign government.

So that onetime benefit is reflected, but that doesn't have any impact on the ongoing run rate of the tax rate. It is really only that one change in the favorable jurisdiction that drives that rate; and that we have reflected.

Okay, great. Thanks very much.

Rick Wise of Bear Stearns.

Good morning, everybody. Following up on the notion of acquisitions and the positive operating leverage that you showed us this quarter, can you elaborate, first, a little more on the improved business and product mix? I mean, we have talked about some things. But is there, are there one or two drivers in your mind that played a bigger role than others?

Should we rethink, with sales tracking at the upper end of the 8% if you exclude all the noise already, should we feel like it is possible that with acquisitions and everything that we might see more in the 8% to 10% growth range over the next several years?

Okay, Rick. This is Bob. In terms of the mix dynamics going on, starting at the highest level I described it as business mix. Obviously, BioScience is growing at a faster pace than Renal and Med Delivery. It has inherently higher margins. So we continue to benefit from that, as reflected in the overall corporate gross margins.

But in terms of product mix, in the interest of time I won't go through everything; but every one of our businesses is benefiting by focus promotionally and from a marketing point of view on higher-margin products.

You know, the discussion we had as a follow-up to Mike Weinstein's question on ARALAST is a great example of that. Continued conversion to recombinant. Obviously, pricing throughout BioScience, particularly in plasma proteins, is helping the margins considerably.

But if you look at Medication Delivery, anesthesia, we talked about that being a 24% year-to-date grower versus prior year. We are projecting the same performance for the rest of the year. Anesthesia has a much higher margin than the rest of Med Delivery.

So I will stop there, but I think there are myriad examples of product mix upgrades in each of our businesses; and then further augmented by the higher-level issue of BioScience as a higher-margin business growing at a faster rate. Those dynamics that I described, we certainly foresee those continuing throughout the rest of this year, '08, and frankly beyond.

To your second question, Rick, on organic growth rate, kind of the 7% number that we threw out at the March investor conference -- and even in my prepared comments this morning, I further reinforced that, with it being about 8% when you adjust for FX and the TT divestiture over the last four quarters.

That will get off course a little bit, obviously, the second half of this year because of this loss of promotion rights on BeneFIX, which we have talked about. So that impacts us about 1%.

(multiple speakers) percent to the back half of the year.

Yes, about 1% in the back half of the year. But back to your question, our framework has been consistent from the start. We are looking at a 7% kind of a base-case organic growth of the portfolio of businesses. As we look to some of these wildcards materializing, and as we look to accelerating business development -- either via acquisitions or in-licensing of product and technology -- it is reasonable to expect--. Well, certainly our aspiration long-term over our five-year long-range plan is to exceed that 7% organic growth. Okay?

Committing to a number and being more specific until some of these wildcards do begin to manifest themselves -- and in fact we do put runs on the board in terms of deals that can be an overlay to that base case -- it would be premature probably to quantify it.

But it is clearly safe to say our aspiration as a Company is to grow our top line at a faster rate than that 7% kind of organic base-case growth that we talked about in March.

The other thing I would add is everything that we do, given our disciplined focus on achieving or exceeding financial thresholds, is I would expect that we continue to be committed that our margins are going to continue to be improved and bottom-line EPS will grow at a faster rate than the top line throughout the five-year financial plan.

Thanks. Two last questions. One, anything -- you talked to the wildcards. Anything we should ask about? An update on any of the wildcard projects?

Last, I feel like somebody has to ask about the COLLEAGUE in a little more detail. Happily, you caught the issues early. Happily, it seems limited. But how did it happen at a time when you seem to be executing so well? How can you reassure patients, customers, FDA that this isn't going to keep happening?

Just maybe on a personal level, Bob, do you think it hurts your franchise longer-term that this keeps recurring? Thank you.

Yes, let me start with the COLLEAGUE and then work back to the status of the wildcards. Those are two very different kinds of questions.

But the COLLEAGUE things, given the announcement last night, is kind of the proverbial elephant in the room, so I'm actually glad you asked it. The obvious question is, how did something like this happen?

I think it is probably fair to say that, given the unique nature of this thing, it is not something that one would typically pick up during a kind of conventional or traditional kinds of validation efforts. This was really kind of an extreme real-world operating scenario that in certain conditions a user -- specifically a critical care nurse -- one who is extremely familiar and in fact very adept with how she or he programs the device, could actually program a series of commands at a very rapid rate. Whereby the capacity -- I don't want to get too technical -- but whereby the capacity of the buffer becomes overloaded. That was really the phenomenon.

So the question is, we should have caught this, and we didn't. I think it was a real-world situation that was extremely difficult to simulate. But the reality is we should have caught it, we didn't, it is that simple.

So the question is, how do we learn from that? How do we get better going forward? I mentioned in my comments, we have a fix. The issue isn't the fix. The issue now is in testing the fix and subsequently validating the fix, understanding -- by implementing this simple, quote unquote, fix, are there unintended consequences or a ripple effect someplace else in the system?

We don't think that is the case. But given our experience throughout this COLLEAGUE situation, and then clearly more recently with this -- you can only characterize it as a disappointment, even though we did catch it early; nonetheless, it is a significant disappointment. We can't afford to screw up again, and I don't think we will.

But we learn from the experience and we go forward and we try to get better.

The second part of your question on COLLEAGUE relative to long-term ramifications, look, if we move ahead and complete the remediation consistent with the timetable that we spelled out, if we can work through the consent decree, get our certification from Parexel, get the agency back here, in here in the third quarter, fulfill our obligations per the terms of the consent decree, and be in a position hopefully by year-end if not before to re-commercialize COLLEAGUE, I am confident we will manage through all this.

But having said that, we are not oblivious to the fact that patience on behalf of our hospital customers does have its limits. This situation does not help. I would not say, assuming we can execute, moving ahead in accordance with how I believe we can, that it will fundamentally hurt the franchise. But we cannot afford any more mistakes. That is as direct as I can be on the COLLEAGUE situation.

Your first question, which is a very different question, which is kind of the update on wildcards, there is nothing new to report; other than I would say we have not had any milestone disappointments on any of those programs. We will be more forthcoming on aspects of our flu program, both the pandemic and the seasonal flu vaccine program, in the coming quarter and certainly in the next call. There's a lot of things going on there. They are very positive. So I'm actually increasingly positive about the prospects of our flue wildcard.

The Alzheimer's IVIG wildcard, nothing new to report. I think you all know that Phase II clinicals being conducted by Cornell Medical Center will be concluded sometime in the third quarter. We will see what the outcome there is. But there is no new news on that front.

The whole cell therapy program, actually I am having two-hour project update tomorrow with the team. But I have already gotten kind of Cliff Notes version. Things continue to progress very well there, ranging from enrollment of patients in the Phase II clinical to all other aspects of that program. So we continue to be very bullish about that.

Halozyme, we commented on that in the prepared comments. We're actively engaged in an array of clinicals; continue to be very excited about that technology.

Anyway, I will stop there so this isn't a detailed R&D review. But no disappointments on any of the wildcards, and I would think on a number of them, if not most of them, perhaps even more encouraging position today than when we discussed them in March.

Thanks so much, Bob.

Ben Andrew of William Blair.

Good morning. I just wanted to ask about plasma collections. I saw some data recently that US plasma collections are up about 20% year-to-date to about 12.5 million liters, which is where they peaked back in '03. Do you feel like the pace of plasma collection growth is picking up speed? What do you really project for '07 and '08 in terms of industry overall collections?

Ben, this is Rob. Yes, I think you have seen collection pace increase across the industry. Obviously, this is in large part driven by the fact that demand continues to be very strong and, frankly, above expectation. So we do not believe in any way that collections are outpacing demand.

As we have said many times, there is as much of a risk of under-collecting in a strong demand market as there is in over-collecting. So in that sense, we are kind of frankly encouraged by the collections, because it means the industry is keeping pace.

As you look forward, that being said, I don't believe -- and this is our internal view -- that we are going to continue to see the kind of growth that we have seen this year going forward. We have signaled on several different occasions long-term we look at the plasma market to be growing at around 10% total; and in that is about 6% volume. So you can back into what that has to be from a collections perspective.

So while we are benefited from this, feel good about it this year, it doesn't change our long-term aspects or long-term outlook at this time.

Okay. Then on the manufacturing side, how are things going with the new plasma facility? The yield improvements there that you expect coming along? When do you think you will shut down the older facility in Glendale?

Yes, things continue to come along well. As you know, we have approval in that facility for our lyophilized versions IVIG and albumin; and we are starting to ramp up production.

As you recall we have signaled, given the fact that we ship out of that facility globally, we are still in the midst of working through registrations outside the got United States. As a result of that, really don't expect to be fully up and running in that facility until probably early 2009.

We will expect to get liquid IVIG approved here sometime in 2008. But -- so by the time you get that approved, then go do the same international registration process, as well as bring up the production of the lyophilized products as we get that registration, it is still a couple-year process to get this fully up and running. Nothing, however, tells us that we are either behind our timelines or have run into any issues.

Okay, thank you.

Glenn Novarro of Banc of America.

Thanks. I have two questions. One, on the BioScience, sales were up 20, FX contributed 5 points. Can you break out what overall price contributed to the BioScience growth in the quarter? And then maybe comment about how sustainable that pricing benefit will be on 2008? That is question one.

Then just a follow-up question on the COLLEAGUE. I'm imagining if the consent decree does drag on for a few more months or a quarter longer than we think, one risk would be potential pump contracts coming up that may be impacted. I am not aware of any pump contracts coming up; but can you just clarify that for me? Thanks.

Yes, Glenn, this is Bob. Let me comment on the COLLEAGUE thing, then I will have Mary Kay or Rob maybe respond on your price question on BioScience.

As I think you know, typically our pumps are contracted as part of a broader IV solutions, IV set, bundled kind of a contract. Actually, virtually all of those contracts with the major groups are extended out in the future and, in most cases, fairly significant term. Okay?

So given that there are not any significant overall contracts or certainly pump segment contracts that are coming up for renewal in the near future. So there just aren't.

Okay, good. That's what I thought.

There may be -- there's some few isolated single accounts here or there, Glenn. But no, there's no biggies.

Okay, great.

Okay. Mary Kay, why don't you comment on the price thing?

Glenn, in terms of price, most of our products we had very strong volume growth this quarter. I would say volume growth probably averaged in the high single digits across BioScience. We had some products where volume growth was significantly higher than that. In some cases, I would say even at the low-end, some products grew from a volume perspective in the mid single digits.

Obviously, pricing within the plasma proteins area continues to improve. Sequentially, though, pricing was maybe up across the board a couple of percent. Year-over-year, the gains are a little bit larger.

Overall, if you look at margin, gross profit, dollars within BioScience, still the primary driver is the mix shift to some of the higher-margin products. Liquid IVIG, ADVATE, FLEXBUMIN, for instance. So about 70% of our margin improvement in BioScience continues to be volume, mix shift, and cost reductions actually; and about 30% is price.

Okay, thanks, Mary Kay.

I think we have time for one more question, Sean.

Dhulsini de Zoysa from Cowen.

Great, thanks. Bob, that was a very good explanation of the COLLEAGUE, the most recent recall. But I was wondering if you could just help us understand, just to tie up loose ends, how this didn't bubble up from overseas. Maybe put in context what the triple channel pumps represent as a percentage of overall COLLEAGUE pumps overseas, so we can understand how over the past year that you have been remediating this didn't arise there?

Then if I missed it, I am sorry, but did you give an ADVATE number for the quarter?

Yes, Dhulsini, that is a great question on COLLEAGUE. I will answer that. Let's just clear the ADVATE. What was the ADVATE number?

Yes, ADVATE, Dhulsini, was almost $300 million in the quarter.

Great, thank you.

Okay, back to your question on COLLEAGUE, which is actually a very practical question. The reality is the upgraded triple channels being remediated in the US are a different software version than what we moved ahead with in the remediation outside the US. Okay?

It incorporated some additional functionality and features, which -- again I'm not going to get in too much detail or too technical -- were contributing factors to this buffer issue that I described. But simply stated, that is why the issue that manifested itself in the US had not previously manifested itself outside the US, where the pumps, both the single and the triple, actually are working very well.

Our plan, I would tell you, however, was to take the new software version with the additional functionality in the US and over time phase it through our COLLEAGUE installed base in markets throughout the world. In fact, when we recalled the 4,500 COLLEAGUEs, there were a handful of those that were out in two or three international markets. The reason for that is we had cut over into new production in Singapore with the new software version that I described for the upgraded triple channels in the US. Because we were at the early stages, a few of those devices had gotten out in international markets.

Fortunately, we were able to catch that, intercede. I think only -- no more than 20 devices actually or 30 devices, or something like that, a very low number, had actually made it to hospitals.

So that is simply stated the reason for the issue in the US versus what has continued to be very reliable performance outside the US.

And we don't need to worry that this might actually --?

No, nope.

Okay, great. Terrific. Thank you.

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