百特醫療 (BAX) 2008 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 copywrited 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 of Baxter International. Ms. Ladone, you may begin.

Thanks Sean and good morning everyone and welcome to our Q2 2008 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Rob Davis, our Chief Financial Officer.

Before we get started, let me remind you that this presentation including comments regarding our financial outlook, new product development, and regulatory matters contain forward-looking statements that involve risks and uncertainties and of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially.

In addition in today's call non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website.

Now I 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 we reported earlier today and also pleased with our continued operational momentum, as evidenced by a strong first half of 2008. While Rob will provide a more detailed explanation of our financial results and outlook in just a few minutes, let me briefly summarize a few important highlights at the outset this morning.

As you saw, adjusted EPS exceeded guidance for the quarter, reflecting an 18% increase versus prior year. Sales growth after adjusting for FX was 5%, however excluding BeneFIX, which as you know creates a difficult comparison to last year, growth in our core businesses was again in the 7% to 8% range, consistent with how we've been running on an organic basis over the last several quarters.

I think that it is also worth noting that our growth in international sales, which excluding the impact of foreign currency and BeneFIX increased approximately 10% in the quarter; international sales now represent more than 60% of our total reported sales, reflecting the strength and the diversity of our global business portfolio and reinforcing our strategy of global expansion.

We also continue to be pleased with the consistency of our improving margins. Gross margin was 51% and operating income as a percentage of sales with 22%. Importantly we are achieving this performance while investing appropriately in marketing and promotional activities, along with R&D programs that will position us for growth over the long term.

As you saw in the release this morning, our R&D increased 25% in the quarter as we advanced many of the programs in our pipeline. Let me take just a couple of minutes to update you on the status of just a few of the key programs. First of all in our renal business, we are further expanding our leadership in home dialysis therapy through a development program with DEKA on a home hemodialysis device, which continues to progress well. We have completed development of a prototype and expect to begin clinical trials next year, leading to an anticipated launch in 2011.

In our regenerative medicine business, we currently have two Phase II programs underway investigating the use of adult stem cells for chronic myocardial ischemia or CMI and chronic limb ischemia, CLI, utilizing our ISOLEX stem cell separation technology. We've started to enroll patients in the CLI trial and have completed patient enrollment in the CMI trial earlier this year. Given the required six-month patient follow-up, we currently expect to have Phase II CMI results available in 2009.

In vaccines, we continue to advance both our pandemic and seasonal influenza programs. A Phase III clinical trial is currently underway in the U.S. using our seasonal influenza vaccine, [gammabate], and we submitted a regulatory filing in Europe for our candidate pandemic vaccine and anticipate approval in 2009, which provides us with a limited license and the ability to market the vaccine in the event of a pandemic.

As we've discussed in the past, we continue to look for ways to leverage technology capabilities across our businesses. An example of this is the ongoing program evaluating the use of Hylenex, a technology initially licensed from Halozyme by our medication delivery business for subcutaneous infusion with gamma guard liquid. Traditional subcutaneous administration of IGIV has been limited by the inability of the tissue to absorb large volumes of injected drugs, creating the need to administer the therapy in smaller weekly doses and through multiple injection sites. Subcutaneous administration of gamma guard liquid via a single site could allow patients to administer a sufficient dose of IGIV once monthly at home. Encouraging Phase I/II results were presented earlier this year and we expect to begin a Phase III trial in 2009.

Finally as you may know, Dr. Diamanto Tsakanikas and Dr. Norman Relkin of New York Presbyterian/Weill Cornell Medical Center will be presenting the nine-month Phase II results from a trial investigating the use of Gammagard for the treatment of Alzheimer's disease on July 30 at the international conference on Alzheimer's disease in Chicago. As we discussed last quarter, we submitted our IND to the FDA for the Phase III study and upon approval expect to begin enrolling patients in the second half of the year.

While time does not allow me today to update you on all of our programs, I am increasingly encouraged by the progress that we are making. As we reinvigorate innovation across the Company and accelerate R&D spending, we will continue to do so in a disciplined fashion while balancing our pipeline with both short- and long-term product opportunities that improve treatment for patients, expand access to care, and enhance the quality of life for people around the world.

In closing, while our margins have exceeded the expectations we laid out last year, we expect both gross and operating margins to continue to expand over our long-range plan as the result of improving product, business and geographic mix, intense focus on pricing opportunities throughout all of our businesses, and disciplined control of manufacturing costs and productivity improvements throughout our global manufacturing footprint.

Our Company continues to benefit from the power of our diversified healthcare model with each of the businesses making contributions to our overall performance. While we are not of course without our challenges, we continue to be very well positioned with respect to the changing macro environment. Given the medically necessary nature of our products and our strong market positions, further supported by our global brand and presence, we are confident in our ability to drive improved performance and grow despite the uncertain economic and political conditions.

Our financial guidance continues to be aligned with our long-range strategic plans and we remain committed to meeting our short-term financial guidance while investing in innovation and business development activities that position the Company for enhanced growth in the future.

As always, I would be happy to address any questions you might have during the Q&A this morning. In the meantime let me now turn the call over to Rob for a more detailed discussion of our Q2 results and outlook for the remainder of 2008.

Thanks, Bob, and good morning, everyone. As Bob mentioned, we posted solid financial results today that favorably compare to the earnings guidance we previously provided. Our performance is the continued result of gross and operating margin expansion, allowing us the flexibility to selectively invest in sales and marketing programs and increase our investments in R&D.

I will now walk you through the P&L by line item before updating you on our financial outlook for the year. Starting with sales, our reported sales totaled approximately $3.2 billion, and increased 13% with currency contributing 8 percentage points of growth. Therefore sales growth excluding foreign currency was 5%, which was at the high end of our guidance for the quarter of 4% to 5% growth.

Sales growth in the U.S. was 4% and international sales, which now comprise more than 60% of our total reported sales, increased 19% or 6% excluding foreign currency. As you may recall, this is the last quarter of difficult comparisons in both bioscience and medication delivery for BeneFIX and propofol respectively, which had combined sales totaling more than $75 million in the second quarter last year.

In addition, sales for renal were impacted by the loss of a government tender in Mexico, which totaled approximately $25 million in the quarter. Year-to-date reported sales increased 10% and sales growth excluding foreign currency was 3%. The comparisons for transfusion therapies, BeneFIX, and propofol for the first half of the year impacted sales by over $180 million or approximately 4 points of growth.

In terms of individual business performance, let me start with medication delivery, which had sales totaling approximately $1.2 billion, an increase of 12%. Currency contributed 7 percentage points of growth, so excluding foreign currency, medication delivery sales increased 5%. International sales were again robust and increased 27%, driven by double-digit increases across all of our business units. International sales growth excluding foreign currency increased 13%.

U.S. sales in medication delivery were down 2% as a result of the performance of our injectables business, where sales declined 16%. However excluding injectables, U.S. medication delivery sales increased a solid 9%. The expected decline in the U.S. injectables business with the continued result of difficult comparisons both for propofol and heparin, intense competition for generic injectables, and the lost contracts in our Pharma partnering business that we discussed last quarter. Offsetting the U.S. performance in injectables was the strong international injectables growth of 35%, which was driven primarily by our pharmacy compounding business.

Turning to the other segments, global IV therapy sales of $408 million increased 18% with currency contributing 10 percentage points of growth. Growth continues to be solid and driven by our IV solutions globally, U.S. pricing improvements and strong growth in our nutritions business.

Infusion system sales totaled $229 million in the quarter and increased 10% or 5% excluding foreign currency. This is due to strong sales of [access] sets, U.S. remediation revenues for COLLEAGUE, and COLLEAGUE placements in international markets.

Anesthesia sales totaled $122 million and increased 27%, with foreign currency contributing 5 percentage points of growth. This performance was a result of continued penetration for SUPRANE, our proprietary anesthetic, augmented by growth of sevoflurane which we've launched in approximately 10 countries during 2008. In summary, all of our business segments in medication delivery showed strong growth, with the exception of the U.S. injectables business.

The strong international growth for medication delivery is evidence of our strategic focus on geographic expansion, which is further augmented by continued success of our higher-margin franchise in anesthesia and our ability to get price in the U.S. IV business for the first time in many years.

Moving on to renal, first-quarter sales totaled approximately $600 million and increased 8% with foreign currency contributing 9 percentage points of growth. U.S. sales increased 2% and international sales increased 9%. Global PD sales totaled $479 million and increased 8%. In the U.S., PD sales growth of 7% was again driven by solid patient growth.

In international markets, PD patient gains continued to grow in the double digits in Asia, but by consistent patient growth in China of approximately 25% as well as strong patient growth in other developing countries around the world. Excluding the impact of the lost tender in Mexico and foreign currency, international PD sales were up approximately 4% and global PD sales increased 5%.

Hemodialysis sales of $119 million increased 8% and excluding foreign currency sales declined by 2%. To summarize, renal continues to perform in line with our expectations. The success of our back to basics approach is strengthening our global leadership position and we continue to expand geographically as governments, particularly those in the developing world, focus on providing increased access to treatment for patients with end-stage renal disease.

Now turning to Bioscience, BioScience sales totaled approximately $1.4 billion and increased 16%. This growth includes 8 percentage points of benefit from currency. Strong double-digit growth across the portfolio more than offset the lost BeneFIX sales which totaled approximately $65 million last year. Excluding the impact of BeneFIX and foreign currency, total BioScience sales increased 15%.

Recombinant sales of $508 million increased 18% or 10% excluding foreign currency. International sales increased 30% while U.S. sales were up 4% due to the timing of shipments in the quarter and strong double-digit growth in the first quarter of this year. ADVATE sales continued to exceed our expectations and now represent more than 75% of our total recombinant sales. (inaudible) conversion in Europe remains at over 90%, we continue to advance conversion in the U.S., which now stands at more than 60% and is ahead of our original expectations going into the year. Both our short- and long-term outlook for the recombinant business reflect continued strong demand for ADVATE, increased compliance, improved penetration and standards of care globally, further supported by our differentiation of the therapy with various dosage forms making it more convenient for patients by reducing the number of vials needed as well as the total infusion time.

Turning to the plasma business, in the quarter, plasma protein sales of $291 million increased 20% with currency benefiting sales by 8 percentage points. Performance continues to be driven by the ongoing strong demand for plasma proteins and improved pricing, particularly for albumin. International sales increased 32% with U.S. plasma protein sales increasing 1%. In the U.S., sales of albumin and ARALAST, which increased by more than 20% in the quarter, were offset by difficult year-on-year comparisons for PD Factor VIII and FEIBA.

Antibody therapy sales increased 32% and totaled $315 million, with currency benefiting sales by 5 percentage points. Growth in this area was once again driven by conversion to Gammagard liquid, price improvements, and strong growth in demand, which continues to increase in double digits.

Sales of regenerative medicine business totaled $109 million and increased 25%, with currency contributing 8 percentage points of growth. This continues to be the result of strong growth of FLOSEAL and COSEAL.

Finally, revenues in the other category totaled $162 million and declined 15% as strong vaccine sales were more than offset by the difficult comparison for BeneFIX. Vaccine sales in the quarter totaled approximately $150 million and excluding foreign currency, increased approximately 20% due to the increased demand for our FSME encephalitis vaccine.

In summary, the core BioScience growth in the first half has been robust. We continue to advance our leadership position in hemophilia, as evidenced by the strong global conversion to ADVATE. Stability in the plasma market dynamics as a result of accelerated global demand for these critical therapies and improved pricing is driving double-digit growth across our specialty therapeutic portfolio and we continue to believe that the plasma business remains a sustainable growth opportunity for the Company going forward.

The stable and improving market fundamentals for the BioScience business along with a shift in product mix toward our higher-margin specialty products gives us continuing confidence in our ability to meet our long-range growth objectives.

Turning to the rest of the P&L and starting with gross margin, gross margin in the quarter of 51% improved by 1.8 points versus last year. This expansion is the continued result of improved business and product mix including conversion to ADVATE and Gammagard liquid, strong growth of our higher-margin vaccines, favorable pricing across multiple businesses, and continued manufacturing efficiencies. These margin drivers are more than offsetting a modest impact from rising raw material costs.

Turning to SG&A, SG&A of $703 million in the quarter increased 13% compared to the prior year. This growth includes approximately 7 percentage points of growth from foreign currency. Excluding currency, SG&A growth was in the mid-single digits. We continue to select investments in marketing in promotional programs aimed at our higher growth, higher margin products and continue to tightly manage general and administrative costs. Looking at this, SG&A as a percent of sales was 22%, flat to the prior year.

R&D spending of $222 million increased 25% and represented approximately 7% of sales. Excluding foreign currency, R&D growth was in the mid teens, driven by double-digit increases across all three businesses for new product development, clinical trials, and milestone payments to partners.

Operating margin in the quarter was 22%, an improvement of 1 percentage point. Interest expense was $25 million compared to income of $1 million in the prior year period primarily due to lower interest income as a result of lower interest rates and cash balances as well as settling net investment hedges. Other expense was $5 million compared to $17 million last year and includes a variety of items such as foreign exchange, minority interest, and other expenses. The tax rate in the quarter was 19%, in line with our expectations and adjusted EPS of $0.85 increased 18%, exceeding the guidance we previously provided.

Moving to cash flow, cash flow from operations for the quarter totaled $720 million and for the year we have generated approximately $1.1 billion in cash flow from operations. This is an improvement of almost $140 million versus the prior year period. Our total DSO, which ended the quarter at 57 days, is generally in line with our DSO in the second quarter last year. During 2008, we have experienced improvements in both domestic and international DSOs. However, as our sales outside the U.S. grow at a faster pace than in the U.S., we will continue to feel pressure on the total company DSO due to geographic mix as DSOs outside the U.S. are structurally higher.

Inventory turns of 2.3 turns are lower than 2.6 turns last year. This is primarily the result of higher inventory levels in BioScience as we build plasma inventory in preparation for a planned facility shutdown in Q3 and extend safety stock levels.

Capital expenditures for the quarter totaled $207 million compared to $165 million in the second quarter last year as we continue to invest in appropriate capacity across our business to support our future growth. And lastly during the quarter, we repurchased 6 million shares of common stock for $388 million. On a net basis, we repurchased 3 million shares for $255 million. So far this year in line with our full-year expectations, we've repurchased more than 15 million shares totaling $933 million, which equals on a net basis a total of 9 million shares or $688 million.

Finally, let me conclude my comments this morning by providing an update on our financial outlook for 2008. As you saw the press release this morning, we raised our earnings guidance to $3.28 to $3.32 per share. This reflects continued year-over-year expansion of both gross and operating margins and continued investments to support our future growth. More specifically, we expect sales growth excluding the impact of foreign exchange to be in the 5% to 6% range. Foreign currency for the full year is expected to benefit sales growth by approximately 5 points, so our reported sales growth is expected to be in the 10% range. For the full year, we expect gross margin as a percentage of sales to improve by approximately 150 points. Our gross margin in the second half of the year will be slightly higher than the first half.

For the third quarter, however, we expect gross margins to decline by approximately 100 basis points sequentially from Q2 due to the timing of tenders and the seasonality in the vaccines business and an increase by approximately 100 basis points into Q4.

For the full year, we expect SG&A growth to be approximately 10% and R&D growth to be approximately 20%. Our change in SG&A and R&D guidance is primarily related to the impact of foreign exchange. Based on this guidance, we expect our operating margin to improve to the full year 2008 by 100 basis points to approximately 22%.

We expect interest and other expense combined to total approximately $130 million. Interest expense is expected to increase year-over-year and total approximately $75 million as a result of exiting net investment hedges as well as due to lower interest income and lower cash balances as I mentioned earlier. We expect our tax rate to be in the lower end of our previous guidance of 19% to 19.5% and we expect a full-year average share count of 635 million to 640 million shares assuming share repurchases of at least $1 billion on a net basis.

From a cash flow perspective, we now expect cash flow from operations to total at least $2.6 billion and capital expenditures to continue to approximate $1 billion.

Turning to the three businesses, for 2008 we continue to expect Renal sales excluding foreign currency to be approximately flat. This is primarily the result of lower PD growth due to the lost PD tender in Mexico late last year. Adjusting for this, Renal sales growth would be in mid-single digits, demonstrating continued progress in the core PD franchise across other markets.

For medication delivery, we continue to expect sales excluding foreign currency to grow approximately 4%. This will be driven by growth of approximately 5% for our global infusion systems business, IV therapy sales growth in mid to high single digits, flat sales versus the prior year in our global injectables business, and midteens growth in our anesthesia business.

Finally, for the BioScience business excluding foreign currency, we continue to expect sales growth of approximately 10%, driven by strong growth across the portfolio. First, we continue to expect recombinant growth in high single digits including ADVATE sales of more than $1.4 billion. Second, we expect plasma protein and antibody therapy sales to grow in mid teens given solid demand and improved pricing. Third, we expect growth in our BioSurgery business to once again be in the midteens and we expect the other category to decline in low double digits as the impact of BeneFIX offsets strong vaccines else. Vaccine sales are expected to total more than $400 million for the full year, representing an increase of more than 20% versus 2007.

For the third quarter, we expect earnings per diluted share of $0.81 to $0.83 and sales growth excluding impact of foreign currency of 6% to 8%. In summary, we believe our 2000 date projections are realistic and achievable. They reflect the benefits of our diversified healthcare model and continue to track well with our long-term expectations.

Now, let me open up the call for questions.

(OPERATOR INSTRUCTIONS) Larry Keusch, Goldman Sachs.

Good morning, everyone. Just a couple of quick questions here. First I am wondering, Bob, if you're willing at this point to give us any details on the protocol for the Phase III study for IVIG in Alzheimer's?

Not this morning, Larry. As I mentioned, we are still working through receiving the approval in the IND from the FDA. I think that is progressing very well, but until there is more definition in that regard, we are not going to communicate anything. But you will learn more about that later.

Okay, then two other questions. First, Rob, you talked a little bit about the rising commodity costs. Could you just run us through again sort of where you see that most acutely in your business? I think when we saw you last you had made some comments that you might start to pass that on to the end users. If you could just sort of walk us through that.

Then the second question really is in the current economic environment -- now I'm talking about collections for plasma -- are you seeing either any changes in the number of folks coming through willing to donate or are you being able to change your cost structure in any way? I just wanted to get some sense on that side.

Sure, on the raw material price side, obviously it hits us most in our freight and distribution area in the delivery of products both to our distributors as well as to the home for our renal business. But if you look at it and we've spent a fair bit of time over the last several weeks really digging deep into this, it actually is not material for the Company going into the rest of the year either of the gross margin or at an SG&A line. In fact, coming into the first half of the year we have largely offset all of the cost increases through ongoing manufacturing efficiencies and VIP programs. There might be a slight cost increase in the back half, but again it is immaterial to the total results and I think that is a testament to what our manufacturing guys have been able to do.

But if you look at it from where is it most acute, it is probably most acute in our renal business, given the fact that we are delivering into the homes and that is something where we continue to try to work with both our distributors and with directly with the patients to try to find the best solution to how to do this. But as of right now, again it is not material.

On the second part of your question with regards to what we are doing in our collection centers, I think we might have even spoken about this at the conference. But in general we are basically running at capacity in our collection centers and moving as many people through as we can based on the ability to get throughput in the center. So it hasn't really been a noticeable change in our collection pace as a result of the economic situation. And as we looked at our cost structure, it was something where we weren't necessarily really driving up our cost of collection trying to bring in new patients. We were getting most of our efficiency improvements through other means, marketing programs and driving really production efficiency through the centers. So it hasn't also really allowed us to change in any way our cost structure.

The good news is our centers are doing an excellent job getting patients through. We continue to see very good collections and as a result we are able to drive increased collections through our existing footprint as opposed to needing to add materially to our footprint. I think that will continue, but not necessarily due to the economy.

Okay, great. Thanks very much.

Mike Weinstein, JPMorgan.

Let me just touch for a minute on your guidance. You obviously had a very strong quarter and based on your level of R&D spend, it looks like you could've made it even stronger if you'd like. But you raised your full-year guidance by a lot more than the level (inaudible) and you beat it by $0.03 and raised your full year by $0.08 to $0.10. If you would, Bob, maybe must spend a minute on what you are seeing in the back half of the year that is making you as optimistic obviously as you are.

And then second on the R&D piece, could you just spend another minute on where you are spending the incremental dollars and your expectations on the returns on those investments? Thanks.

Sure. Relative to the guidance, let me just answer your question at a high level. We've spoken frequently about, I think, our continuing confidence in the fact that our margin improvement story still has a lot of legs for all the reasons we've mentioned, from business mix to business unit mix within our businesses, pricing focus. And in all of our businesses, particularly we're encouraged by what we see in the US ID market in terms of more robust pricing.

And as Rob mentioned in his answer to Larry's question about how we're managing the cost increases, just a continued I think very solid job in our manufacturing operations in terms of identifying ways to reduce costs, as well as yield improvements and so on in our BioScience business.

So I will stop there and not get too granular, but the increase in our guidance is just, as I say, again at a high level. I think a tangible manifestation of the confidence that we have and the fact that our margin improvement story as I said still has, we think, a long way to run. We've given a lot of details, Mike, but that really is the sum and substance of it.

As it relates to R&D, as we've stated many times, we are committed to increase the level of R&D investment at a much faster rate than revenue. We feel we have a fairly target-rich environment in all of our businesses to invest in R&D. I would tell you that relative to the three businesses, we are increasing our R&D spending within our BioScience business at a faster pace.

And our BioScience business really is, I think, a fast-growing biotech business in many ways. And we have a number of initiatives that, frankly, we haven't spoken about externally. We look forward to our investor conference next year when, as we did at our last investor conference, we can provide more detail in terms of our pipeline. But as I mentioned in my prepared comments, I couldn't be more pleased with how our pipeline is becoming increasingly robust as a result not only of the accelerated spending in R&D, but I think doing a better job of prioritizing our programs and managing those programs once they are approved. But I think it is fair to say that BioScience is the disproportionate recipient of the accelerated R&D spend.

Bob, just one more final follow-up here. On the operating margin, obviously you're surpassing your expectations you initially laid out in your long-range plan. Are you going to hold off on updating that plan until your next analyst meeting?

Yes, we are. That is really the forum, as you know, that we get into more detail in terms of our long-range outlook. And we are clearly pleased that we are performing I think on all metrics beyond and above what we showed you at the last investor conference in 2007. But we are not going to update those numbers until we see you at the conference next year.

Okay. Sounds good, thanks.

Ben Andrew, William Blair.

Just maybe following up on Mike's question. If you can in any kind of qualitative way, the investment in R&D, when do you see that delivering an acceleration in revenues? Is it six months, 18 months, 36 months? How do you really view that? I know it is going to be a progression, but just maybe give us your thoughts on that.

Well, first of all, Ben, I'd say I think we have a good balance between our short-term and long-term programs, but much of that ramp up in R&D is associated with -- well, actually the kinds of programs that I mentioned in my comments this morning, whether it is the [Alazine] IVIG initiative, obviously the flu programs, the adult stem cell programs for two potentially very significant indications. So those kinds of programs are going to have paybacks frankly really only starting in a material way late in our five-year long-range plan.

I can tell you as we've evolved the Company over the last few years we are spending a lot more time looking at the 10-year projections, not unlike a Pharma company would, frankly, with most of our businesses now. So again, we feel very confident that the organic growth of our core businesses is in that 7% to 8% range. That is a good base case and then of course our aspiration is to do better and our ability to do better first and foremost is a function of these programs, these R&D programs materializing over time and then obviously augmented further by BD initiatives. Much of the ramp up in spending is further out in time.

Okay, that makes sense. Just a more specific question, if I might. On the COLLEAGUE, you didn't give an update on the remediation or on the 510(k) process or the triple channel. Where are we at with that? When should we be thinking you will have some progress there?

Our position, Ben, really isn't any different than the last call relative to timeline for re-commercialization. As you know, we've taken the sales for re-commercialization out of 2008, which we communicated last quarter. We do continue to expect revenues in 2008 of approximately $30 million for replacement costs which are being provided to existing customers as part and parcel to the remediation program. We continue to make good progress with the remediation. Through the second quarter I think we have remediated about 90,000 devices, which is over 60% of the single channel devices in the market. We continue to work with the FDA on multiple fronts.

Again as we've been indicated previously, we have identified the fix to this triple channel buffer issue, which you know about, and we continue in active dialogue with the FDA regarding the validation and some of the software modifications. We are also -- we also continue dialogue with the agency as it relates to observations from their December inspection as it relates to the certification of our quality systems. I think again we are actively addressing those issues.

So again, we're making progress on multiple fronts. Remediation, certification of our quality systems as part of the consent decree, then finally the regulatory pathway for resubmission of the 510(k) and the triple channel. But given the variety of activities we have going, it's really why we communicated last quarter not to plan on re-commercialization this year. Beyond that I don't want to be specific and speculate at this stage into '09, but I think we are making solid progress again as I said on multiple fronts.

Just briefly following that, are you starting to see any impact on contracts or big purchase agreements or hospitals?

We have lost a few accounts in the second quarter. I do think it's fair to say, though, there clearly is no acceleration in the erosion of the base. So first and foremost we are not, as I said many times, we are not happy with the position we put our customers in. They don't really have a lot of options sometimes, but in terms of the financial impact, we didn't see any acceleration of the negative impact or the erosion of the base in any material way in the second quarter actually.

Matt Dodds, Citigroup.

Good morning, a couple questions. First, Rob, on the Recombinant Factor VIII, up 4% in the U.S., you said some of that was timing, but a year ago it was only a 2%. So I'm wondering, are you saying that Q1 was artificially strong or maybe that Q3 something slipped there?

No, it is more of -- if you look at our first quarter I think we are up almost 11% and it really was an artificially strong Q1 due to the timing of shipments. It was more of a phasing Q1/Q2 and if you look in the back half of the year, our growth was -- first half/back half it is pretty much in line with what you would expect. So it was more this year than it was year-on-year.

Matt, it's Mary Kay. I would add that in the back half growth will accelerate versus Q2 and growth in the U.S. we expect to be call it in the mid to high single digits for the year.

When you look out in this market, is it your impression that that high single-digit growth you're talking about is pretty consistent between US/0-US or is O-US going to drive more of that going forward?

O-U.S. is going to drive more of it than the U.S. U.S. is growing a little bit slower than the rest of the world.

Okay, then one more question. On medication delivery, you talked a lot about or a little bit about price in IV therapies, just getting price now. Are there any other areas in medication delivery where you might also be getting price?

This is Bob. We are getting price in anesthesia with SUPRANE, which as you know is our proprietary inhalation agent. And when we talk about price in IVs, I think it is important to understand that -- and you know this very well -- especially in the U.S. where you've got bundled contracts at the IVs, it's the sets. It's the nutritional products. It's the secondary administration systems from MINIBAG to MINIBAG Plus to pre-mixes and so on. So all of those products which are part of the bundled contract frankly are starting to be favorably impacted by this pricing dynamic in the market.

And then one last question on that. When you talk about the price increases in med delivery, I would assume they are relatively modest, low single-digit when you talk about price increase, nothing dramatic going on here. Is that correct?

We're actually in a number of contracts getting price increases in excess of what you just said.

Thanks, Bob. Thanks, Rob.

Kristen Stewart, Credit Suisse.

Sorry if you already addressed this, but did you give -- actively quantify what the plasma pricing was? I think your comments were that it was improved pricing. Are you seeing that becoming a little bit better on a sequential basis or --?

This is Rob. Good morning. Not, it is pretty consistent. We have been as you know, through the first part of the year running in the really the low double digits in price increases and that continued into the second quarter.

Kristen, I would add that is really more for IVIG and albumin. We're really not seeing pricing on PD Factor VIII or FEIBA or some of the other proteins.

I know Baxter recently -- well a couple months ago at least -- got approval for its next-generation recombinant factory product. Are you seeing anything there in the kind of competition dynamics and how do you generally view that product as a threat for ADVATE going forward?

Restating your question, I think, are you talking about ReFacto AF?

Yes, I think they had [Azanta].

Yes, Azanta. They actually have not launched yet. That is coming in the back half of the year, but overall we feel very good about how ADVATE is positioned versus that product. So while it has something obviously we watch very closely and we are putting in place marketing efforts to address, it is not -- we don't perceive it as a risk to the ADVATE franchise.

Then I guess just on your use of cash, any updates on how you are thinking about M&A these days? I know obviously you have your share repurchase program, but are you thinking any more about expanding or adding an additional leg to Baxter at this stage?

I will jump in and then Bob can add comments if he'd like. We have been very consistent in that we are not looking to add a fourth leg to the business. Our business development activity is very much aimed at smaller deals which augment existing businesses we're in and really leverage where we bring competencies that we think are competitive advantages. So if you look at the deals we have done over the last couple, really two years, they've primarily been development stage deals, smaller in size and often either a codevelopment or a licensing deal to bring in products that are in development that we have augmented into our own R&D pipeline in bringing forward. And as we look forward, my expectation is that you will see more of that type of activity.

I think the key here is while we actively pursue business development opportunities, the real key here is that as we've talked about we feel very good about our ability to deliver top-tier growth through the organic opportunities we have over the next several years in our own business. Therefore we have taken a very disciplined approach to this and I can tell you in fact that we have walked away from deals in the market, some of which you've seen announced publicly, because as we have looked at them, the price was too high.

That being said, I'm confident there are good deals out there and we will find them and we are going to obviously continue to try to drive for those opportunities. But the key is we are not going to do a deal until we find one that meets both our financial and strategic hurdles and when we do we are going to execute it and do so with the confidence that we're going to add shareholder value. So it really is about an opportunistic view of trying to augment what we think is a solid growth story, not a defensive play trying to find the growth for the coming years. I don't know, Bob, do you want to add anything?

No, I think it is well stated. Thanks.

Thanks very much.

Rick Wise, Leerink Swann.

Good morning, Bob, a couple questions. Let me go back to the EPS growth question and just implications of margins and looking ahead. When I look at your guidance for the year, the new EPS guidance, the midpoint suggests an 18% year-over-year growth rate and knowing you and watching you over the years, I can't believe that you are anxious to grow EPS 18% one year, 10% the next year, 15% the next. I assume that if you are willing to show this kind of EPS growth, that something in this kind of range should be sustainable as we look out for the next couple of years. Is that a reasonable assumption?

I would not conclude that the 18% increase represents a new baseline for our LRP. As I said before to one of the earlier questions, the momentum of the business is very good right now. Our position long term is not different than what we have communicated previously, which is we believe we can grow EPS over a long-range plan at a faster rate certainly than our topline revenue growth along the lines of what we communicated at the last investor conference. The facts are, you are right. We're running favorable to that. We are encouraged by that, but it is one thing to do that in a year, year and a half since our last investor conference, and another thing to suggest that that is a new baseline that's sustainable over five years. I think it would be a great aspiration, but we're not prepared to commit to that kind of 18% aspiration at this point. Okay?

I hear you. Turning to plasma market dynamics, clearly price -- it sounds like you agree that pricing is strong and demand is strong. Can you talk a little more specifically about Gammagard and what we are hearing from our contacts about growing off label use in Alzheimer's -- if that demand -- if your nine-month data is positive, if the demand continues to grow, can you all meet that demand and maybe you could comment as well about the ongoing transition to [LA frac]? Thanks.

Let me take a stab at this and, Rob, if you want to augment my comments because there's a lot of dimensions of your question there, Rick. First of all, I thought your recent report that you wrote on this subject, did a good job of capturing the various dimensions. We think given the expanded use of this product, and this is independent of Alzheimer's into multiple indications and uses and so on is going to sustain a pretty strong underlying growth on a global basis. That will be then further augmented by pricing buoyancy that while not to the degree of what we've experienced over the last couple of years is going to continue. So that's a very, very positive outlook I think.

And then of course you've got as I termed the wildcard issue of Alzheimer's and the question of our ability to meet the demand, clearly that is something that we are and have been evaluating. I think the situation of LA frac coming on when it is and when it has as well as the opportunity for further yield improvements is very timely. I think there's a lot of questions that remain on this Alzheimer's indication, not the least of which is to not collectively lose sight of the fact that we haven't even started a Phase III study. So we need to first and foremost establish efficacy.

Subsequent to that obviously you've got the issue of reimbursement. This will be expensive therapy. That will be a fairly long-term process I think and as a result will give us I think some flexibility to evaluate options that are available to us to accommodate the additional demand. So there's a lot of dimensions of this that's we are balancing. I do think it's important that we don't get ahead of ourselves on this. On the other hand, we do need to be planful for what could be a step function increase in demand although depending upon the timing of the reimbursement we may find that that is more evolutionary in increased demand than a dramatic step function. Again thereby giving us some time to plan accordingly and do it with I think with less risk and less speculation.

Rick, I would just add one thing because I think Bob addressed the long term. Obviously in the very short term, we don't expect material off label use. There is some out there today but it's very small. We expect it to stay that way so it is not a short-term supply issue due to off label use at this time. Primarily because the cost of the therapy and the fact that as Bob mentioned it is not reimbursed. So I just want to make that clear to the short term.

Okay, two last quick ones if I could. Specialty injectables flat, maybe you could give us a little more color on either market dynamics or the outlook. Last, with the Premier contracts coming up for renewal, just remind us are you worried -- are there any risks that Baxter's position might be negatively affected due to COLLEAGUE or heparin issues or anything else that might put you in a less favorable position? Thanks again.

Let me address the Premier thing. Rob, why don't you handle the injectables, so you can be thinking about that as I talk about Premier. First of all, I would tell you that we have not yet concluded our negotiations with Premier, so I think it is premature to get into any of the specifics. I would say this. I think we are going to get this resolved and something done very shortly. If so, given what we have on the table frankly, we are positive about the terms and conditions of the agreement including the pricing.

As a practical matter, relative -- the heparin situation I think relative to the Premier IV contract is a nonissue. The COLLEAGUE situation of course presents some challenges, although the last five years has been a multisource contractor have been options for Premier hospitals to buy competitive pumps. So frankly that flexibility has existed historically, will likely continue when we get the new contract signed and in place. But we actually based on what's on the table we hope to get it signed shortly. We feel pretty good about the extension of the agreement and the quality of the agreement.

Thanks, Bob.

If you look at the injectables, as I think I mentioned in the prepared comments, for the full year we expect this to be flat given that we are down through the first half, actually we're going to have modest growth coming into the back half of the year. The driver, one of the big drivers of being down in the first half obviously has been continued impact of propofol, which is the gift that seems to keep on giving. But we are almost out of that and in fact this will be the last quarter that we have that negative comp.

And then also heparin while it doesn't really do anything from a margin perspective does impact the sales line. Then the third one is we mentioned last quarter we did have a couple contracts that's we did not get in our Pharma partnering business, not due to service issues from our side, but due to more events at the customer side of this. Actually as you look in the back half of the year, that business also does better just based on the phasing of contracts.

So overall, it will improve slightly but the biggest driver of this continues to be the multisource business, which in total is a tough business. It's got very intense pricing and you are battling it out daily, so that is the reality we face but we do expect to see those other areas that have been more profitable and growing for us come back to some growth in the back half.

I think we have time for one more question.

Paul Choi, Merrill Lynch.

Thank you for squeezing me in here. Just on one follow-up on BioScience, with respect to some of the purchasing timing that you guys mentioned, is that more of a one-off reflective of the first quarter or have we seen any particular structural change in terms of timing and ordering patterns with respect to some of the plasma products you guys had mentioned?

No, it is more of a one-off. And the comment I think you are referring to we were talking about recombinant earlier, so in general it's more of a one-off thing. I would not say we've seen a fundamental shift in the buying patterns.

Okay, great. Bob, just in terms of the SG&A line which has held fairly consistent here, can you just give us a little more color on where you feel that the priority spending is needed? Maybe just a little bit of what the impact of currency could be there that's keeping you from releasing some of that leverage down to the bottom line.

Yes, I think one of the things while we have held -- continue to hold SG&A spending as a percent of sales at a fairly constant rate, what you all don't see necessarily is the reprioritization of SG&A spending within that broad category. Obviously we are focusing on putting more dollars toward promotional opportunities that exist for existing products that are higher growth and are higher margin. So if I look at what we are spending on what I will call pure promotion sales, those particular lines with that SG&A frankly they are growing at a faster rate than total SG&A. We obviously look to offset that by more aggressively controlling SG&A spending in those areas that would be I guess generally described as structural costs, indirect costs and so on.

So we think we are doing a disciplined job of maintaining our SG&A spending overall as a percent of sales, yet I think doing some good things within the parameters of that are appropriate to grow our business.

Great, and it grew a touch faster than sales, maybe just what the FX impact was there potentially?

It actually -- it roughly was the same on the sales line and in the SG&A line, so from this quarter there was a touch of growth, but overall it doesn't really change the outlook for the year.

Then maybe just one last question on the cash flows. It seems, Rob, you mentioned just a little bit about international collections with the receivables looks like doubling versus the prior year. Just can you give us any color on what's happening there and maybe what you guys are doing to reduce the DSOs there?

Yes, as I mentioned in the prepared comments, what you are highlighting and by pointing to the fact of how sales have grown relative to the U.S. is we are seeing with international receivables growing faster, it is putting pressure because on average we run upwards of over 70 days in our international DSOs driven primarily by the fact that you have a different customer base. Usually you are dealing with governments outside the United States, whereas in the U.S. you've got a lot of private payers and governments tend to have longer timelines till they pay.

That being said, we have been very focused on trying to drive that number down and I'm happy to say that due to good efforts primarily in our European group as well as frankly in our Latin American group both have seen really nice improvements. We brought that down actually quarter on quarter we are down several days versus where we were last quarter and we are down versus where we were last year. So we are seeing improvement, but obviously we are just not being able to paste that improvement fast enough to offset this mix issue and it is something we are going to continue to see, which though frankly I'd say is a good thing as we talked about it really reinforces that our business and our whole notion of geographic mix and growing outside the United States is working.

It is not that we are not collecting and I don't see our bad debt situation changing, so it is really just more of a timing issue that we will have to rebalance as we think about it.

Great. Thanks a lot, guys.

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