百特醫療 (BAX) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's first-quarter earnings conference call. Your lines will remain in the listen-only mode until the question-and-answer segment of today's call. (Operator Instructions). As a reminder, this conference call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

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

Thanks, Sean, and good morning, everyone. Welcome to our Q1 2009 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Rob Davis, Chief Financial Officer.

Before we get started, let me remind you that this presentation including comments regarding our financial outlook, new product development, and regulatory matters contain forward-looking statements that involve risks and uncertainties and of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more 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 pleased today to announce our financial results for the first quarter and to provide you with an update on our full-year 2009 outlook. As I'm sure you all saw in the press release that was issued earlier this morning, adjusted EPS of $0.83 exceeded guidance for the quarter and increased 12% versus last year. This was the continued result of strong underlying fundamentals across the portfolio and as you saw, improved margins driven by operational leverage and favorable business and product mix.

First-quarter sales growth excluding FX was 6% and excluding transfusion therapy sales from both years, sales increased 7%. This is fairly consistent with how we have been running on an organic basis over the last several quarters.

We continue to succeed in driving growth through geographic expansion, leveraging the momentum of our existing businesses while accelerating our investment in research and development and consistent with our strategic priority, as you saw, we increased overall R&D spending for the quarter by 12%.

I'm also particularly encouraged with the continued consistency of our improving margins. Gross margin in the first quarter was 52.7% and operating income as a percentage of sales was 23.5%. Both of these key metrics reached new historic levels, demonstrating our disciplined focus on driving profitable and sustainable growth.

Despite the challenging global macroeconomic environment, our first-quarter financial results I think underscore the value of our diversified healthcare model, the solid fundamentals underpinning our portfolio, and our ability to drive margin improvement. You need to know that we are quite vigilant in monitoring the landscape in which we operate. While no company including Baxter is immune to the global macro environment, to date we have not experienced any meaningful impact. We continue to believe that we are well positioned given our geographic reach and the medically necessary nature of our portfolio to deliver improved performance and growth in both the short and the long term.

Over the last few years, we have made significant progress in strengthening our financial position which has afforded us the latitude to renew our commitment to innovation. As mentioned earlier, we continue to accelerate our investment in R&D in line with our 77-year heritage as a pioneer and leader in healthcare.

In addition, our financial strength has also allowed us the flexibility to selectively pursue a range of business development initiatives to grow our business and to leverage our core competencies. Over the last few years, we've announced a number of collaborations with key science and technology partners that bring complementary skills and resources to augment our own expertise, like DEKA, Halozyme, Kuros, Nektar, and [Lipoxin], just to name a few.

I'm pleased to briefly comment this morning on our recent announcement of a three-year exclusive distribution agreement with Sigma International for infusion technologies, including the company's Spectrum large volume pump. As part of this agreement, Baxter has also acquired a 40% equity stake in the company with an option to purchase the remaining portion.

This agreement enables us to immediately accommodate hospital customer needs, provide them with alternatives to upgrade from older pump technologies and strengthens our position as a leading global provider of infusion systems products. Spectrum is one of the latest generation smart pumps with over three years of established market performance. There were over 35,000 Spectrum pumps in use in the US today and the adoption is rapidly increasing with recent awards by large GPOs. Importantly, Spectrum uses Baxter's standard intravenous administration sets, which provides customers with the most cost-effective infusion system in the market.

In addition, as a result of our internal development efforts we continue to make very good progress on our next-generation infusion pump platform and expect to begin clinical evaluations before the end of this year. Beyond the strategic importance of both SIGMA and our next-generation infusion platform, our number one priority continues to be completion of the remediation activities of COLLEAGUE and delivering on our commitment to customers and regulatory agencies globally. The combination of these various infusion pump initiatives will allow Baxter to reestablish its leadership position in this important market in the years to come.

I am increasingly encouraged by the progress that we are making to spur innovation throughout the company and the acceleration of R&D spending. We look forward to presenting details on our evolving pipeline at our investor conference September 16 of this year in Chicago. Of course at that time, we will also provide you all with an update on our longer-term financial objectives.

My optimism for our future is based not only in our strong financial and market positions, the stability of our underlying markets, and our evolving scientific capabilities, but also on the ability to leverage our diversified healthcare model to effectively manage through this challenging and uncertain global macro environment.

As always, I would be happy to address any questions that you might have during the Q&A, but in the meantime, let me now turn the call over to Rob for a more detailed discussion of our Q1 results and also our outlook for the remainder of this year. Rob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, we are very pleased with our first-quarter results, which included continued margin expansion and earnings that exceeded our guidance. The quality of our performance is the result of continued gross and operating margin expansion, which again allowed us the flexibility to selectively invest in R&D as well as specific sales and marketing programs.

Let me briefly walk you through the P&L by line item for the first quarter before providing you with an update on our financial outlook for the second quarter and the full year 2009.

Starting with sales, our reported sales in the quarter totaled $2.8 billion and declined 2% with foreign currency trimming sales growth by a total of 8 percentage points. Therefore, excluding foreign currency, sales growth was 6% and was driven by solid growth across all key product categories within bioscience and growth in medication delivery, particularly in the anesthesia business. I would also like to reiterate Bob's point that we've seen no meaningful impact from the global macro environment.

As Bob mentioned earlier, excluding transfusion therapies from both years, reported sales declined 1% and excluding foreign currency, sales growth was 7%. I would note that is during a quarter where there were two fewer billing days versus last year. Sales growth in the US was 5% and international sales declined 7% on a reported basis. Excluding foreign currency, international sales growth was 7%.

In terms of individual business performance, let me start with medication delivery which had first-quarter sales totaling $1 billion, a decline of 3% on a reported basis. Excluding foreign currency, medication delivery sales grew 6% which on an organic basis is consistent with the growth we've recently seen in this business. US sales increased 2% and international sales in medication delivery declined 7% on a reported basis. But excluding foreign currency, international sales were up 9%.

Within the product categories, IV therapy sales in the first quarter totaled $344 million and declined 7%. Excluding foreign currency, sales increased 4% and were driven by improved US pricing and demand internationally for our IV solutions and nutritional products.

Global injectable sales increased 1% to $371 million in the quarter. Excluding foreign currency, sales grew 10% due to strong growth in our pharma partnering and international pharmacy compounding businesses, which more than offset low single-digit growth in US multisource generics.

Infusion system sales totaled $199 million in the quarter and declined 10%. Excluding foreign currency, sales declined 3% and as expected, this was largely the result of a decline in COLLEAGUE remediation and lower access [sets] revenues. And finally, anesthesia sales totaled $109 million and increased 10% and excluding foreign currency, sales increased 17% driven by continued growth and penetration of both Suprane and sevoflurane.

As we began seeing last year and as evidenced by our first-quarter results, we believe medication delivery is poised for a very solid year. We're making progress and continue to expect sales growth excluding the impact of foreign exchange of 4% to 6% for 2009. This will be driven by several factors.

First, at constant rates, we expect anesthesia to grow in low double digits due to demand for Suprane and additional market launches of sevoflurane. Second, we expect IV therapies and global injectable businesses to grow in mid single digits; and lastly, we now expect infusion system sales to grow in low single digits, reflecting the benefit of the SIGMA distribution agreement that offsets lower COLLEAGUE remediation revenues year-over-year.

Moving to renal, first-quarter sales totaled $515 million and declined 8% on a not reported basis. Adjusting for foreign currency, sales increased 1%. Consistent with our expectations and recent trends, hemodialysis sales of $95 million declined 16% in the first quarter and excluding foreign currency, sales declined by 5% due to lower [sell in] revenues. This performance masked the growth we saw in PD. Globally PD sales totaled $420 million and declined 5% on a reported group basis. But excluding foreign currency, global PD sales increased 3% resulting from consistent PD patient growth of approximately 7% primarily from gains in Latin America, Eastern Europe, China, and the rest of Asia.

We continue to be optimistic about the prospects of our renal business. For the full year 2009, we expect renal sales growth excluding the impact of foreign currency of 4% to 6% as we promote the PD therapy, expand geographically, and as governments focus on providing increased access to treatment for patients with end-stage renal disease.

Longer term, we are encouraged by the recent passage of US Medicare reforms, which will become effective in 2010 and 2011 making peritoneal dialysis a more competitive therapy option for the US market and which further reinforces our strategy of expanding our leadership position in home therapies with the development and launch of a home hemodialysis device.

Turning to BioScience, BioScience sales totaled approximately $1.3 billion and increased 3%. Excluding foreign currency, BioScience sales increased 11% with notable double-digit growth across all key product categories. Recombinant sales in the quarter of $451 million increased 3% on a reported basis and were up 11% excluding the impact of foreign currency.

ADVATE conversion continues to exceed our expectations with conversion in Europe of over 90% and US conversion of approximately 70%. In the plasma business, we continue to see strong underlying fundamentals. In the quarter, plasma protein sales of $274 million increased 5% and excluding the unfavorable impact of foreign currency, plasma protein sales grew 17%. Performance continues to be driven by strong balanced demand across the portfolio for all proteins including Feiba, albumen, plasma-derived factor VIII and ARALAST, as well as improved pricing.

Antibody therapy sales increased 18% to $337 million and excluding foreign currency, antibody therapy sales grew 22%. This growth is the continued result of strong global demand for GAMMAGARD LIQUID and pricing improvements in the US and markets within Europe.

Sales in regenerative medicine totaled $99 million and increased 5%. Growth excluding foreign currency was 14% in the quarter as a result of strong growth of FLOSEAL and COSEAL.

Finally, revenues in the other category totaled $91 million versus $134 million last year. This decline is due to the impact of unfavorable foreign currency and lower sales of the FSME vaccine, creating a difficult comparison for vaccines given a record sales in Q1 of last year.

We continue to be very pleased with the performance of the BioScience business, which had another great quarter. Consistent with prior guidance, we expect sales growth excluding foreign currency to exceed 10% in 2009, driven by strong growth across the portfolio. Excluding foreign currency, we expect recombinant sales to grow in high single digits.

Second, in the plasma business, we continue to expect strong demand generally balanced with supply across the global market. This will result in midteens growth for both the plasma proteins and antibody therapy categories. Third, we expect the regenerative medicine business to grow in midteens and the other category, which includes our vaccines business, to grow in mid-single digits.

In closing, we continue to have confidence in the long-term prospects of our BioScience business both in terms of growth and improved profitability which will continue to be driven by improved mix, new product introductions, improved cost, and yields.

Turning to the rest of the P&L and starting with gross margin, adjusted gross margin in the first quarter of 52.7% improved sequentially by 150 basis points and improved year-over-year by nearly 300 basis points. This margin expansion is primarily the continued result of business and product mix, pricing improvements and manufacturing and cost efficiencies.

Also contributing to this expansion is the favorable impact of foreign exchange and an easier comparison as a result of the $19 million Heparin charge we booked in the first quarter of last year. These two items accounted for approximately 150 basis points of the year-over-year improvement.

SG&A of $611 million in the quarter declined 5% compared to prior year. Excluding foreign currency, SG&A increased in low single digits and at a rate slower than sales growth. As a result, SG&A as a percentage of sales was 21.6%, reflecting a 60 basis point reduction versus the prior year.

R&D spending of $212 million increased 12% and excluding currency, R&D grew in the midteens. As Bob mentioned earlier, we continue to focus on innovation with investments across all three businesses to advance the pipeline. This encompasses our efforts on bringing to market a new home hemodialysis device, as I mentioned earlier; increase spending on clinical trials for the evaluation of GAMMAGARD LIQUID for a number of potential indications; investments in recombinant proteins, vaccines, formulation, and delivery technologies; and new therapies that will broaden our regenerative medicine portfolio.

Interest expense was $26 million compared to $17 million last year and other expense was $2 million in the quarter, compared to $4 million of income last year. Our tax rate in the first quarter of 18.7% was in line with our guidance and finally, as previously mentioned, adjusted EPS for the quarter was $0.83, which exceeded our guidance of $0.80 to $0.82 per diluted share and increased 12% versus the prior year.

Turning to cash flow, we had a very strong quarter with cash flow from operations totaling $237 million. This included a planned pension contribution of $108 million and a $78 million outflow related to an accounting reclassification of excess tax benefits for stock compensation, which is required by FAS 123(R). Excluding these two discrete items, cash flow from operations totaled $423 million and improved by approximately $60 million or 15% increase compared to last year.

Our total DSO ended the quarter at 52.1 days or 1.5 days higher than Q4, which is consistent with our annual phasing of receivables in past years. More importantly, DSO was four days lower in the first quarter of last year and is tracking better than our expectations, with no region showing significant growth year over year. While we continue to expect this to be the area where we will first see the impact of economic softness, we have not experienced it to date.

Inventory turns of 2.1 turns were lower than the fourth quarter and also consistent with the trend we've historically experienced. Inventory turns were also down compared to the first quarter of last year, primarily due to BioScience as we continue to focus on measured steps to provide safe and reliable supplies of critical therapies for patients.

Capital expenditures for the quarter totaled $171 million, compared to $157 million in the prior year period. We continue to expect capital expenditures to total $1 billion for the full year as we continued to invest in appropriate capacity across our businesses to support our future growth. And lastly, in the first quarter, we repurchased 10 million shares of common stock for approximately $566 million. On a net basis, this amounts to repurchases of 8.5 million shares or $505 million, which is tracking in line with our expectation to repurchase a total of $750 million in common stock on a net basis during 2009.

Finally, let me conclude my comments this morning by providing our financial outlook and guidance for 2009, which hasn't changed materially from what we communicated to you in January and also reflects the consolidation and impact of the SIGMA announcement.

First, as you saw in the press release, we now expect earnings per diluted share of $3.72 to $3.78. More specifically, we expect full-year sales growth excluding impact of foreign currency of approximately 7%. We expect our reported sales growth to be approximately flat to 2008, which assumes current exchange rates.

For the full year, we expect gross profit as a percentage of sales to improve by more than 150 basis points, reflecting continued expansion in BioScience, improved profitability and medication delivery, and our core PD business, and a benefit from foreign exchange. We expect annual R&D growth in low single digits given that more than 40% of our R&D is outside the US. This growth rate is dampened by the stronger US dollar so on a constant currency basis, R&D continues to increase at double-digit rates.

We expect SG&A to decline in the low single digits. However, this growth rate is also impacted by a stronger US dollar and on a constant currency basis, SG&A would increase in low to mid single digits. We expect to continue to tightly manage general and administrative expenses while investing in marketing and promotional activities to support a higher growth, higher margin products.

For the full year, we expect to continue our trend of annual operating margin improvement with an improvement of approximately 200 basis points to approximately 24%. We expect interest expense of approximately $90 million to $100 million and other expense to total approximately $60 million. We expect our tax rate to approximate 18.5% to 19%. And finally, we expect a full-year average share count of 615 million to 620 million shares as a result of our share repurchase activities.

From a cash flow perspective, we continue to expect cash flow from operations to exceed $2.6 billion and capital expenditures to total approximately $1 billion. For the second quarter, as we mentioned in our press release, we expect earnings per diluted share of $0.93 to $0.95 and sales growth excluding the impact of foreign currency of approximately 7%. Based on current foreign exchange rates, we expect our reported sales in the second quarter to decline in the low single digits.

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

(Operator Instructions) Mike Weinstein, JPMorgan.

Thank you, good morning. Thanks for taking the questions. Let me start with Rob. Rob, we weren't aware that there was a difference in billing days this quarter versus second quarter -- sorry -- versus the first quarter of '08. The difference of two days, can you just maybe quantify what you think that impacted the top and bottom line?

Yes, if you look at it, it's largely due to the fact that we had Leap Year last year, so normally you would never have more than one billing difference in a quarter. So really the material difference is that extra billing day due to the Leap Year phenomenon. That primarily affects our medication delivery and our renal businesses. If you were going to quantify it, it's probably a little less than 1%. And really our point there was as we look at our operational year-on-year sales growth, if you adjust for that, we are running very much in line with where we have been running over the last several years.

That's helpful, thank you. I thought, Bob, with all the discussion intraquarter about the health of the plasma protein market, I thought I'd give you a chance to talk a little bit more about it. You obviously posted a very strong quarter across your key products, in particular IVIG but also some of the other products. So with the [contact] with the numbers you just posted, maybe just share with us your thoughts on the state of the market, state of supply/demand and pricing.

Yes, maybe let me start at kind of a high level I guess for everybody to get grounded. First of all, I would say our view of this market is really unchanged from previous discussions that we have had with all of you. We continue to grow our collections in line with market growth and the market growth continues to be frankly quite robust on a volume basis. If you look at the first quarter, I think the PPTA data would say that antibody -- the antibody market growth was in the high -- very high single digits in the first quarter. We actually experienced growth slightly above that level. So it would certainly correlate with the general market data that we're seeing.

And so we really haven't seen an impact in terms of the macro environment and underlying demand certainly through the first quarter. There also continues to be latent demand that is largely unserved. It's primarily in developing markets around the world but as inventories become available, we have an opportunity to serve that latent demand.

The other point I would say on the volume front is that the opportunity for what I call demand creation going forward I think is significant and largely because we have been living hand to mouth in terms of inventories over the last couple years. We have been largely unable to proactively promote directly to the clinician.

As an example, PID is a significantly underdiagnosed condition in all markets around the world including developed markets. And as our safety stock inventories come back in line with what should be normal, if you will, it provides us an opportunity and we are actually doing this now to selectively go out and begin through awareness programs and other things start to create fundamental demand on approved indications with the product today.

The other piece is that of course is as you know, we continue to move forward with expanded label indications which presents another opportunity for demand creation. A good example of that is the [MMN] indication that we moved into Phase III clinicals in 2008. We continue to believe there is opportunity going forward for modest price improvement in the coming years. As we discussed with you many times, clearly not to the degree that the industry or we have experienced over the last few years. But we do believe there will be opportunity for modest price improvement in the coming year.

I should mention just as an aside, we took price increases as recently as January. As I think you all know, they were in the mid to high single digits and those price increases have been fully implemented in the marketplace. So the latest data point on the pricing front.

Going forward, this is a little more further out kind of looking out in the coming years, we are confident we are going to be able to expand on our lead position by adding really clinical value and/or patient convenience through an array of different kinds of product differentiation. A great example you are all familiar with is FLEXBUMIN. You know, today half our albumin sales in the US are actually in this unique and proprietary packaging system. One-third of our sales globally are in FLEXBUMIN. We are making capacity expansions right now so we can meet existing demand to convert much more of our albumin business to a differentiated packaging system.

Perhaps even a more dramatic example is you know we moved GAMMAGARD and Hylenex for subcu administration into Phase III trials in 2008. Frankly it's successful. I don't think it's an overstatement to say that could revolutionize this therapy.

And then of course, we have what I term as the wild card opportunity of IVIG, Alzheimer's. Still very early but as we know, we haven't contemplated any of that potential in any of our numbers. So that may be more detail, Mike, than what you bargained for, but I think it's important to kind of start at a high level and incorporate the various dimensions that really lead us I would guess in summary to conclude that this plasma protein business I think is set up for continued high-quality growth in the years to come. Again very consistent with what we've been messaging to all of you.

That was a good starting point. Let me just follow up with two items then I will pass it on. So on the demand side of the equation, you indicated that you are starting to take some action to more aggressively promote the therapy, something you haven't done in the past. Are you doing that both on approved indications and in geographies where you haven't marketed IVIG today?

And then the second question is on the supply side, are you from a plasma collection standpoint, are you adjusting your collections of plasma either reduced hours, paying donors less, any of those other mechanisms you could use as you are seeing more supply become available? Thanks.

Sure, the promotional front, obviously we are only promoting approved non-label indications. We're actually doing it more in developed markets like the US. Whereas I said in my response to the earlier question, even in what we would characterize as developed markets, US, Western Europe and so on, PID is a significantly underdiagnosed and treated condition. So as our inventories have come to safety stock levels that are more appropriate, it now affords us the opportunity to selectively make promotion sales investments in a way that can drive demand.

We are also doing it in emerging markets selectively as well. Brazil is a great example. We just set up a couple of these Jeffrey Modell centers in Brazil as well to do the same kind of thing. So it's not limited just to developed markets. We are doing it in select markets around the world for approved label indications.

The second part of your question, actually I think our collections in the first quarter were down a bit from the fourth quarter. We are frankly being able to dial in more efficiencies in our operations as our safety stock levels come back more in line. We are finding ease of accessing donors because of the economic environment and so on, which allows us the opportunity to further rationalize our installed capacity. But the quick answer to your question is I think our collections were down somewhat in the first quarter, Mary Kay, versus fourth quarter?

Yes, growth slowed in the first quarter versus the fourth quarter.

Great, I will let some others jump in. Thanks, guys.

Ben Andrews, William Blair.

Good morning. I just wanted to follow up and maybe talk about the macro environment. You mentioned you haven't seen a material effect kind of on the business. As we've talked to hospitals, I mean you do get sort of a range of comments from no impact to maybe procedures are down a bit. The comments you heard maybe in the last quarter, are they consistent with what you had heard maybe in the fourth quarter? Or has there been a change in tone from your customers?

Actually, Ben, I would say our assessment of the environment is really similar to what we communicated to all of you last quarter. Okay? We are seeing selective softening in hospital activity not only in the US but around the world. It's not dramatic. It's reflected in key indicators such as patient admissions, surgical procedures and so on. Now specifically what are those admissions and surgical procedures and how do they translate into the utilization of Baxter's products, IV solutions and so on is a little bit more difficult to assess. Which is why again, we would say on that front really not a material impact.

As we shared with you last quarter, one of the things we reflected in our plan because we thought one of the first things that would be impacted would be receivables and so we dial in frankly a pretty significant increase in our DSO in our plan. I think it was what, four days, Rob, over the course of the year?

Yes.

And as Rob mentioned in his prepared comments, actually our DSOs are running very well right now. So we haven't really seen that materialize to any significant degree. One of the things we're watching very closely and again I commented on this last quarter, is in emerging and developing markets that already are limiting access as their economy softened, will the healthcare spending budgets contract and will that then have an effect on some of the therapies and so on? Again, I would say three months into the year we really haven't seen that.

We monitor tender activity in a lot of these emerging developing markets. The tenders seem to be coming out. The volumes seem to be comparable to what they were last year. We are watching Central Eastern Europe very closely for obvious reasons. We don't have that much business there in terms of percent of overall Baxter sales, but nonetheless, it's what I said in my comments. We continue to be very vigilant, but thus far it really hasn't been a material impact.

The other thing I would say is in some of our key BioScience products, hemophilia, antibody therapy and so on, first-quarter volume growth was very strong. I think it reinforces what I call the medically necessary nature of our products. Unlike other pharmaceuticals that may treat diseases or conditions of various degrees of severity, mild, moderate, severe, and so on, hemophilia -- primary immune deficiency is binary. You either have it or you don't and if you have it, it's life-threatening. And if it's life-threatening, it has to be treated.

And so it really speaks again I think to the core nature of our products. Having said all that, and as I commented in my prepared comments, nobody is immune from this environment. I've got to believe we are getting nipped here or there because of the environment and again looking forward through the rest of the year, we provided sales guidance which we think is very reasonable. And so we will continue to update you all on this as we become more knowledgeable. But one quarter into the year frankly our assessment of the impact of the macro environment on Baxter is largely unchanged from what we communicated three months ago.

One quick follow-up, Bob. As you -- maybe characterize if you would the negotiations with SIGMA. Are you seeing sellers a bit more willing to talk price and be more aggressive to make a sale or has the environment just not shifted much yet?

Sellers more -- explain that a little bit, Ben. I'm not sure I understand what you are asking.

I'm just curious with the tightening of the environment if you are seeing the potential partners or tuck-in acquisitions, etc. being a little bit more willing to talk and (multiple speakers)?

Yes, I wouldn't draw any conclusions from the SIGMA deal as a manifestation of an increased willingness of companies to sell themselves at a lower price. I think that you all appreciate the strategic significance of the deal that we did with SIGMA, but I wouldn't generalize more broadly any -- and draw any conclusions beyond that. Okay?

Okay, thanks.

Matt Dodds, Citigroup.

Good morning, a couple questions. First for Rob, when you look at the gross margin, I know the comps were pretty easy year-over-year, but you were about 130 basis points above consensus. And when I kind of look at some of the factors that might have influenced that and how they would go forward, I'd have to think that selling days probably favored BioScience that that might not continue in the next couple quarters. But on the foreign exchange, the flow through, should we assume that's going to help the gross margin and at least for second quarter and the full year that over 150 basis points you didn't change it -- could be it be a little stronger early?

Yes, it could but to be clear on the 150 basis points I referenced, that included both the impact of foreign exchange and the impact of the Heparin charge we took in our gross margin in the first quarter of last year. They were roughly almost half and half. So FX itself in our margin was really probably 75 to 80 basis points of that 150.

As you look forward, given now that relative to both our original expectations and frankly just as you're seeing in the marketplace, we do expect into the back half of the year currency is going to be less of a negative drag on the top line if rates hold where they are today. And as a result, this will diminish through the back half of the year, but it will be a benefit throughout the year in our margin.

Got it, and then on this -- I will stay off plasma but I won't go too far. On recombinant factor VIII, Bob, can you just talk about the OUS trends there? Because it's been strong for a while internationally in the growth rate. Can you say broadly if any one of the major markets, Europe, Japan, or emerging is driving it or if it's pretty consistent across the board?

I don't want to get too granular market by market. I would say --

I gave you three big ones, that's why.

Well, Japan has been very successful. It's been a great launch for us and we've established a leadership position in that market and the volume growth in Japan continues to be very attractive. The other thing that's happening generally is this ongoing conversion and upgrade around the world from plasma-derived to first-generation recombinant to ADVATE as the latest generation recombinant.

And not to get back to the plasma discussion at this point, but we still are in both as a company and an industry very much living hand to mouth in our ability to meet the demand for plasma-derived factor VIII. You are seeing this as a condition that is a priority for countries as they increase their spending on healthcare to provide access to treatment of hemophilia and the demand for plasma-derived factor VIII today is greater than the ability of the industry to supply it.

We are also seeing in emerging developing markets selectively conversion from plasma-derived to recombinant. So you've got the underlying market growth. You've got the ongoing conversion from first generation or Recombinate to ADVATE. You've got the conversion of plasma-derived factor VIII to recombinant forms in select markets. It's fair to say that globally we are probably gaining some modest amount of market share as well. And we have continued launches, new market launches with ADVATE.

So the confluence of all those variables that I just described stack up to continue to drive very attractive volume growth for this product.

Thanks, Bob. Thanks, Rob.

Rick Wise, Leerink Swann.

Good morning, Bob. Let's start off with the US plasma number, at $98 million versus $92 million a year ago, that was a little lighter than we thought. Were we too aggressive with his tender timing? Can you give us a little quick perspective?

Rick, you're talking about the US number?

Yes, just the US number.

There's no tenders in the US for plasma. There really wasn't anything going on there in particular.

Okay, don't read anything into it then.

No, I wouldn't read anything into it.

Okay, moving on, Bob, you said you expect modest price increases. You have said in the past that we should expect BioScience to see mid to high single digit demand growth and low to mid-single digit price increases. Is that still your view?

Yes.

And that's what you meant. Competitor consolidation, is this a big deal for Baxter anyway it goes with the CSL-Talecris deal? Are we concerned if it doesn't happen? Are we less concerned if it does?

I don't really want to comment on that. Frankly, I don't think it's a material issue for Baxter one way or the other. Beyond that, I'm not going to --

That's all I needed. Two last things. Does -- can you talk a little bit about your pump strategy here? Does the SIGMA deal in any way suggest waning confidence in your ability to resolve the COLLEAGUE issues in the United States quickly or -- and should we think two or three years out if you can resolve COLLEAGUE that COLLEAGUE, Sigma, and your internally developed products are all on the market? How do we think about all this?

It's why, in my prepared comments, I said what I said the way I said it, okay, which is, enthusiastic as we are about the Sigma opportunities, as well as moving our internally developed next-generation platforms into the clinic by the end of this year, our number one priority continues to be the remediation on COLLEAGUE. We see all three instruments being complementary.

Let's not lose sight of the fact that COLLEAGUE was developed and launched in the late 1990s, so this is a system that its design is over 10 years old. So independent of some of the regulatory challenges we are managing through and have been managing through on COLLEAGUE, it's inevitable that, at a certain point in time, you need to upgrade the platform to incorporate latest technology and functionality for the users. We think pathway -- excuse me -- Sigma represents that, our next-generation platform represents that. But the reality is COLLEAGUE continues to be a workhorse product and I think still today represents the largest footprint of number of devices in the US market of any of the competitors.

And no update on timing there?

No.

Okay, last -- a big picture question. When we spoke a month ago, you were concerned about the deferred tax issues and the potential impact on Baxter. Any updated thoughts there? Are you more concerned, less concerned today?

I think at this stage -- let me comment, then, Rob, you might want to add to this. Look, a lot of discussion going on and not a lot of definition. We don't view that there is anything meaningful that's going to happen frankly this year or next year. Having said that, we do think it's inevitable that, over time, our tax rate is going to continue to increase as a result of various tax reform initiatives and so on. We've reflected that in our five-year financials -- well, since -- in the five years I've been here at Baxter, okay? And the numbers we reviewed with you at our last investor conference and those that we will review with you this coming September will reflect a fairly significant increase in corporate tax rate.

Now how much and when I think is really the question. I don't think anybody knows that. There's a debate that's going on. That will get settled out. I think we all recognize we have the second-highest corporate tax rate in the world in the US and going too far in this regard, that would compromise the global competitiveness of the US and US-based multinational companies strategically and practically for that matter. It's just not a wise thing and I'm confident that as this gets debated and discussed and sorted out, that will be reflected wherever we end up on this. Rob, why don't you -- if you want to add to that.

Rick, it's Rob. I think Bob largely covered it. I do think the important point is while we have reflected as we mentioned longer-term some increase in the tax rate, clearly that wouldn't include a full repeal of deferral as we've talked about. And importantly, I think what everyone needs to focus on -- and you are hearing a lot of people starting the discussion now is the real policy around what does this mean to US competitive starts to happen.

But as you look at repealing deferral, it will reduce the amount of exports of foreign sales coming on to the US. As Bob mentioned, given the fact that we have one of the highest tax rates, really the second-highest tax rate now I think behind Japan in the world, as you think about not having deferral, we will be at a competitive disadvantage versus our competitors that operate outside the United States and ultimately that could cost jobs in the US.

So as we move beyond Baxter to what this means to US corporations, we are going to obviously focus and try to help educate on these facts, as will others. But there's a lot to be written. It's too early. There's no real more definition than what we've known since the announcement came out. So we are starting to marshal our own thoughts and make sure that people do understand what this could mean for our competitiveness going forward. I think that's a bigger issue than Baxter, but a very important issue.

Right. Thank you so much.

Bruce Nudell, UBS.

Good morning. Thanks for taking my call. I had a question. As we look through 2009 and perhaps through 2010, in terms of the Baxter and in terms of the industry, do you feel that supply constraints will be shifting from the collection side to the processing side?

That's a great question, because as we constantly interact on questions regarding the plasma market, it seems we always focus on collections. You know, the more relevant issue is fractionation capacity because if you can't finish it for obvious reasons, you can't provide it to the patient. So as you look at both our own capacity situation and I think that of the industry, I think it's fair to say that the industry is probably in the area of 85% utilization of installed capacity or thereabouts. Okay?

And there isn't big components of incremental fractionation capacity coming on in the near term and this is a market that as we've said earlier that is on a volume growth basis is still very robust market growth.

So simply stated, 15% excess capacity in a market that is growing high single digits still has latent demand in countries around the world that is not served and certainly in our own case, a desire to more proactively promote to build and create demand and accelerate the growth. That's not a lot of flexibility in terms of fractionation capacity. I think that, Bruce, you asked a great question because at the end of day to me singularly, that's the most important variable in this whole equation.

Look, you can collect plasma. You can freeze it. It has an extremely long shelf life. All that really matters is processing it and finishing it and that comes back to fractionation capacity. That's why I think your question is very pertinent.

And with regards to that 85%, does that include the requisite downtime that all these factories need to have?

Say that again, Bruce. I'm sorry.

In other words, does that 85% capacity, working at 85% capacity, is that inclusive of -- does that take into account the downtime that factories need for annual refurbishment and such so that in fact the maximum effective capacity will be somewhere below 100%?

I'm not going to get into detail of how we roll that up, but it's what I would call realistic capacity. I think all the manufacturers have some kind of surge capability in the short term, but the nature of these processes are such that it's just not practical to run them 24-7. You've got downtime as you mentioned and so on and so forth. So there is -- like most manufacturing processes, there's a theoretical capacity and there is a practical capacity, but when we talk about these, we also take into account various projections for continued yield improvements and so on, which is another way to effectively increase capacity.

We know in our own case what that is. We make estimates in terms of competition and so on, so there's a lot of variables that go into this calculation. I think for purposes of this discussion, what's really meaningful is over the longer term, over the course of let's say a six-, nine-month period, realistically how much excess capacity exists in the industry to support continued market growth. That's really the basis of the numbers that I shared with you.

My final question is a philosophical one. When the PPTA in their public comments have really said that it's important for all stakeholders to have a reliable supply and part of having a reliable supply is that you don't have booms or gluts and dearths of supply and that it's perfectly appropriate for the industry to kind of keep supply in reasonable proximity to demand. And the fear on the part of some investors is that, well somehow that is gaming the system and just maintaining a price, a favorable price environment. What is your general view on the state of the industry in that regard?

As recently as a year ago, a little bit longer, we actually established a patient registry for our patients that were on GAMMAGARD so that we could track those patients to ensure and guarantee that they had access to what in that point in the marketplace was extremely limited supply. As we all know, these are life-saving, life-sustaining products.

And so it really starts with the patient and the ability to guarantee and ensure that there is consistent sustainable access to product that they depend upon. And that's really what drives all of this. It's one of the reasons frankly we've been very, very careful about marketing promotional investments on this whole demand creation front. Because it's a two-edged sword and to the degree we are very successful with that, we don't want to get back into a situation that we were in a year ago either as a company or as an industry.

And so when you have volatility in supply at the end of the day the most important thing is are you increasing the risk that access to therapy for patients that depend on this therapy that could be compromised? And that is really what fundamentally drives our sensitivity to this.

Thanks so much.

I think we have time for one or two more questions.

David Lewis, Morgan Stanley.

Good morning. Bob, I hate to go back to supply here, but I know we just finished up there. But just to be very, very clear, you said collections were down sequentially. Was that more of a market-driven factor or were there factors that Baxter or the industry instituted to control that collection?

It was really -- I can't speak for the industry. I just speak for ourselves is it provides us -- as inventories have approached what I will call acceptable safety stock and as donor access has increased because of the economy and things like that, it has provided us a wonderful opportunity to reevaluate our plasma collection network and platform and try to rationalize that in various ways. So most of that was a result of rationalization efforts that we ourselves initiated. Mary Kay or Rob, I don't know if you want to add to that.

David, I would just add that recovered plasma, people that go to the American Red Cross to donate their plasma for free continues to decline at a significant rate.

Okay and that was my next question. So I am trying to understand whether you had constrainment efforts on source plasma or you are simply still relying on recovered plasma declines to maintain this balance.

Recovered plasma, as Mary Kay said, is not only declining in the US but in Europe.

The answer is both.

Yes, okay.

Okay, very helpful. Bob, there's a perception out there amongst the industry that IVIG is sort of a commoditized product. But talking to procurement managers in hospitals, there actually seems to be a fair amount of preference for your products. Maybe you can talk to us about how you are driving these preference issues.

Well, look, it's a formulation, packaging, expanded label claims, new delivery systems, new indications. It's really all those things that I covered, I think when Mike Weinstein, his opening question. You know, it's really the totality of all those initiatives that I think have led us to establish a leadership position but give us confidence that we can build on that leadership position in antibody therapy in the years to come.

Okay and just two more quick ones. I guess first, just on international IVIG, have you seen any impact in certain European countries of pushback on off label use of IVIG?

Mary Kay? Rob? I don't think so.

Well, no. I think probably what you are referring to is Germany and Germany's market where we are not a big player. So I don't think it's worth us really getting into specifics.

Yes, David, I would mention in Europe I don't believe there really is a significant off label use that occurs there.

Okay, just last question, Rob, and I will jump back here. On ADVATE, obviously climbing up to 70% in the US. What is a reasonable level for peak penetration of ADVATE do you believe the next 12 to 18 months?

Well, I don't want to get into where we think it's going to be in next year because that then starts to get into guidance for next year. Clearly we continue to believe that we will push this market to 90% plus over time. And as we talked about before, it really is based on as existing patients go off therapy at the end of life frankly. Now most of those -- the older patients who would have converted, have converted, it really is a phased approach of new pumps coming on with those old patients going off therapy. And we are looking at still at least two or three years before we are getting to a point where we see the US hit full penetration. So it's a ways out yet.

Thanks very much.

Glenn Novarro, RBC.

Thanks, guys. Two questions on -- actually three questions on ADVATE/Recombinate and the economy. What we've heard now in the last couple of weeks is that patients are having issues making their co-pays and affording their medications. And biologics now are starting to slow. So I'm just wondering with ADVATE and Recombinate, question one is what is Baxter doing to help the patient continue to afford the medication in this difficult economic environment?

Two, what are you seeing in terms of utilization trends because one of the drivers of ADVATE and Recombinate is the move to prevention and more utilization. So is the economy having any impact there?

Then lastly, ADVATE and Recombinate are sold through specialty pharmacies and ADVATE yesterday said that they are seeing inventory levels coming down at specialty pharmacies. So I'm just wondering if you're seeing any impact there as well? Thank you.

Okay. Well, there is a lot of pieces of this. We could spend a lot of time. Let me kind of kick this off, Glenn, and then anything that Mary Kay or Rob would like to add to it would be fine. First of all, let me start with what I said earlier. Through the first quarter, whether it was in the hemophilia space or the antibody therapy space, we saw robust end market growth through the first quarter.

I think an important distinction that I'm not sure everyone understands is that both of these therapies, hemophilia and antibody therapy, traditionally get covered under the medical benefit, an individual's health benefit plan as opposed to the pharmacy benefit program. That has significant implications as it relates to part of your question in terms of co-pay and the like. And I think that's one of the major distinctions of these kinds of therapies, which as I've said many times, you know, the difference between life and death.

These also are therapies where you have fairly small defined finite patient groups as well. We have an array of access bridge programs in place on both of these therapies that allow us to work with patients as their healthcare benefits change and so on and so forth. But they are also again because of the nature of these diseases, work conditions and the relatively small patient populations, there are an array of support groups and so one that also are helpful in facilitating access to payment and reimbursement.

So I will stop there. We could get into a lot of detail. Mary Kay or Rob, I don't know if there is anything you would like to add to that but I think those are really important distinctions with these products from perhaps some other pharmaceutical products that you may cover.

But the key take away here is the economy is not impacting the ADVATE/Recombinate franchise. Utilization remains very strong and at least here in the near term, there are no major issues getting access to the drug.

That is our position today, yes.

Great, thank you.

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