百特醫療 (BAX) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's third-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, Shawn. Good morning, everyone, and welcome to our Q3 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, 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 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. Now, 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 very pleased with our third-quarter financial results that were reported earlier today. Not only did we again exceed expectations on key financial metrics, we continue to improve the quality of our earnings and also strengthen our overall financial position. While Rob will provide a more detailed explanation of our financial results in just a few minutes, I would like to point out a few important highlights at the outset this morning.

As you saw, adjusted EPS again exceed consensus for the quarter, reflecting a 23% increase versus the prior year. I'm also pleased that the sales growth for the quarter, after adjusting for both FX and the TT divestiture, grew a very solid 7%, despite the loss of BeneFIX sales in Europe in the third quarter.

Year-to-date sales growth, again adjusting for FX and the sale of TT, was 8% versus 2006. So clearly we are tracking very well against the projections that we provided all of you at our investors' conference earlier this year.

Another aspect of our Q3 results that I want to emphasize is the continuing improvement in the profile of the P&L. Gross margins improved as you saw to 50% in the quarter, which is our highest level in many years. Likewise on an adjusted basis, operating income as a percentage to sales achieved 21.9% for the quarter. Both these key metrics continued to improve sequentially as well as versus prior year.

As I commented during last quarter's call, our improving margins are the result of improving product mix and business mix; intense focus on pricing opportunities throughout all of our businesses; disciplined control of manufacturing costs; and productivity improvements throughout our global manufacturing footprint, all supported further by the pruning of underperforming and lower-margin businesses and product lines, most notably the recent divestiture of the TT business.

Finally, we continue to accelerate our overall R&D spending both internally and through ongoing business development initiatives. As you saw, R&D spending for the quarter increased by 13% on an adjusted basis versus the prior year, and we're actually up some 16% year-to-date versus 2006.

What I would like to do is just take a few minutes to provide some additional color and update you on some business development and R&D milestones that were achieved during the third quarter. Let me starts with business development activities, which included, first, a collaboration in our renal business with DEKA Research & Development Corporation for the development of a next-generation home hemodialysis machine. This reinforces our ongoing commitment to innovation in end-stage renal disease treatment and expansion of our leadership position in at-home dialysis.

I should also mention that a study which was recently published in the Journal of the American Medical Association and funded by the Kidney Foundation of Canada highlighted that nocturnal hemodialysis done six times per week may be better than conventional in-center dialysis. This further supports the broader use of at-home dialysis, where Baxter has unmatched expertise.

In our Medication Delivery business, we finalized a joint venture in the third quarter for parenteral nutritional products in China. This venture will allow us to improve access to care by expanding the availability of Baxter's innovative parenteral nutrition products to patients, physicians, and pharmacists in the region and also reflects the importance of China to our continued geographic expansion and growth.

In BioScience, we expanded our relationship with Halozyme Therapeutics, forming a new collaboration focused on the development of subcutaneous liquid IVIG. This delivery enhancement will apply Halozyme's proprietary Enhanze Technology with GAMMAGARD LIQUID, increasing convenience and improving delivery of the therapy.

Finally, earlier this week, we announced an agreement between BioScience and Kaketsuken, the Chemo-Sero-Therapeutic Research Institute based in Kumamoto, Japan, for the worldwide rights to develop, manufacture, and market the recombinant protein ADAMTS13. In the absence of the ADAMTS13 in the blood, patients develop a severe, often life-threatening condition called thrombotic thrombocytopenic purpura, marked by the formation of platelet-rich blood clots and blood vessels throughout the body. Recombinant ADAMTS13 is being developed for the treatment of TTP and related disorders and will be evaluated for other indications in the future.

During the third quarter, we also achieved a number of R&D milestones. First, we announced promising Phase 1/2 European study data for our candidate seasonal influenza vaccine indicating that the vaccine induced a strong antibody response and demonstrated good tolerability in all study populations.

Second, we signed an advanced supply agreement with the UK Department of Health for our candidate pandemic H5N1 influenza vaccine, and we continue to work closely with governments around the world on pandemic preparation. As you know, both our pandemic and seasonal vaccines are manufactured in a serum-free viro-cell-based system which offers several advantages over the conventional egg-based technologies.

Third, we announced plans to initiate a Phase 3 Alzheimer's clinical trial with liquid GAMMAGARD, which will begin in early 2008. This decision was based on the results and preliminary analysis of interim data from a double-blind and placebo-controlled Phase 2 study completed by Dr. Norman Relkin and colleagues at Weill Cornell Medical College in New York City. In this study, 24 patients with mild to moderate Alzheimer's were treated with IVIG and demonstrated a favorable response relative to those given placebo. We expect the final results of the Phase 2 trial to be formally published in early 2008.

Finally, I would like to mention that the transition to our new state-of-the-art plasma fractionation facility in Los Angeles is proceeding as planned. In fact, I am pleased to announce that we have recently received regulatory approval from the FDA to process liquid IVIG at our new fractionation facility. This approval, which was actually received earlier than expected, marks the final milestone for the US as we are now able to commercialized all key plasma proteins produced at this new facility for the US market. As you know, this facility is expected to be more efficient and over time enhance the yields of our fractionation process.

Before turning the call over to Rob, let me provide you a brief update on the ongoing situation with the COLLEAGUE infusion pump. First of all, I'm pleased to communicate this morning that the FDA was recently notified by Parexel, our outside expert, that our quality systems have been inspected and certified, thereby triggering an inspection by the FDA within the next 30 days. We continue to make good progress with the remediation of the US installed base of single channel COLLEAGUEs, with now approximately 40,000 of the US installed base of 150,000 devices remediated to date. These upgraded single channel COLLEAGUEs are performing very well in the marketplace.

We have also defined the fix to the triple channel COLLEAGUE issue, which as you know was the basis of the July field corrective action. We are in the final stages of completed the necessary testing validation of the software modifications. We expect to submit our 510(k) to the agency reflecting our enhancements to the pump before our next earnings call in January.

As you know, we did communicate that our financial guidance for the remainder of 2007 does not reflect any sales or earnings associated with recommercialization of COLLEAGUE. We will be in a position to provide guidance regarding COLLEAGUE sales for 2008 when we provide overall Baxter guidance in January. I would be happy to discuss any questions on this matter during our Q&A this morning. But first, let me turn the call over to Rob for a more detailed discussion of our Q3 results. Rob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, we reported strong financial results today, which favorably compare to the guidance we previously provided. The quality of our performance is the result of solid revenue gains and continued gross margin expansion, which again allowed us the flexibility to selectively invest in sales and marketing programs and R&D.

You may have noted that our GAAP results included after-tax charges totaling $63 million or $0.09 per diluted share. These charges are for in-process R&D associated with collaborations we announced during the period with DEKA Research & Development Corporation and Halozyme Therapeutics, both of which Bob referred to earlier; and a charge to establish reserves for litigation related to ongoing disputes concerning historic average wholesaler pricing practices.

Excluding these charges, adjusted earnings per diluted share of $0.70 increased 23% and compared favorably to our earnings guidance for the quarter of $0.64 to $0.66 per share.

I will now walk you through the P&L by line item, and I will spend most of my time this morning on the sales discussion by business and our revised outlook for the year, given that the P&L for the quarter is pretty straightforward, reflecting strong operational results.

Now, starting with sales. Our reported sales totaled approximately $2.8 billion and increased 8%. Currency contributed 4 percentage points of growth; so sales growth excluding foreign currency was 4% and in line with our sales guidance of 3% to 4% at constant currency rates. As Bob mentioned, excluding Transfusion Therapies from both years, reported sales increased 11%; and excluding foreign currency, sales growth was 7%.

In addition, I would like to remind you that we face difficult comparisons to prior year in both BioScience and Medication Delivery, due to the planned transition of marketing rights for BeneFIX and propofol, which had combined sales totaling more than $60 million in Q3 of last year for these two products.

Turning now to individual business performance, let me start with Medication Delivery, which had sales totaling over $1 billion, an increase of 10%. Currency contributed 4 percentage points of growth; and excluding foreign currency, Medication Delivery sales increased 6%. As we expected, Medication Delivery growth accelerated versus Q2 primarily as a result of strong performance in our anesthesia business and solid improvements across the rest of the portfolio. US sales for the business increased 8% while international sales increased 13%.

By segment, anesthesia sales totaled $111 million in the third quarter. Sales increased sequentially by approximately $15 million or 16%, and increased 46% compared to prior year. We remain encouraged by the strong underlying fundamentals in this business as reflected by the continued growth in end-user demand. Our success with our proprietary anesthetic SUPRANE reinforces our position as the only supplier with all three modern inhaled anesthetics in the global marketplace.

Global Injectables and pharma partnering sales of $372 million increased 6%, with currency contributing 3 percentage points of growth. Strong growth in the pharma partnering business, which was up 20%, partially offset the decline of propofol, which had sales of approximately $20 million in Q3 last year.

IV Therapies sales totaled $346 million, an increase of 9%, with currency contributing 6 percentage points of growth. US growth in IV therapy was driven by solid demand and modest pricing improvements, while international performance was the result of growth in our nutrition business in addition to volume gains in IV therapy products, particularly in Europe, Latin America, and China.

Infusion Systems sales totaled $207 million, similar to the first two quarters of this year. Sales growth of 5%, or 3% excluding foreign currency, was in line with overall market growth.

I would also like to point out that, given the breadth of our Medication Delivery portfolio, during the third quarter we announced a two-year extension of a sole-source contract for IV therapy and nutrition products and the continuation of our infusion pump agreement with Novation on behalf of the University Healthcare Consortium. UHC includes the most prestigious academic hospitals in the US, and our new contract is valued at approximately $200 million over the award period.

In summary, we remain encouraged by a number of positive trends across our Medication Delivery business, including the solid fundamentals in our IV therapy and anesthesia business, and the growth prospects in pharma partnering. As a result, we continue to expect Medication Delivery to contribute sales growth, excluding the impact of foreign currency, in the 4% to 6% range for the full year.

Moving now to renal, third-quarter sales totaled $560 million and increased 8%, with foreign currency contributing 5 percentage points of growth. Global PD sales increased 10%, with currency contributing 5 percentage points of growth. This consistent performance is once again the result of strong international growth with accelerating patient gains, particularly in China, the rest of Asia, Central and Eastern Europe, and Latin America. In the US, the positive patient growth trend also continues, with both patient gains and PD sales growth in the quarter approximating 3%.

In hemodialysis, while reported sales increased modestly, excluding currency sales declined in mid single digits versus prior year due to lower sales of dialyzers and ancillary HD products. The expected decline in hemodialysis is consistent with our strategy of de-emphasizing lower-margin businesses in the portfolio.

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

BioScience reported another outstanding quarter with sales of approximately $1.1 billion, an increase of 14%. This growth includes 4 percentage points of benefit from foreign currency. Excluding foreign currency, sales growth in BioScience was 10%. US sales increased 19%, driven by double-digit increases in all product categories, while international sales growth increased 9% with currency contributing 7 points of growth.

As I mentioned earlier, BioScience sales growth was impacted by the planned transition of an international marketing rights back to Wyeth for BeneFIX. BeneFIX sales last year totaled more than $40 million in the third quarter. Therefore, BioScience sales growth excluding BeneFIX was 19%; and excluding foreign currency, sales growth was 16%. This is consistent with the growth generated by BioScience in the first half of this year. In addition, international sales growth excluding BeneFIX was 19%; or 12% excluding currency.

In the period, we continued to see conversion to ADVATE globally, with ADVATE sales now comprising more than 70% of our total recombinant business. Conversion in Europe remains over 90%, while we have converted more than 50% of our patients to ADVATE in the US and the rest of the world, largely driven by Japan and Canada, where we are approaching 100% conversion to the therapy. Recombinant sales of $432 million increased 11%, with strong growth in the US of 13% and 10% growth internationally.

In the quarter, I would like to note that we anniversaried ADVATE launches in both Australia and in Canada. The strong US performance reflects demand for our ultra-high potency 3,000 IU dosage form of ADVATE, which was launched in August of this year. As you may know, the new 3,000 IU dosage strength makes it easier for patients requiring higher doses to administer ADVATE by reducing the number of vials needed and the total infusion time.

Turning now to the plasma business, in the quarter Plasma Proteins sales of $246 million increased 15%, with currency benefiting sales by 5 percentage points. Performance continues to be driven by the further conversion to specialty therapeutics like FLEXBUMIN and ARALAST, as well as increased demand and improved pricing across the portfolio.

Antibody Therapy sales increased 25% and totaled $245 million, with currency benefiting sales by 2 points. Growth was driven by continued conversion to liquid GAMMAGARD and price improvements in the US as well as in Europe.

Sales of our Regenerative Medicine business increased 14%, driven primarily by strong growth of FLOSEAL and COSEAL. As we have mentioned in previous quarters, we continue to see a balance between supply and demand. Collections, which as you know are currently the bottleneck to supply, continue to keep pace with global demand growth. We continue to have good visibility to the drivers of accelerated demand as well as our own supply capabilities. As a result, the market fundamentals and our outlook on this business have not changed. This business remains a sustainable growth opportunity for the Company going forward.

Finally, revenues in the Other category totaled $94 million and declined 2%. The difficult comparison for BeneFIX offset strong vaccines growth, which was the continued result of increased demand for our FSME encephalitis and meningitis vaccines, particularly in Germany, as well as approximately $15 million in revenue associated with our influenza development effort in the US.

As you know, BioScience has reported excellent results so far this year. Because of this, we would expect sales growth to be at the high end of our previously issued guidance of 11% to 13%, excluding the impact of foreign currency.

For the fourth quarter, sales growth for BioScience is expected to be in the high single digits, excluding currency. While this may appear to be somewhat lower than previous quarters, excluding the Other category -- where we record vaccine sales, BeneFIX, and third-party plasma contract sales -- core BioScience sales growth is expected to be consistent with the first three quarters of this year.

Turning now to gross margin. Gross margin in the quarter of 50% improved sequentially and also improved 2.5 points versus last year's gross margin of 47.5%. The primary driver of margin expansion continues to be improved business and product mix.

In the third quarter, SG&A of $607 million declined sequentially and increased 8% compared to prior year. This growth includes approximately 3 points of growth from foreign currency. R&D spending of $168 million increased 13% on an adjusted basis, driven by significant increases in BioScience related to clinical trials and milestone payments to partners.

Our operating margin in the quarter was 21.9%, an improvement of 2.2 percentage points despite increases in SG&A and R&D. Other expense of $21 million and interest expense of $6 million were both similar to last year. Our tax rate in the quarter of 20.2% was in line with our expectation.

Finally, earnings per diluted share of $0.70 increased 23% compared to an adjusted basis EPS of $0.57 last year. Our share count was 651 million shares, down sequentially and down from the prior year, contributing a penny of upside versus our original expectation.

Moving to cash flow, cash flow from operations for the quarter totaled $608 million. Year-to-date, we have generated cash flow from operations of approximately $1.6 billion. Inventory turns of 2.3 turns are slightly lower than 2.4 turns last year. I should note, however, that this continues to be primarily due to inventory build in Medication Delivery for the COLLEAGUE remediation efforts and an increase in BioScience inventory as we seek to re-establish safety stock levels of our Plasma Proteins.

DSO of 59 days was higher than last year as DSOs internationally, due to changing geographic mix, were partially offset by lower DSOs in the US. On a country-by-country basis, however, DSOs generally remained flat or better to last year.

In the third quarter, we increased the pace of share repurchase, repurchasing $827 million of common stock or 15.3 million shares. This represented one-half of our repurchases year-to-date of approximately $1.6 billion or 30.4 million shares. We remain committed to returning value to our shareholders with continued share repurchases and our quarterly dividends. In the fourth quarter, we would expect to return to our historical pace of repurchases. For the full year we therefore expect to repurchase approximately $1.8 billion in stock, or $1.2 billion on a net basis.

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 Q3 results we are now expecting earnings of $2.75 to $2.77 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. At current rates, we would expect currency to contribute approximately 3 percentage points of growth for the full year. Therefore, full-year reported sales growth would approximate 7% to 8%.

Our sales guidance also reflects the impact of BeneFIX and propofol as well as the Transfusion Therapies divestiture. As we have previously discussed, revenues related to the transition services provided to the Transfusion Therapies business are expected to total more than $200 million for the year. Adjusting for foreign currency and Transfusion Therapies in both years, we continue to expect our full-year sales growth to approximate 8%, consistent with what Bob outlined in his opening remarks.

We now expect gross profit as a percentage of sales to improve by approximately 250 basis points and operating margin to improve by more than 200 basis points. We expect interest and other expense combined to total less than $70 million. For the full year, we expect our tax rate to be approximately 20%. And given our share repurchases to date, we now expect our full-year average share count to be approximately 655 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 fourth quarter, we expect earnings per diluted share of $0.72 to $0.74 and sales growth, excluding the impact of foreign currency, of 2% to 3%. This equates to the 7% we mentioned in the press release excluding the Transfusion Therapies sales.

In summary, we have generated very strong revenue growth throughout 2007, consistent with our long-range expectations, and we are proud of the improved profile of the P&L. The consistency and continuing strength of our financial results further validates the benefits of our diversified healthcare model and stated growth strategies, and reinforces our confidence in our future prospects.

Now, I would like to turn the call back over to Bob for some closing comments.

Thanks, Rob. Actually, just a couple of closing thoughts before we open up the call to Q&A. Our continuing financial strength has allowed us over the course of the last couple of years, obviously, to accelerate our investment in R&D. Our new product pipeline, which we presented to all of you in some detail during our March investors conference, continues to evolve and in fact strengthen.

As our Company has transitioned over the past two to three years, we are now spending much more time and effort on those initiatives that will contribute to revenue acceleration over our long-range plan. New business development initiatives such as those discussed earlier are an important part of this effort.

Finally, as you know, we will provide financial guidance for 2008 during our Q4 call in mid January. Without being specific today, it is fair to say that 2008 is shaping up to be another solid year for Baxter. We believe there continues to be opportunity for further margin expansion. We see building momentum in Medication Delivery and our core PD business within renal, augmenting continuing strength in BioScience. And we are gradually accelerating our business development efforts in a disciplined fashion to complement our accelerating internal R&D.

So while we are not without some challenges, of course, generally things are moving ahead quite well and very much in accordance with our plans. So with that, we will now open up the call to Q&A.

(OPERATOR INSTRUCTIONS) I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 30 days at www.Baxter.com.

Michael Weinstein from JPMorgan.

Thank you. Good morning. Nice job this quarter, once again. Let me start with a couple different items. First, when you come out with your 10-Q every quarter, we get a better picture of the margin improvement within the three businesses. With the step up we are seeing here and growth within Medication Delivery now, once we see the 10-Q, how is that going to look? The question I am getting to is -- we are continuing to see this great improvement in margins over the last several quarters within BioSciences. That has been obviously the big margin driver. We are continuing to see, obviously, the total corporate picture here, this great step-up in gross margins in this quarter.

How much of that is coming from BioSciences? How much of it is coming from the other two divisions?

Mike, let me comment, and then, Rob, if you want to maybe pitch in when I'm done. Stating the obvious, BioScience is driving that. The strengthening in the plasma business, the associated pricing, has been, continues to be, and we believe will be going forward a significant contributor to continued margin improvement.

Bud as we point out, Mike, continuously -- I even referenced it again in my prepared comments this morning -- we think there continues to be upside going forward in margin improvement, really driven by a number of things beyond the BioScience story.

What you will see in Q3 margin for Medication Delivery is a very nice improvement in overall margins in Medication Delivery. Actually, in all the key market segments.

Again, this is a combination of factors. First of all, we are starting to get price in the core IV business, which is quite encouraging. That manifests itself across all the businesses. Some of our higher-margin businesses, whether it's our B-to-B business, our anesthesia business, the nutritional business, and so on, tend to grow faster than the overall business. Again, those are higher-margin product segments. So what you get within Medication Delivery is a positive product or business unit mix effect that we believe will continue to contribute to improving margins in Medication Delivery.

Renal, as we continue our focus on PD and so on, and we accelerate our growth, albeit modestly, nonetheless I think it is a continuous improvement over the last year or two in renal. PD as well is contributing to that. So it really is a combination of factors.

The other thing I would say is we continue this year, despite escalating material costs in many of our businesses, to more than offset that with cost-reduction programs throughout our global manufacturing footprint.

So, it is easy to say BioScience and more specifically plasma, obviously, that has been a major contributor. But this is more than a one-trick pony. And it is why we look forward to '08 and beyond with confidence when we talk about continued leverage and improving our gross margins. Rob, I don't know if you want to add to that.

Yes, the only thing I would add is, as you know, Mike, we have seen margins, pretax margins improve in BioScience. I think, though, if you look at Medication Delivery over the three quarters in 2007, they have also shown consistent increases. Actually when you see the 10-Q, you'll see the third quarter pretax accelerated faster in Medication Delivery than it did in BioScience.

So that being said, BioScience still runs about 45% of the total driver on a percentage point basis of our gross margin; but Medication Delivery is fastly approaching that. It is at about 35% with renal around 18%. So if you look at it, BioScience still is the main driver, but it is pretty balanced overall across all the businesses.

Let me just follow up with two items that I think might be helpful to people. One, on the second-quarter call, I think coming out of that there was confusion as to what you guys were saying about the health and the stability of the Plasma Proteins market and your outlook for pricing there. So maybe you want to take the opportunity just to clarify your views on that.

Then second to just focus on your comments there about the Med Delivery business, one of the challenges that I have is trying to walk through people through the difference mix drivers within these businesses; and how mix itself should be driving gross margins. So if you could just focus for a minute on Med Delivery and talk about the growth drivers, and why there is a natural mix shift within that business, that would be great.

Let me just kind of reiterate, Mike, what I commented on a couple of minutes ago. Yes, Med Delivery is really an amalgamation of a number of distinct business segments. They happen to be interrelated at a high level, but we look at anesthesia as a franchise very differently, as an example, than we do nutritionals. We look at both of those very differently than we do our B-to-B operation, where we collaborate with pharma companies.

All three of those business segments are significant for us. They all represent higher gross margins than overall Medication Delivery as a business. And all three of those are growing at a faster rate than Medication Delivery overall, largely because it is weighted by very low single digit volume growth in the core IV business, predominantly in the US, and so on.

So, that is really what is contributing primarily to the improved gross margins in Med Delivery. As we have discussed many times before, those three businesses as an example -- anesthesia, nutritionals, and our B-to-B business -- are areas of continued investment, promotional focus, which is why we believe they are going to continue to grow at a faster rate. So I would just -- does that answer your question?

Yes, that's great.

Maybe I will take the former part of that question. To be clear, we continue to see this to be a very stable market. We are very focused -- the plasma market is what I am referring to. We clearly are aimed at making sure that we drive our supply to match demand, and we will continue to do so.

In doing that, we believe you're going to see price appreciation. We have laid it out in the past. But going forward, we do expect to see low to mid single digit price growth over our long-range horizon, combined with mid to high single digit volume growth, driving to about 10% overall growth in that business.

So nothing has changed, and I tried to highlight that in the prepared comments, in our outlook on the stability and strength of that business. I think that is the key message -- that we continue to be very bullish on this business.

Perfect. Thank you, guys.

Rick Wise of Bear Stearns.

Bob, a couple questions. First, on COLLEAGUE, you are clearly making progress on each of the -- the remediation, the filing, the inspections and so forth. Can you just give us your best impression of when you think you can get this basically resolved? Is it possible by year end, or not possible? Is it --would you hope to get it resolved by the end of the first quarter? Just any thoughts you could give us would be appreciated.

Yes, I don't think it is reasonable to suggest we are going to get all of it resolved by year end, so I wouldn't assume that at all. Relative to when it will get resolved in 2008, there are still too many moving parts to be specific as to a specific date on that, Rick, which is why I mentioned in my comments stay tuned when we give the guidance in January.

As you all know, there's multiple timelines here. There is the regulatory pathway on the 510(k) on the triple channel. There is the remediation pathway, which as I commented we continue to make very good progress. Then there is the pathway under the consent decree, which was why what I communicated this morning about Parexel issuing their certification and thereby triggering the inspection by the FDA within 30 days -- is really an important milestone on that third pathway.

But it is complex, as you know, as we have discussed before. A lot of moving parts. I am pleased with the progress we are making. I really am, and I believe we will manage through this.

But, relative to the magic question of recommercialization date in 2008, I just want a little bit more visibility on some of these moving parts before we would specifically communicate anything on that. I think that is the right thing to do. But I am very confident that we can be much more specific in our call in January. So, sorry I can't do any better than that. It is what it is.

Exactly. Turning to two other things, just thinking about new growth drivers, can you just maybe at whatever level you want update us on some of your thoughts about some of the wildcards? Obviously, IVIG is very much on everybody's mind. But maybe something that -- whatever you're thinking about that could be impactful, eight, nine. Any updates there?

Second, on the acquisition front, again you have been very vocal in suggesting we could see acquisitions -- the pace of acquisitions pick up. What expectations should we have there for the next six, 12 months as well? Thank you so much, Bob.

Okay, thanks, Rick. Let me start with the second piece on acquisitions. First of all, let me reiterate our position. Any deals that we do that are traditional acquisitions are in fact going to be smaller in scope, as we have characterized previously. Adjacencies, bolt-ons, whatever terms one might want to use. So we continue to actively evaluate a number of opportunities there with our business development organizations throughout the Company.

But again, just be clear, we don't feel we need to pursue anything of a large scale. So that is not in our plans.

The other piece of business development beyond traditional acquisitions, I think you can see by some of the things we communicated or summarized for the third quarter, the business development wheel is starting to move at a faster rate. We would expect that virtually every quarter going forward there will be a handful of things that we will be updating you on, in terms of new initiatives.

So relative to the wildcard question, we introduced that notion I think at our March investor conference and presented a list of things. All these things continue to remain very active, which six months on I think, for things that have a risk element to them, such as these, from an R&D point of view I think it is encouraging to say virtually all these things are on track.

We continue to make great progress not only with our pandemic flu program, but our seasonal flue program. We updated you again this morning on the Alzheimer's program, which we commented on. The Halozyme initiative and collaboration we expanded further in the third quarter with our collaboration on IVIG. So really -- and it's why I addressed it the way I did in my prepared comments. The product pipeline, the new product pipeline that we disclosed in some detail with the March investor conference is more robust today, six months on, than it was six months ago.

There isn't anything that was on the list, including on the wildcard list, that has really fallen off the table. So clearly, the wildcard things are a little longer term. The other one would be the cell therapy program, which we continue to actively enroll patients in Phase 2. We continue to be encouraged, very encouraged about.

So generally all the wildcards continue to be in play. Again, just to reinforce what I think all of you know, is to the degree these things manifest themselves in the coming years, that represents an upside we believe to our base case projected revenue growth over the next five-plus years of 7%-plus.

So as we aspire to accelerate that top-line revenue growth, I think we are confident that these wildcards will be a significant contributor to that.

Thanks (inaudible).

Lawrence Keusch of Goldman Sachs.

Good morning, guys. A couple of quick ones. First, in thinking about your mothballed manufacturing suite, I think, which is in Thousand Oaks, is the ADAMTS13 product --? Just trying to think of where that is going to be manufactured and again how you are thinking about that. That use of that suite which has been written off, that is question one.

Then the other two, just are -- in your cash flow, which continues to really see very nice improvements, again, how are you thinking about share repurchase? I know that you said you're going to moderate some of that pace going forward. But do you expect to be a very consistent share repurchaser here and returning cash over the next year?

Then lastly, the timing of the sub-cu, which I think is really interesting. Talecris and CSL I know are developing their own sub-cu products.

Yes, Larry, let me start with the utilization of the manufacturing footprint and then Rob can address the cash flow, and we can decide who addresses the sub-cu question.

Yes, the ADAMTS13 and our recombinant von Willebrand's factor, which we have talked about before, both represent opportunities for further utilization of installed assets, which is great. We have not at this stage specifically decided how we are going to deploy that capacity. I think the important thing, Larry, to note is that we have a couple of things now on the table that could represent opportunities; and frankly, we are looking at some other things as well as part of our business development initiative.

So I think as we sit today, we're reasonably confident we're going to figure out a way how to utilize that asset, which obviously is very encouraging. But specifically how we are going to do that is a little bit early, I think.

So Rob, do you want to comment on the cash flow?

Yes, good morning, Larry. Clearly, part of the driver of our acceleration in the third quarter was what we saw to be the dip in our stock price. We felt, based on our own confidence in the business, a great buying opportunity, and that is what we did. That is really what you see reflected in that acceleration.

As you look forward, I think to your comment, yes, you should expect that we will continue buying shares into next year at a pace similar to where we were this year. Not the third quarter, but if you look kind of year-to-date. So we will be definitely probably at 1 billion of net repurchases or more next year as well, as we continue to execute on the capital allocation framework we laid out. Nothing has changed there and that continues to be an important way for us to return value to shareholders.

On the sub-cu, you are referring to the Halozyme collaboration, Larry?

Correct, yes.

Larry, it's Mary Kay.

Mary Kay, why don't you comment on that? Yes.

The sub-cu with Halozyme, we are looking at the end of our LRP period. So probably in the 2010, 2011 time frame.

Okay, great. Then, just on that manufacturing suite, that has been written off, is that correct? So anything that you bring back into that obviously has some economic advantage for you.

Yes, that's correct.

Exactly right.

Okay, terrific. Thanks, guys.

Glenn Reicin of Morgan Stanley.

Good morning, this is David Roman filling in for Glenn. Just a couple questions here. First, on cash flow, it looks like operating cash flow guidance for the year didn't change although earnings guidance went up. Can you kind of walk us through what is going on there?

Sure. If you look at it, what we are seeing is -- and part of it we hit when we looked at what is going on in our inventory levels. Because we did have a build in inventory of the COLLEAGUE pump, and really this is not only completed pumps but it's also all the spare parts and other tools we need to be able to do the remediation. That is, as we look at to the fourth quarter, something that likely will absorb any incremental cash flow benefit we get from operations coming from net income. So that is really the biggest piece of it.

Okay, then I think this is the first full quarter after all the FX hedges have rolled off that you entered into in 2002. Can you help? Was there any impact in the quarter? Kind of help us understand if the reversal contributed to gross margin improvement.

Well, to be clear, this isn't -- if you are looking on a year-on-year basis, I guess it would be. But those ended coming into the beginning of this year. We have signaled about $30 million of benefit flowing into our gross margin year-on-year. I would have to look to see what the split is. They were roughly ratable through the year; so it's probably about the quarter of that would have hit in this quarter.

Okay. Then lastly, just you talked a little bit about IVIG and Alzheimer's. I think we were going to see Phase 2 top-line data in November. But I think Bob referenced publication early next year. Are we still expecting to see something next month?

Well, as you know, we are doing this in partnership with Dr. Relkin from Cornell Medical College. He is really controlling the timing of the release of the data. I think it is safe to say he is looking for the most visible and prestigious opportunity he can to bring that forward.

There is a conference actually now scheduled I think in February where he's looking to present that at. I will leave it to him to give more details, but that really is the driver of it, the change.

So we won't be publishing anything next quarter. We are waiting for him. Obviously, when we came out and announced that we were going to initiate Phase 3 clinical trials, we did at that time indicate that we did see favorable results with patients on GAMMAGARD versus those on placebo, and felt good about achieving the endpoints in the clinical trial, which is what led us to decide to go ahead with Phase 3.

So in that sense, nothing has changed. It is just the timing of when Dr. Relkin has found a conference to present the data is all that has moved here.

I promise, one last quick one. The tax rate was a little higher than we thought in the quarter. Are we still looking for the 20% range for the full year?

Yes, actually you're going to see in the fourth quarter the tax rate is probably going to be down closer to 19%. We have seen overall operations in our lower tax jurisdictions outside the US better than expected. So, you will see an overall rate for the year of 20%; and obviously to get that, that drives about a 19% in the fourth quarter.

Got it. Thank you very much.

We have time for one more question.

Matthew Dodds of Citigroup.

Next question?

I'm not showing any other questions. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.