百特醫療 (BAX) 2008 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. At that time, if you have a question (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.

Thanks, John, and good morning, everyone, and welcome to our Q3 2008 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 developments, 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 joining us this morning. We are pleased today to announce very strong financial performance for the third quarter. While Rob will provide more detail on our financial results and outlook in just a few minutes, I would like to take a moment to highlight just a few key points.

First of all, our financial performance this quarter reflects many of the themes that we have discussed with all of you over the last several quarters. Not only did we exceed expectations in all of the key financial metrics, we are continuing to leverage our diversified healthcare model, capitalizing on our broad global presence and accelerating the pace of R&D spending.

As you saw this morning, adjusted EPS of $0.88 exceeded guidance for the quarter and increased 26% versus last year. Sales growth, after adjusting out for FX, was 9%. And I think it is worth highlighting that our international sales growth was very robust, and again, after adjusting for foreign currency, increased 12%, with all of our international regions outside the US growing in double digits. I think that this continues to demonstrate the value and strength of our diversified business model. It reinforces our strategy and illustrates the market potential for further global expansion.

Adjusted gross margin was 50.6% and operating income as a percentage of sales was 22%. Importantly, we are achieving this performance while also investing in key marketing and promotional activities, along with R&D programs that will position us for growth over the longer term.

Finally, our Company continues to generate healthy cash flow, a tribute to the focus throughout the organization on managing this very important metric. Our financial strength and flexibility provides us with a solid foundation in this uncertain global economy.

One of our key challenges continues to be the COLLEAGUE pump. As you saw in our press release this morning, we recorded a special charge to increase our COLLEAGUE remediation reserves. This charge primarily accounts for increased repair costs and modifications related to our decision to harmonize the global installed base on a software platform consistent with our impending 510(k) regulatory filing.

We continue to be in active dialogue with the FDA relative to additional software modifications, which include the buffer issue that we previously discussed, the submission of our 510(k) and the protocol for executing a comprehensive clinical evaluation of pump enhancements. As always, I'd be happy to take any questions that you might have on COLLEAGUE during the Q&A this morning.

Before turning the call over to Rob, I would like to take just a few minutes to discuss some recent highlights on several new product and R&D initiatives as we advance our pipeline through both internal development and external collaborations.

First, within our regenerative medicine business, we continue to augment our BioSurgery portfolio. During the third quarter, we announced a licensing agreement with Innocoll Pharmaceuticals for exclusive US marketing rights for their gentamicin surgical implant. This is the first biodegradable antibiotic surgical sponge used as an adjunct therapy for prevention and treatment of surgical site infections. This product is already approved and available in 49 countries and is currently in two Phase III clinical trials in the United States.

Also within regenerative medicine, we are advancing programs and achieving milestones with our partners, Kuros Biosurgery AG. This partnership is focused on the development and commercialization of a portfolio of hard and soft tissue repair products. These products will be based on Baxter's fibrin-based biomatrix TISSEEL fibrin sealant, combined with Kuros' proprietary Biologics and associated binding technology.

Our development partner Kuros is currently enrolling patients in a number of Phase II clinical programs which, if successful and confirmed in Phase III trials, will allow us to enter the fast-growing orthobiologic market.

Third, we have submitted an IND to the FDA for the evaluation of GAMMAGARD LIQUID, combined with Enhanze, Halozyme's proprietary drug delivery technology that can facilitate the absorption and dispersion of drugs subcutaneously. This will be a 12-month Phase III trial for patients with primary immune deficiency.

Subcutaneous administration of GAMMAGARD LIQUID via a single site could allow patients to administer a sufficient dose of IGIV once monthly at home. We expect to begin this trial by the end of this year.

Lastly, we initiated a Phase III clinical trial evaluating the use of GAMMAGARD LIQUID for multifocal motor neuropathy, or MMN. MMN is a rare neurological disorder characterized by progressive limb weakness, primarily affecting the upper extremities. This trial is a 15-month randomized double-blinded placebo-controlled study involving 40 patients.

These are just a few of the initiatives that represent our increasingly robust new product pipeline.

In closing, we believe that Baxter is very well-positioned in today's global macroeconomic environment. While we are certainly not without challenges of our own, the progress that we've made over the last several years to improve the quality of our balance sheet and financial performance will yield great benefits in the coming months and years. Our Company continues to benefit from the power of our diversified healthcare model, with each of the businesses and regions making significant contributions to our overall performance.

And as I've mentioned in the past, given the medically necessary nature of our products, our strong market positions, further supported by our global branded presence, we are confident in our ability to drive solid operational performance and grow, despite the uncertain economic times. As always, I would be happy to take any questions you might have during the Q&A. In the meantime, let me turn the call over to Rob for a more detailed discussion of our Q3 results and also outlook for the remainder of 2008.

Thanks, Bob, and good morning, everyone. Before providing our outlook for Q4, I'd like to start today by quickly reviewing with you the charges we recorded in the third quarter, which are reflected on our GAAP results, and then discuss our adjusted earnings, excluding charges, in both the current and prior-year periods. Please refer to page 8 of our press release, which reconciles our reported GAAP earnings to our adjusted earnings.

First, as Bob mentioned, we recorded an after-tax charge of $65 million, or $0.10 per diluted share, to increase our COLLEAGUE remediation reserves, to harmonize our pump software and address increased repair and warranty costs. In addition, our third-quarter GAAP results include an after-tax $19 million charge, or $0.03 per diluted share, for fixed asset write-offs associated with the discontinuation of the CLEARSHOT pre-filled syringe program within Medication Delivery. This step reflects our disciplined approach to R&D milestone and program management, as the marginal return on this program did not justify further investment.

Finally, as we have previously indicated, our results reflect an after-tax charge of $7 million, or $0.01 per diluted share, for in-process research and development related to our new collaboration with Innocoll Pharmaceuticals.

In summary, our reported GAAP earnings of $0.74 per diluted share increased 21% over the prior year period. Excluding charges in both the current and prior year, adjusted earnings of $0.88 per diluted share compared favorably to the earnings guidance we previously provided of $0.81 to $0.83, and represented an increase of 26% over the prior year period.

Our adjusted results reflect better-than-expected sales and gross margin and a $0.02 benefit resulting from discrete items impacting the tax rate I'll get into it just a little bit.

Now, I'll walk you briefly through the P&L by line item before updating you on the financial outlook for the rest of the year. Starting with sales, our reported sales totaled approximately $3.2 billion and increased 15%. Excluding foreign currency, sales growth of 9% exceeded our guidance for the quarter of 6% to 8%, led by better-than-expected recombinant sales, robust growth across all major product categories within Bioscience, and strong international growth in Medication Delivery.

Organic growth this quarter also represents a sequential acceleration of approximately 4 points, as we have now annualized several items that created difficult growth comparisons for us over the past year or so.

Sales growth in the US was 5%, driven by double-digit sales growth in Bioscience. International sales, which comprise 60% of our total reported sales, increased 22%, with strong growth across all regions and major product categories.

Year-to-date, sales increased 12%, and sales growth, excluding foreign currency, was 5%. Excluding foreign currency, the loss of BeneFIX and the sale of the transfusion therapies business, sales growth was 7% on a year-to-date basis.

In terms of individual business performance, let me start with Medication Delivery, which had sales totaling approximately $1.2 billion, an increase of 11%. Currency contributed 5 percentage points of growth; therefore, excluding foreign currency, Medication Delivery sales grew 6%.

International sales were again robust and increased 21%, driven by double-digit increases across all businesses, with international sales excluding foreign-currency increasing 12%.

US sales in Medication Delivery were flat, as solid growth in IV therapies and infusion systems offset the performance in the US anesthesia and injectables businesses. As we discussed last quarter, the decline of 4% in the US injectables business continues to be the result of competition from multi-source generics and the impact of heparin, which was somewhat offset by growth of our enhanced packaging product offerings.

The injectables business outside US grew in double digits for the fourth consecutive quarter, driven prematurely from growth of our drug compounding businesses.

Anesthesia sales totaled $112 million, an increase of 1%, and excluding foreign currency, declined 1%. Double-digit international growth continues to be driven by penetration of SUPRANE, our proprietary anesthetic, augmented by growth of sevoflurane. US sales growth was impacted by the timing of wholesaler purchases, as well as a difficult comparison to last year, when US sales growth exceeded 40%.

Global IV therapy sales totaled $403 million and increased 16%, with currency contributing 6 percentage points of growth. Growth continues to be driven by solid demand for IV solutions globally, US pricing improvements, and strong growth in our nutritions business.

Infusion system sales totaled $235 million in the quarter and increased 14%, or 11% excluding foreign currency. Sales benefited from solid growth of access sets, US remediation revenues for COLLEAGUE, and COLLEAGUE placements in international markets.

In summary, for Medication Delivery, we continue to expect full-year sales, excluding foreign currency, to grow approximately 4%. This will be driven by flat sales versus the prior year in our global injectables business, growth of approximately 5% for our infusion systems business, IV therapy sales growth in mid to high single digits, and we expect anesthesia to grow in low double digits, primarily driven by strong international growth.

Moving now to Renal, third-quarter sales totaled approximately $600 million and increased 6%, with foreign currency contributing 7 percentage points of growth. US sales declined 1% and international sales increased 7%. Global PD sales totaled $480 million and increased 7%. Excluding foreign currency, global PD sales were flat, due to the lost tender in Mexico we have previously discussed.

Excluding both the impact of the lost tender and foreign currency, international PD sales were up approximately 5% and global PD sales also increased 5%. This growth is due to the expanded use of peritoneal dialysis in many developed and emerging markets around the world.

In international markets, we continue to see PD patient growth in the double digits in Asia, led by consistent growth of approximately 25% in China, along with solid patient growth in other developing countries around the world. In the US, PD sales growth of 6% was again driven by patient gains.

Hemodialysis sales of $113 million increased 1%, and excluding foreign currency, sales declined by 5%. To summarize, Renal continues to perform in line with our expectations. Full-year 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 the mid single digits, demonstrating continued progress in the core PD franchise across other markets.

Now turning to Bioscience, Bioscience sales totaled approximately $1.4 billion, generating record quarterly growth up 23%. This growth includes 6 percentage points of benefit from foreign currency. This performance is the result of accelerating sales across the portfolio, resulting in double-digit increases for all major product categories. Recombinant sales of $516 million increased 19%, or 14% excluding foreign currency.

As we have previously mentioned, ADVATE sales continue to exceed our expectations, with ADVATE conversion in Europe at over 90% and US conversion improving to approximately 65%. US recombinant sales were up 7%, and international sales increased 30%. The international performance was better than expected, primarily due to timing of orders and the acceleration of tenders in the [Asemea] region.

Turning to the Plasma business, in the quarter, Plasma protein sales of $338 million increased 37%, with currency benefiting sales by 11 percentage points. Performance continues to be driven by the ongoing double-digit growth in global demand for plasma proteins and improved pricing. US plasma protein sales increased 7%, while international sales increased 59%.

As we discussed last quarter, strong international growth was expected due to a difference year-over-year in the timing of shipments for Feiba and PD Factor VIII tenders in the Latin American and [Asemea] markets.

Antibody therapy sales increased 25% and totaled $307 million, with currency benefiting sales by 3 percentage points. Growth was once again driven by conversion to GAMMAGARD LIQUID, pricing improvements, and strong growth in demand.

Sales of our regenerative medicine business totaled $104 million and increased 27%, with currency contributing 6 percentage points of growth. This is the result of growth of our core portfolio of products, TISSEEL, FLOSEAL and COSEAL.

Finally, revenues in the Other category totaled $89 million and declined 5%. This decline is primarily due to a tough comparison for the vaccines business in the quarter and a decline in lower-margin third-party plasma sales.

In summary, Bioscience growth through the first nine months of the year has been both balanced and robust across the entire portfolio. Therefore, we expect Bioscience sales, excluding foreign currency, to exceed 10% for the full year. This growth is comprised of the following.

First, recombinant sales growth in high single digits. Second, we expect plasma protein and antibody therapy sales in total to grow in the mid to high teens, given solid demand and higher prices. Third, we continue to expect growth in our Biosurgery business to be in the mid teens. Finally, we expect the Other category to decline in mid single digits for the year versus our prior-year expectation of a double-digit decline.

This change is a result of a strong year-to-year performance in the vaccines business, augmented by a benefit from a large tender expected in the fourth quarter. The strong vaccine sales for the year of approximately $450 million will be more than offset by the difficult comparison for BeneFIX, resulting in the mid-single-digit decline for the category.

Turning to the rest of the P&L and starting with gross margin, gross margin in the quarter of 50.6% improved by 60 basis points versus last year. This performance reflected a significant improvement over our expectation for the quarter of flat margins year-over-year, primarily due to timing and mix resulting from better-than-expected sales of higher-margin products in the quarter. Margin expansion is the continued result of improved business and product mix, including conversion to ADVATE and GAMMAGARD LIQUID, favorable pricing across multiple businesses, and manufacturing efficiencies. These drivers continue to offset a modest impact from rising raw material costs and a slight negative impact on margin percentage from currency fluctuations.

For the fourth quarter, we expect these operational trends to continue, resulting in a gross margin that's slightly higher than Q3 and reflecting continued margin expansion year-over-year.

Turning to SG&A, SG&A of $681 million in the quarter increased 12% compared to prior year. This growth includes approximately 5 percentage points of growth from foreign currency. SG&A as a percentage of sales is 21.6%, reflecting a 50 basis point reduction versus the prior year period.

As Bob mentioned earlier, R&D spending of $218 million increased 30%, and as a ratio to sales was almost 7%. Excluding foreign currency, R&D growth was over 20%, driven by significant growth in BioScience and double-digit increases in Medication Delivery and Renal. As our results indicate, we continue to invest for the longer term while continuing to meet our short-term objectives. As evidence of this, despite significant growth in R&D, our operating margin for the quarter was 22%.

Interest expense was $20 million compared to $6 million last year. This increase is primarily due to lower interest income as a result of lower interest rates and the settlement of net investment hedges, as well as increased expense on debt issued within the last 12 months.

Other expense was $1 million in the quarter, as miscellaneous expenses and minority interests were offset by foreign currency gains. As I indicated earlier, the tax rate in the quarter was 16.3% and lower than our guidance of 19%. While our underlying effective tax remains at approximately 19%, the lower rate in the quarter was the result of favorable accounting adjustments due to valuation allowances, which were somewhat offset by tax expense associated with foreign earnings that we plan to repatriate to the US. Net-net, this resulted in a $0.02 benefit for the quarter.

Finally, as previously mentioned, EPS of $0.88 represented an increase of 26%.

Moving now to cash flow, cash flow from operations for the quarter totaled $813 million, and for the year, we've generated approximately $1.9 billion in cash flow from operations. This is an improvement of over $300 million versus the prior year.

Our total DSO, which ended the quarter at 55.6 days, improved versus last quarter as 3 days lower than last year. Inventory turns of 2.4 turns were also better than last quarter and last year. Sequentially, BioScience and Renal turns improved, while turns within Medication Delivery remained relatively flat.

Capital expenditures for the quarter totaled $251 million compared to $166 million in the third quarter last year as we continue to invest in appropriate capacity across our businesses to support our future growth. I am also pleased to let you know that during the quarter, we made our last payment of approximately $240 million and we have now completely terminated the net investment hedge liability.

Lastly, during the quarter, we repurchased 8.5 million shares of common stock for $589 million. So far this year, we have repurchased 24 million shares totaling $1.5 billion. On the net basis, this amounts to repurchases totaling 11.2 million shares for $1 billion, in line with our commitment on a net basis for the year.

Overall, I am particularly pleased with our ongoing ability to generate strong cash flows. We continue to return significant value to shareholders as a result of our improved financial flexibility, capital allocation discipline, and financial management, while accelerating investments in R&D, both internally and through business development activities, that will position us for future growth.

Now, before turning to the financial outlook for the remainder of the year, given the recent developments in the financial markets, I would like to share some important points about Baxter. Fortunately, as you know, we've spent a number of years improving the overall profile of our financial performance and strengthening our balance sheet, so we believe we are well-positioned in this uncertain economy. We continue to generate strong operating cash flow, which provides the flexibility to fund our operations without the need to access the short-term debt markets.

With significant cash on hand of over $2 billion, both in the US and internationally, along with increased flexibility to repatriate cash as needed, our liquidity position remains very strong. We have access to the commercial paper market at reasonable rates if needed, and we maintain a backup credit facility with [committed] lines of credit of $1.5 billion, which does not mature until 2011, and another facility of EUR300 million, which does not mature until 2013. Overall, the credit issues currently impacting the financial markets do not pose a meaningful risk to our operations and funding requirements.

Given the recent market volatility and drastic movements in currency rates in the last several weeks, I also want to address the ongoing impact of foreign currency. As we've previously indicated, to date, we have seen a modest benefit on our results. While it is somewhat premature to speculate on 2009, given these drastic movements, particularly in the Latin American currencies, which we cannot directly hedge, we could face some foreign currency headwind next year. Overall, however, we continue to be confident in our margin expansion opportunities and growth profile, driving results at a minimum, consistent with our long-range objectives, despite the current uncertainties.

Finally, let me conclude my comments this morning by providing an update on our financial outlook for the remainder of 2008. As you saw in the press release this morning, we raised our earnings guidance to $3.35 to $3.37 per share. Our previous earnings guidance was $3.28 to $3.32 per share.

For full year 2008, we expect sales growth, excluding the impact of foreign currency, to be in the 5% to 6% range. Foreign currency for the full year is expected to benefit sales growth by approximately 4 points, with reported sales growth expected to be in the 10% range.

For 2008, we expect gross profit to improve year-over-year by approximately 150 basis points, with SG&A growth of approximately 10% and R&D growth of approximately 20%. Based on this guidance, we expect our operating margin to improve for the year 2008 by approximately 100 basis points to nearly 22%. We now expect interest and other expense combined to total approximately $100 million. We expect interest expense to total more than $80 million as a result of exiting net investment hedges, lower interest income, and lower balances of cash.

While we expect our operational tax rate to approximate 19% for the year due to the discrete items that drove the tax rate lower in Q3 and a modest benefit of approximately $0.01 related to the 2008 R&D tax credit, which will be implanted in the fourth quarter, the full-year adjusted tax rate is expected to approximate 18%. We continue to expect a full-year average share count of 635 million to 640 million shares, and we now expect cash flow from operations to exceed $2.6 billion and capital expenditures to approximate $1 billion.

For the fourth quarter, we expect earnings per diluted share of $0.88 to $0.90, and sales growth, excluding foreign currency, of approximately 7%. While we cannot precisely predict currency fluctuations, assuming current rates, foreign currency could negatively impact fourth-quarter sales by approximately 2 points.

In summary, thus far this year, we've achieved or exceeded our financial objectives. While the macroeconomic environment may be more challenging in the coming months and years ahead, given our balanced, diversified product portfolio, global brand and geographic presence, we are confident in our ability to deliver operational growth consistent with our long-range objectives.

Now I would like to open the call up for Q&A.

(Operator Instructions) Matt Dodds, Citigroup.

Thanks. Good morning. A couple questions. I usually don't get on this quick. First, Bob, on the fourth-quarter comments, I think -- or Rob, you said that there would be a vaccine -- a vaccine contract or sort of a one-time benefit from a product.

Yes, it's actually a tender, very consistent with what we've done in the past. It's advanced purchase agreements. I don't want to disclose the country because right now we are under some confidentiality agreements with them. But it will be a one-time tender in the quarter of probably about $50 million.

Can you at least say -- because usually those are pretty high-margin tenders -- is that realistic to think about as --?

Yes, this will be a relatively high-margin tender.

Okay. And then the second question is on the PD contract in Mexico. Is that coming up for tender again in '09? And if so, is there a chance that you would potentially bid on it or it could be a better contract that would allow you to get back in?

Yes, Matt, this is Bob. It is coming up. We actually expect to receive the tender for '09 shortly. We don't know all the terms -- what has changed from last year, given, frankly, what has transpired in the marketplace with the conversion last year and so on. So we will definitely participate in that tender.

Relative to the financial impact, going forward, obviously, as we all know, we took a major hit in '08. We're obviously hopeful that on a year-to-year basis we certainly wouldn't decline any further '09/'08, based upon the results of the tender.

Okay. Thanks, Bob. Thanks, Rob.

Larry Keusch.

On IVIG sales, I think, if I have this right, declined sequentially in the third quarter, which is the first time, I think, since going back to '06 that that has occurred. Any color around that, Bob?

Is that right? We are checking the numbers. I wasn't aware of that. I can assure you there's nothing fundamentally going on in the market.

Hey, Larry, it's Mary Kay. Antibody therapy in the quarter, yes, it's a $5 million decline from Q2 to Q3. Is that what you are referring to?

Right. Exactly.

Yes. I mean, there's nothing that I'm aware of. We see significant demand. It's still growing in double digits and pricing is up in double digits as well.

Yes. No, obviously, I'm not picking on it. It grew 25%. I was just --.

I have to admit I hadn't noticed that, but there's nothing fundamental going on that you ought to be concerned about there.

Okay, perfect. Then just two questions for Rob. Rob, again, just given again the significant moves in the Euro here, even the last couple of weeks, can you just again remind us how well you are hedged for next year and if these recent moves have impacted you in any way?

And then on the cash that you're sitting on, can you just give us a flavor of what's sort of in that cash bucket? Do you have any exposure there on what is cash?

Sure. To your first question, as we look at the impact of currencies, I think, as I've discussed with most of you in the past, the euro is one of the currencies where we do hedge. So we have largely hedged our position going into the remainder of this year and into next year for the euro. And also, given the fact that the euro is one of our largest cost bases due to our manufacturing footprint within Europe and how we do global supply of our BioScience products, the euro, frankly, is not going to be the material driver of any FX concerns we have.

Really, if you look at it, the currencies that are the most impactful from the comment I made in the prepared remarks are really more coming from Latin America. We can't directly hedge those. I think as I've also highlighted in the past, we have historically benefited from a portfolio effect, given the number of currencies we have margin in, that as the currencies move in different degrees and different directions versus both the dollar and the euro, they have created a muting effect, so we don't really get major swings up or down.

In the last couple of weeks, we have seen a 20% to 30% move in those currencies, really retracing since September 1 back to levels they were at back in 2005. So that's what I wanted to signal, which is it's too early to say what that will do next year, because obviously it depends on how all of the currencies move together. But given that is kind of a historic move, I did want to just highlight to people it's something we are watching. How it plays out next year, we will have to see. But the current moves of the euro are not a concern.

Okay, and on the cash?

On the cash side, we are very conservative in how we invest our cash. It's all sitting in either bank deposits or in money market accounts. We have no auction rate securities, no investments in subprime mortgages, no meaningful investments of any kind in any of the companies, the financial institutions that you have seen in the press. So from that perspective, we are in very good shape.

Okay, excellent. Thanks, guys.

David Lewis, Morgan Stanley.

Good morning. A couple things. I guess first off on guidance for the fourth quarter, Rob, when we think about the performance in the third quarter and we sort of just transpose that onto the fourth quarter, it does appear that the $0.88 to $0.90 in guidance reflects some conservatism. Are there other dynamics, either R&D spend continuing these higher levels or increasing SG&A spend in the fourth quarter, we should be aware of?

No. I mean, we are not looking at an acceleration of any of our spend items. If you look at really what drove the third-quarter performance, as I think I mentioned in the call, if you look at the roughly $0.06 of overperformance versus the street expectation, $0.02 of that is coming from the tax side. Roughly $0.02 of that is operational overperformance and about $0.02 of it is really a pull-forward of some of the sales we had originally expected, especially on some high-margin products we thought we would see in the fourth quarter.

So that's why, really, as you look at what we're guiding for the full year, we are still running ahead of where we expected to be on the full year. But there was a little bit of timing shift between the fourth and the third quarters.

Operationally, it sounds like GM is the most significant factor for you. I thought GMs would be a little weaker in the third, and now obviously they weren't, but that's just a pull-forward.

Yes, correct.

And David, that's a result of the better-than-expected recombinant sales in the quarter, and that's also related to the shift that Rob is talking about.

Great. Can you touch -- you signaled in the second -- the back half of the year we would see better plasma-derived from Factor VIII, and you talked about specific timing. Could you just walk through the specific timing of those contracts or the specific countries that are involved?

You are talking about the plasma-derived and Feiba tenders?

Yes.

Yes, basically we are seeing a shift from last year compared to this year. So it's basically in Brazil and some of the [Asemea] markets where these tenders occur. So if we look at last year, David, we had about -- let's call it 20% of our tender orders come through in the third quarter. This year, we had about 45% of the tenders come through.

Okay, very helpful. And then I guess for Bob here a second, thinking about just demand drivers for IVIG, clearly you talked about your MMN process moving forward, where you had another competitor in the second quarter -- or sorry, the third quarter, talk about a CIDP approval.

Right.

Do you expect competitive approvals for CIDP in your ongoing development efforts in MMN to result in any acceleration in demand for neuropathy, broadly defined, over the next six to 12 months?

I think generally whenever any of the competitors or players in the market get approval for specific indications, it's generally a good thing for the market. You're referencing Talecris' approval for the CIDP indication. Obviously, this is a priority for us going forward, as evidenced by the MMN project that I described to continue to expand our label with approved indications. I think it's one of several reasons why we are very bullish on the long-term outlook in terms of the demand drivers for IVIG.

Lastly, and I'll hop in queue here, but R&D obviously continues to be at sort of the higher end of ranges that we would expect. Would you still be thinking about heading into next year -- and, obviously, Bob, this is a strategic focus for the business -- would you be thinking about a trendline for '09 that's going to keep R&D in the high 6%, close to 7%?

Well, we certainly are going to continue to invest in R&D growth at a greater rate than revenue. You're right. It has been fairly dramatic toward the upper end over the last couple of years. As we have commented frequently, our improving financial position really has allowed us to not only generate great short-term results, but invest in the business for the long term. We are very pleased with how our pipeline continues to evolve.

And frankly, we look forward to next year when we have our investor conference probably provide a little bit more insight in terms of the pipeline and the benefit that we are deriving from the investment. But going forward, again, strategically, our commitment is to invest in R&D at a faster rate than top-line growth. Just how much that will be is a function of a number of things, which obviously we will comment on in more detail with our '09 guidance in January.

Great. Thank you very much.

Mike Weinstein, JPMorgan.

A couple clarifications. First, on the anesthesia business. You commented about the tough comparisons obviously in the US, as well as some wholesaler patterns. Should we assume anesthesia reaccelerates in the fourth quarter?

Yes, we do expect to see some acceleration in the US in the fourth quarter, as we will see some of that wholesale restocking reverse itself.

Should we think about on the BioSciences side of the business -- it's tough to keep track of some of these contracts and the different pieces of the business -- but your BioSciences business was obviously very strong internationally this quarter, in part because of the timing of some tenders that historically you would have gotten in the fourth quarter. So as we think about third-quarter BioSciences' growth versus fourth-quarter BioSciences' growth, that is principally the differential.

Yes.

And then last question, help people think a little bit about the impact of FX on the gross margin line going forward. Your gross margin guidance for the fourth quarter might look a little bit conservative, but I want to hear how (inaudible) -- how (inaudible) plays into that.

Mike, this is Rob. I will answer that. As we've talked about in the past, it's actually currencies, as we have had a weakening dollar, have actually had a slight drag on our gross margin. And by slight, I mean we're talking gross margin percentage maybe 0.2% or less. It's very small. So it's not a meaningful drag and it won't be a meaningful benefit as the dollar strengthens, would be my expectation.

But I would expect that if we do see the dollar continue to strengthen across the board, it should flip to be a slight benefit -- again not meaningful enough in my mind to change any direction on the type of guidance we've been giving.

Let me just throw one other question out there. I apologize. Bob, if you could comment, are you seeing any change or any -- I'm thinking across your business, across your various customers. Are you seeing anything as a result of the credit crisis in the economy in your customer base? You have in a unique set of customers, where certainly in the US market, you wouldn't think you'd see much of it. But I'm curious if internationally if you're seeing anything at all.

No, we are really not. I think it speaks to one of the great strengths of our company, which is the nature of the businesses that we are in that we describe as medically necessary products. You know, we are not in OTC vitamins and other kinds of discretionary categories within healthcare. Everything that we are in is the difference between life and death. So the underlying demand, Mike, whether it is US or globally, continues to be there. We don't see any impact thus far.

And frankly, even projecting out in time, you know, it's difficult for us to conceive of where there's going to be a major impact in terms of the underlying demand drivers. One might suggest internationally in certain markets, let's say some of the Latin American markets and so on, that there may be fewer discretionary dollars that they can make available for tenders for certain products and so on. I think we have a long ways to go before we get to that point.

I think the more practical impact on our business, whether it is US or globally, really is -- and we closely monitor, obviously, our receivables -- I think it's reasonable to conclude for all industries and all companies that, given the credit situation and so on, that people are going to take longer to pay their bills. I would tell you we haven't seen that manifest itself thus far. In fact, we had great results in Q3, as Rob indicated, on our DSO.

But I think we need to be open-minded to the fact that that's likely going to happen, and we are very vigilant in monitoring that. But in some ways, that's more tactical than the question you are asking, which is the core underlying drivers of our business. And we want to be objective about it. We don't want to stick our head in the sand. But I do think it's fair to say that given the nature of our products, we really don't think, certainly for the foreseeable future, that there's going to be any dilution in the underlying demand drivers for our businesses.

Perfect. Thanks, guys.

Bruce Nudell, UBS.

Good morning. Thank you. Could you give us some idea of the percent of sales or operating profit that comes from the countries in Latin America that don't either have natural hedges or financial hedges?

Bruce, this is Rob. Those countries have tended to be, if you look in absolute dollars of margin for us, depending on the country, around $90 million to $100 million of margin in each of those countries.

Okay, that's terrific. And we are a little surprised when we talked to J&J on the quarterly call about the extent to which currency-driven changes in margin would actually flow down to the margin line, excuse me. You know, they were saying 2/3 or so. Is your exposure in those territories?

No, or even near that. I think as we have indicated in the past, really up until this most recent move in the market, we were confident that we were going to see really no meaningful impact at all. It is still too early, as I highlighted in my comments and in the question earlier, to say what it will be. But under no scenario is it anything to that level.

Okay, so a third or less. Is that fair?

Less.

Even less than that, Bruce.

Okay, that's terrific. Could you comment just on the dynamics within the plasma protein segment this quarter, what was strong? Well, it looked all pretty good, but any particular standouts in that category?

I think, Bruce, to your point everything really did quite well. As I commented, we are seeing great growth in all of the categories. As we highlighted, we saw some plasma-derived Factor VIII tenders, which drove that. Feiba has continued to do well. Recombinant did exceedingly well in the third quarter, and our plasma business continued to show very good growth. So I really -- I would just say really we're quite pleased with how all of those businesses are performing. One doesn't necessarily stand out versus any of the others.

Bruce, it's Mary Kay. I'd just add that across the board on the plasma proteins, almost every product grew more than 20% in the quarter. Now, I would caution some of that was due to the timing of some of these Feiba and PD Factor VIII tenders, so that growth will not continue into the fourth quarter.

Right. But specifically with regards to albumin, how did that do?

Up significantly.

Thanks so much.

Rick Wise, Leerink Swann.

Good morning, Bob. A couple questions. Clearly, R&D spending is rising. And given, the, I guess, ending of the CLEARSHOT program, I don't know whether CLEARSHOT was part of the wildcard pipeline. I don't recall. But maybe you could point us to some things we are going to see coming out of the pipeline or on the wildcard pipeline. Anything happening over the next 6, 12 months incremental that we should be focused on?

Let me comment specifically on CLEARSHOT, and then -- first of all, no, CLEARSHOT was never on the wildcard list. It was on a different list. I'm not sure what we'd call it. But no, this is a program that was implemented, I think, going back 7, 8 years in time, interesting technology. At the end of the day, the product features and the ability to differentiate and price the product was never going to offset or cover the incremental manufacturing cost.

And this is one of those where I think there were some missed calls from the start, and I think we have the discipline to say we are pulling the plug on it. But I will tell you this was a program that was never dialed in our long-range outlook in terms of upside in any material way. So that's specifically CLEARSHOT.

On the other "wildcard programs," you know, whether it's the flu vaccine or the cell therapy program or new indications for GAMMAGARD and so on, I think generally those are very much still in play. I don't really want to get into any details and comment on any of those specific programs today. Like I said earlier, in response to -- I don't know if it was Larry or David's question -- you know, we will get into that in more detail in our investor conference next year.

So suffice it to say we are pleased with how our new product pipeline continues to evolve, become more robust. I think virtually all the wildcards anyway that we've showed you a year or so ago continue to be in play and represent upsides out in time. By that I mean even beyond our five-year financial LRP. So beyond that, unless you have a specific question, I will just kind of stop there, Rick.

Okay, a couple more. Rob, you talked about the 2009 headwinds and that we should expect you would perform at a minimum in line with your longer-term goals. I just wanted to make sure I understood what that meant. 11% to 13% off this range you've offered us for the full '08 year?

Yes.

So, at a minimum in that range. Turning to COLLEAGUE, I hate to ask you always about this, Bob, but maybe you could just update us in a little more detail. Are we likely to see more of these quarterly runoffs reserves adjustments? Maybe you can update us on some of the regulatory milestones we could expect in --.

The answer to your first question is we certainly hope not and we certainly don't plan on it, but obviously it's been difficult to predict kind of the circuitous route of the efforts to remediate and then relaunch the product.

Let me just comment on several things. The remediation of the singles continues in the US. I would tell you things are going very well outside the US with both the singles and the triples. The area of focus, as you know, is to get to a point where we can resubmit a 510(k) on the triples. We've talked, going back in time, about this buffer overload issue. And through the process of fixing that, there were, as we've commented previously, several other what I will just call low-level issues that we wanted to make sure we were comprehensive in addressing.

So we continue to work through that. We are in open dialogue with the Agency on multiple aspects of this, including some type of what I will just say "clinical study" on the triples before we relaunch or recommercialize the product. I think it's in everyone's interest, first and foremost our customers, but certainly the Agency's and ours, to make sure that when we relaunch the next time there are no mistakes made.

Therefore, as I say. we continue to have dialogue with the Agency relative to some type of clinical trial that we do before we relaunch. And I think one of the questions there is do we do that before we formally submit to 510(k)? Do we formally submit the 510(k), have the Agency hold that until we complete this, again, clinical trial that I'm talking about? And frankly, we don't have all the pieces nailed down on that yet.

So in terms of financial impact, I mean, clearly we are not going to be recommercializing the product this year. We will by the end of the year generate about $30 million in revenues associated with the remediated devices in the US, and also roughly about $30 million in normal revenue O-US. So about $60 million in sales per COLLEAGUE this year.

The final point I would make and then I'll stop, if you have any specific follow-ups, Rick, is that since we spoke on this subject last quarter, we've actually experienced hardly any erosion of our installed base in the US. So I think that's good news in a number of ways. But again, I think it just reinforces our need to be disciplined and thorough and working hand-in-hand with the Agency so when we get to the point where we do recommercialize, we experience no surprises going forward.

That makes sense. Just one follow-up on that. Does a possible clinical trial make it likelier that COLLEAGUE returning is a 2010 event, or no, it's still --

It's premature to estimate, and obviously we will be more definitive in the call in January. But no, you should not conclude that.

Okay, one last quick one. Rob, the fourth-quarter tax rate, maybe you could help us make sure of the impact of the R&D tax credit catch-up. I assume that's got to have a beneficial -- especially beneficial effect there.

Yes, it's a little -- to a full-year rate, it's about a half of a point. As I said, it's about $0.01 based on what we expect it to be at the moment to the fourth quarter, and that's about 0.5 point on the full-year tax rate.

Thank you very much.

Ben Andrew, William Blair.

Good morning. Just wanted to touch base briefly on Medicaid funding. Bob, have you seen any proposals or kind of concerns about directional pressure like we saw -- whatever it was -- six or seven years ago, with attempts to cut reimbursement for PD factor VIII as well as recombinant factor VIII?

No, we haven't. I guess I would say this. There continues to be what I would characterize as ongoing rather evolutionary pressures on reimbursement, largely on a state-by-state basis, which is really a bigger issue, as you know, than any kind of Medicare reimbursement or anything of that nature. So no, we really haven't seen any new events that would suggest to us that that rate is going to accelerate.

Okay. And a follow-up on COLLEAGUE. You commented that you haven't seen any erosion of the product in recent months. At what point do we reach a tipping point here? I mean, in terms of next-generation wireless systems, the sort of things that hospitals really want to be implementing in their hospitals, is there an issue relative to the continued delays here in terms of starting to see some of the larger buying groups switching over to the companies that have been able to start introducing those new generations? When do you have a wireless product?

Yes, I don't know what the date is in terms of a tipping point. I suppose in theory there is some date. I don't see that as imminent, that's for sure. We continue concurrently with the development of a next-generation platform that incorporates a number of the features, functionality, capabilities that you've described. You know, we look forward to being able to bring a product to the market that is responsive to that.

I will say there is a practical issue that I think everybody is dealing with right now, which is whether it's the ability to buy an older version pump like COLLEAGUE or move to next-generation technology offered by someone else or us, hospitals aren't exactly flush with their capital budgets right now. Their world is much different today than it was even 30 days ago.

There's a lot of reasons why we haven't experienced erosion in our base, I think, but one of them as a practical matter is these are major capital investments for hospitals to convert wholesale their IV pumps. And while this next-generation technology that you referred to is intriguing, and will be adopted someday in the US, as a practical matter, most hospitals in the US are dealing with more pressing issues right now.

Right. That gets back to Mike's question, though, about seeing the underlying pressure in the hospitals, whether it's slowdown in procedural growth, which is evident in some hospitals, or whether it's impact on capital programs, doesn't that have the risk of building into something more concerning over the next couple of years if this continues?

I don't think in terms of our business portfolio, Ben, it's fundamental. People will not use fewer IV solutions because of the macroeconomic environment. There may be certain elective procedures, but they tend not to be those that are intensive, in terms of the utilization of the kind of products or businesses that we are in.

So again, we watch this very closely. We don't want to be oblivious to the potential impact, and I think we watch it very closely. But -- well, the comment I made earlier in response to the earlier question, I guess I feel fairly strongly about.

Okay, thank you.

We have time for one more question.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.