百特醫療 (BAX) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's second-quarter earnings conference call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. (Operator Instructions) As a reminder, this call is being recorded by Baxter and is copyrighted material and 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 second-quarter 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 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 details concerning factors that could cause actual results to differ materially.

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

Now I would like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning, everyone. Thanks for calling in this morning.

We are pleased today to announce our financial results for the second quarter and also provide you with an update on the full-year 2009 outlook. As you all saw in the press release issued earlier this morning, EPS of $0.96 exceeded guidance for the quarter and increased 13% versus the prior year. This was the result of strong underlying fundamentals across the portfolio, operational leverage, improved margins derived from product and business mix, continued intense focus on pricing opportunities and manufacturing cost improvements, as well as a benefit from our ongoing share repurchase program.

While we continue to be very vigilant in monitoring the landscape in which we operate, to date we've not experienced any meaningful macroeconomic impact on the underlying demand for our products. As I've mentioned to you all in the past, we continue to believe that we are well positioned, given both our geographic reach and the medically necessary nature of our product line, to meet financial objectives in both the short and the long term.

I'm pleased with the second-quarter sales growth, which excluding FX was 8%; and excluding transfusion therapies from both years, increased 9%. This represents an acceleration on a constant currency basis versus the first-quarter growth rate of 7%, as strong growth from across the portfolio offset lower than expected FSME vaccine sales, primarily in Germany.

Gross margin in the second quarter, as you saw this morning, was 52.4%; and operating income as a percentage of sales was approximately 24%. Both key metrics showed significant year-over-year improvement.

In addition, we continue to advance and expand our product pipeline through investments in research and development, augmented by business development initiatives. In the quarter, R&D spending increased 4%, which was low double digits on a constant currency basis.

A few recent achievements that I would like to highlight. First of all, the completion of patient enrollment in the pivotal Phase III study of GAMMAGARD LIQUID with Enhanze for the treatment of primary immunodeficiency disorder. Approximately 80 patients who will receive monthly subcutaneous injections have now been enrolled. Also, the testing and evaluation of the H1N1 influenza virus and the start of full-scale production of a commercial pandemic vaccine utilizing Baxter's Vero cell culture technology. The initiation of a Phase III study following successful completion of a Phase II trial evaluating TISSEEL fibrin sealant as a hemostatic agent in vascular surgery. These studies are being conducted for submission to the Food and Drug Administration in support of a broad hemostasis indication for this product in the United States.

And finally, the signing in the quarter of the definitive agreement with Edwards Life Sciences Corporation for the acquisition of their hemofiltration business, also known as Continuous Renal Replacement Therapy or CRRT. CRRT provides a method of continuous and adjustable fluid removal that can gradually remove excess fluid and waste products that accumulate with the acute impairment of kidney function, and is usually administered in an intensive care setting in the hospital.

We're very pleased that we continue to meet or exceed our short-term financial goals, as reflected by the strong sales and earnings performance for the first half of 2009, while being able to continue to invest in creating long-term value for our shareholders. These results and also the outlook for the year validate the strength of the diversified healthcare model and reinforce our confidence in achieving longer-term objectives as we accelerate the pace of R&D investment. I'm increasingly encouraged by the progress that we're making to spur innovation throughout the Company; and we all look forward to presenting details on our evolving pipeline at our investor conference on September 16 in Chicago. Of course, at that time, we will also provide you with an update on our longer-term financial objectives and outlook for the Company.

As always I would be happy to address any questions you may have during the Q&A. In the meantime, let me turn the call over to Rob for a more detailed discussion of our second-quarter results and outlook for the remainder of 2009. Then when Robert concludes his commentary, I would like to take just a few moments to update you on our H1N1 pandemic program. So with that, Rob, please?

Thanks, Bob. Good morning, everyone. As Bob mentioned, we are pleased with our second-quarter results, which included continued margin expansion and earnings that exceeded our guidance. Let me briefly walk you through the P&L by line item before providing you with an update on our financial outlook for 2009.

Starting with sales, our reported sales totaled $3.1 billion dollars and declined 2%, excluding a 10 percentage point impact from foreign currency sales growth was 8%. Also note that excluding transfusion therapies from both years, reported sales declined 1%; and excluding foreign currency Baxter's worldwide sales growth was 9%.

This growth was driven by an acceleration across all three businesses versus the first quarter, with double-digit growth across most key product categories within BioScience and solid growth in Medication Delivery and Renal.

As Bob mentioned earlier, we have experienced no material impact from the global macro environment. However, we have faced a weaker than expected vaccine season in Germany for the FSME vaccine. This is primarily the result of a longer winter, a severe influenza season, compounded by a difficult comparison to last year. I would also note that while this affected our first-half results, we have largely absorbed this decline; and as a result of the seasonality of these sales, with the vast majority of them historically occurring in the first six months of the year, we do not anticipate any material impact on the Company's sales performance in the back half of the year due to this dynamic.

In terms of individual business performance, let me start with Medication Delivery, which had a second-quarter sales totaling $1.1 billion, a decline of 3% on a reported basis. But excluding foreign currency, Medication Delivery sales grew 8%. US sales increased 4%, and international sales in Medication Delivery declined 8% on a reported basis. But excluding foreign currency, international sales were up 11%.

Turning to the product categories, IV Therapies sales totaled $384 million and declined 6%. Excluding foreign currency, sales increased 7% and were driven by increased demand globally for IV solutions, low double-digit growth of nutritional products, and improved pricing.

Global Injectables sales increased 6% to $418 million. Excluding foreign currency, sales grew 17% due to strong growth in US multisource generics and our pharma partnering and international pharmacy compounding businesses.

Infusion Systems sales totaled $205 million and declined 10%. Excluding foreign currency, sales declined 3%. While sales improved sequentially from the first quarter, the decline year-over-year is largely the result of lower access revenues.

Finally, Anesthesia sales totaled $120 million and declined 2%. Excluding foreign currency, sales increased 6%. While sales improved sequentially, growth was impacted by a difficult comparison to last year when global sales increased 27%.

Moving on to Renal, second-quarter sales totaled $550 million and declined 8% on a reported basis. Adjusting for foreign currency, however, sales increased 4%. US sales were down 1% due to lower HD sales, and international sales declined 9% on a reported basis. But excluding foreign currency, international sales were up 4%.

Consistent with our expectations and recent trends, global hemodialysis sales of $96 million declined 19%. Excluding foreign currency, sales declined by 5% due to lower saline and HD product revenues. These results somewhat offset the acceleration in PD sales.

Globally, PD sales totaled $454 million and declined 5% on a reported basis. However, excluding foreign currency, global PD sales increased 6% due to consistent PD patient growth, particularly in Latin America, Eastern Europe, China, and the rest of Asia.

Turning to BioScience, BioScience sales totaled approximately $1.4 billion and increased 2%. Excluding foreign currency, BioScience sales increased 13% with notable double-digit growth across most key product categories.

Recombinant sales of $515 million increased 1% on a reported basis and were up 11% excluding the impact of foreign currency. This is the result of our continued success to differentiate with various dosage forms as well as increase ADVATE conversion in the US, which continues to exceed our expectations. In fact, conversion in the US now stands at approximately 70% versus 60% in the second quarter last year.

Turning to the Plasma business, we continue to see strong underlying fundamentals and robust growth across our Plasma portfolio. Plasma Proteins sales of $353 million increased 21%; and excluding the impact of foreign currency, Plasma Proteins sales grew 38%.

Performance continues to be driven by strong demand globally across the portfolio for all proteins including FEIVA, albumin, plasma-derived factor VIII, and Aralast.

Antibody Therapy sales increased 9% to $344 million; and excluding foreign currency, Antibody Therapy sales grew 14%. This growth is the continued result of strong global demand, favorable mix, and pricing.

Sales in the Regenerative Medicine business totaled $109 million and were flat to last year. Growth excluding foreign currency was 9% in the quarter.

Finally, revenues in the Other category totaled $97 million versus $162 million last year. The decline of $65 million was due to lower sales of the FSME vaccine, primarily isolated to the market in Germany as we discussed earlier.

Turning to the rest of the P&L and starting with gross margin, gross margin of 52.4% improved year-over-year by 140 basis points. This margin expansion is primarily due to improved business and product mix, pricing improvements, and manufacturing and cost efficiencies. In fact, margin expansion across all three businesses more than offset a negative 80 to 90 basis point impact from lower vaccine sales and foreign currency, which resulted from our geographic mix of sales and the related year-over-year change in exchange rates.

Turning to SG&A, SG&A of $660 million declined 6% compared to prior year. Excluding foreign currency, SG&A increased in low single digits as we continued to tightly manage general and administrative costs while making appropriate investments in sales and promotional activities to drive future growth. SG&A as a percentage of sales was 21.1%, reflecting a 90 basis point reduction versus the prior year.

R&D spending of $231 million increased 4%; and excluding foreign currency, R&D grew in low double digits. As Bob mentioned earlier, we continue to focus on innovation and investments across all three businesses to advance the pipeline.

This encompasses our efforts on bringing to market a new home hemodialysis therapy; increased 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.

As a result of gross margin expansion and operational leverage, our operating margin of 23.9% reflects an improvement of 40 basis points sequentially and 190 basis points versus the prior year. It is also in line with our full-year guidance of 24%, which represents a historic level for the Company.

Interest expense was $24 million, compared to $25 million last year; and Other was $1 million of income this quarter compared to an expense of $1 million last year as foreign currency translational gains virtually offset miscellaneous expenses.

Our tax rate of 18.6% was in line with our guidance. Finally, as previously mentioned, EPS of $0.96 increased 13% and exceeded our second-quarter guidance of $0.93 to $0.95 per diluted share.

Turning to cash flow, we had another strong quarter. Cash flow from operations totaled $811 million and increased 13%, reflecting an improvement of more than $90 million compared to last year.

DSO ended the quarter at 53.9 days, which is slightly higher than the first quarter. But importantly, DSO was three days lower than the second quarter of last year and continues to track better than our expectations, with no region showing significant increases year-over-year. While we continue to expect this to be the area where we will see the first impact of economic softness, we have not seen any material impact to date.

Inventory turns of 2.3 turns were flat versus the prior period and improved sequentially from 2.1 turns in the first quarter. This was the result of improved performance across BioScience and Medication Delivery, offsetting a slight decline in Renal turns.

Capital expenditures for the quarter totaled $216 million compared to $207 million last year. We continue to expect capital expenditures to total approximately $1 billion for the full year as we continue to invest in appropriate capacity across our businesses to support our future growth.

Lastly, to date we have repurchased 16 million shares of common stock for approximately $866 million. On a net basis -- that is, net of cash proceeds from option exercises -- this amounts to repurchases of 13 million shares or $743 million, which is in line with our expectations to repurchase a total of $750 million in common stock on a net basis for 2009.

Finally, let me conclude my comments this morning by providing our financial outlook and guidance for 2009 before turning the call back to Bob. First, as you saw in the press release, we now expect earnings per diluted share of $3.76 to $3.80. More specifically, we now expect full-year sales growth excluding the impact of foreign currency of approximately 7% to 8%; and we expect our reported sales growth to be approximately flat to 2008.

By business, excluding foreign currency, we continue to expect full-year Renal sales growth of 4% the 5%. We expect Medication Delivery full-year sales growth of 5% to 6% driven by low double-digit growth in Anesthesia, high single-digit growth for Global Injectables, mid-single-digit growth of IV Therapies, and low single-digit growth in the Infusion Systems business.

For BioScience, we expect sales growth excluding foreign currency to be in the 10% to 12% range. This will be driven by high single-digit growth in Recombinant sales, high-teens growth in the Plasma Protein and Antibody Therapy businesses, and mid-teens growth in Regenerative Medicine.

We now expect full-year sales of the Other category, which primarily includes our vaccines business, to decline approximately 20% due to the weak FSME vaccine season we discussed earlier.

I would also like to mention that our 2009 guidance for this category formerly included approximately $60 million in annual pandemic revenues related to ongoing advance purchase agreements or APAs. Due to the declaration of a global pandemic, our guidance now reflects incremental H1N1 pandemic sales for new government orders that offset revenues previously planned from APAs that have been nullified as a result of the Level 6 pandemic.

For the full year, we expect gross profit as a percentage of sales to improve by more than 150 basis points. We now expect annual R&D growth to be in the mid to high single digits; and on a constant currency basis, R&D is expected to increase at double-digit rates.

While we expect SG&A to decline in the low single-digits, on a constant currency basis SG&A is expected to increase in the low to mid-single digits. For the full year, we continue to expect our operating margin to improve by approximately 200 basis points versus the prior year to approximately 24%.

We expect interest expense of approximately $100 million, and Other expense to total approximately $40 million. We expect our tax rate to approximate 18.5% to 19%. And finally, we expect a full-year average share count of approximately 615 million shares as a result of our first-half share repurchase activities.

From a cash flow perspective, we expect cash flow from operations to exceed $2.6 billion and capital expenditures to total approximately $1 billion.

For the third quarter, as we mentioned in our press release, we expect earnings per diluted share of $0.95 to $0.97 and sales growth, excluding the impact of foreign currency, of approximately 7% to 8%. Based on our current foreign exchange rates, we expect our reported sales growth to be approximately flat in the third quarter.

Thank you, and now let me turn the call back over to Bob for his closing comments. Bob?

Thanks, Rob. Before opening up the call to Q&A, I would like to take just a few minutes to provide some additional context on the H1N1 pandemic situation and the potential opportunity which exists for our Company.

First, as mentioned several weeks ago, we received the H1N1 strain from the US Centers for Disease Control and Prevention in May. We completed our viral seed bank production and testing and started full-scale production in early June of a pandemic H1N1 vaccine which utilizes our Vero cell culture technology.

I'm pleased to announce that we're currently filling and finishing our first bulk batches and, pending final approvals, should be in a position to ship limited quantities of vaccine by the end of this month or early August. As you probably know, in June, the World Health Organization raised the pandemic alert level to Phase 6, indicating a global influenza pandemic involving the 2009 H1N1 strain. This triggered the placement of orders by a number of national public health authorities that held existing Advance Purchase Agreements with Baxter including the UK, Ireland, and New Zealand. To date, we have received orders from five countries for a total of approximately 80 million doses.

While there continues to be a heightened demand, at this time we are not in a position to take additional orders due to our current commitment and our desire to work with WHO to allocate a portion of the Company's commercial production to address global public health issues that are deemed most urgent.

Clearly, we believe this demand has the potential to translate into a significant opportunity for our Company. However, at this time it's premature to speculate on the additional financial upside for the remainder of this year due to several factors.

First of all, the optimization of process yields is proving to be a challenge with H1H1 for all manufacturers including Baxter. While we don't yet know what our optimum yields can be, we're certain that they will not reach those earlier established with seasonal H5N1 strains; nor do we know the time it will take to achieve optimum yields.

Once finished product is made available, within several weeks, various regional and national public health authorities require Baxter to conduct clinical trials to confirm dosing and safety as part of initiating widespread vaccination programs in their respective countries, particularly in view of the fact that H1N1 virus appears to be less virulent than earlier concerns, which may also impact the future need for product and purchase commitments.

It should be noted that Baxter continues to work with healthcare authorities on guidelines for clinical testing and final approval of the vaccine.

Also, final dosing regimens -- specifically the need for two injections -- also need to be confirmed with abbreviated clinical trials. Given these factors, the evolving nature of the global crisis, and our continuing internal efforts to optimize yields, our financial guidance for the remainder of the year, as Rob alluded to earlier, conservatively includes only about $30 million to $40 million of incremental H1N1 revenues.

This is offset by manufacturing scale-up costs, required clinical trials, and high-margin revenues related to past Advance Purchase Agreements that have been nullified by current orders. Therefore, our current 2009 earnings guidance at this time assumes no incremental earnings benefit related to H1N1 demand. As we improve yields and can ship additional orders, we will revise our financial projections as appropriate.

Again, while this is a significant financial opportunity for Baxter, given the aforementioned dynamics we feel it is premature to get ahead of ourselves with specific financial projections for the last five months of the year. Of course, as the situation continues to evolve, we'll do our best to update all of you.

So, happy to entertain any follow-up questions you may have on that, and so let's open up the call now to Q&A. Mary Kay?

Sean?

(Operator Instructions) Matt Miksic, Piper Jaffray.

Hi, good morning. Thanks for taking the question. So just a follow-up, Bob, on the vaccine comments that you had, just so I understand this. Is the 80 million doses that have been ordered so far, is it possible that based on yield optimization that the final amount shipped is going to be some number below that? Or just help me understand, I guess, the range of outcomes here based on some of the --?

Yes, well, Matt, I would say first of all, clearly having 80 million doses ordered is very different than being able to deliver it. And in the last five months of the year, for the reasons that I mentioned in my formal comments, obviously we are not going to come close to delivering anything even remotely close to that. All right?

Having said that, as we move into 2010 -- and I will just tell you it's really premature to make any kind of projections for 2010 -- clearly we hope to be in a position in the future that we're able to fill the demand of all the orders that we've received. But again, it's premature to speculate on the timing of that.

And again, as I mentioned in some amount of detail, because as we continue to deal with the scale-up issues, additional confirmatory testing that is going to be required to release product, and so on, it's why we didn't assume any incremental margin for the rest of the year. Also recognizing we had to offset the loss of sales and margin for the pre-existing APA agreements that were in place.

We certainly hope to, over time, in answer to your question, to be in a position to fill all those orders. But clearly that is not going to happen in 2009.

Great. That's helpful. I had one just on Plasma; and then I have one question here on margins for Rob, if that's okay.

Sure.

So just -- conversion to ADVATE has been an important mix driver, but as I understand it the conversion from plasma-derived to recombinant has also been an important trend, and outside the US in particular.

I'm just wondering, one, that maybe carries even a more significant positive mix shift as you look at the delta between those two products in terms of revenues and earnings. It would be helpful if you could talk a little bit about that and maybe provide some numbers, penetration rates, or understand what's happening around the different markets in the global economy.

Yes, without getting into some specific rates, Matt, let me say this. In most developed markets around the world, there continues to be some opportunity to convert from plasma-derived factor VIII to recombinant forms. A great example would be Japan, which still has a fairly high -- I believe it is around 30% of their usage is still in plasma-derived factor VIII; but that is converting fairly rapidly to recombinant forms, which is one of the reasons why our ADVATE is doing so well in Japan.

In other developed markets, Western Europe and the US, we are getting in the area of diminishing returns I think in terms of use of plasma-derived factor VIII and the opportunity to upgrade to recombinant forms. Although there does seem to be -- there continues to be some residual volume. Germany is a good example in Europe, which still uses quite a bit of plasma-derived factor VIII.

I think the real opportunity that you alluded to in your question is what I would just call rest of world. Okay? First of all , in emerging and developing markets around the world, for the first time hemophilia is being treated to some meaningful degree, obviously with plasma-derived factor VIII. So the first opportunity is just patients that previously weren't treated are now being treated with plasma-derived as those economies develop and as they allocate more of their national budgets to healthcare spending.

All of that plasma-derived adoption, of course, represents opportunity longer term to upgrade to recombinant forms, which is why we are registering products like Recombinate and ADVATE in China and so on. Most usage in China today is plasma-derived factor VIII, and there's many patients in China that aren't being treated.

So those are examples of the long-term opportunity. Frankly, they are quite exciting. First of all, adopting plasma-derived factor VIII and then over time setting the stage for upgrade conversions to recombinant forms. So the big opportunity is really rest of world.

There are selective residual opportunities. I mentioned Japan, Germany, and some of the other developed markets for continuing conversion from plasma-derived to recombinant

That's very helpful. Then question for Rob on gross margins. I just want to make sure I'm thinking about the impact of FX here the right way as you head into the back of the half of the year.

You mentioned a little bit of a negative hit in the quarter. As FX gets better, should we be sort of dialing in some increasing headwind, as FX does have kind of a bit of a negative effect?

As we look to the back half of the year, really we would expect the currency impact on gross margin percentage to largely be neutral. Really for the full year it's going to be neutral to slightly positive.

We had a very strong Q1 margin percent contribution from currency. What happened in the second quarter is a little bit of an anomaly given the fact that we had a change in mix of sales to some of the markets, particularly in Eastern Europe, with tender activity that went on in the quarter there. That also had the highest percentage impact year-on-year from currency.

But based on where rates are today for all of those markets, everything is improving and I would expect it to be neutral.

Okay, so the maybe negative impact of FSME also should moderate as well, is that --?

It definitely should. There is really virtually no impact of FSME in the back half of the year. It was almost completely in the first half of the year.

Great. Thanks so much for taking the questions.

Bob Hopkins, Bank of America.

Thanks and good morning. Just first to start off, a question on the BioSciences business. Could you just comment as to whether or not those January 1 price increases are sticking? And has your outlook changed for pricing in that business relative to the guidance that you've given previously of low to mid single digits?

Yes, I don't want to get into specific details on pricing in the Plasma Protein business, Bob. What I would say is the following.

First of all, you saw continued robust growth of our overall Plasma Protein business in Q2, including the Antibody Therapy sector. I would also tell you that our margins for Plasma Proteins and also Antibody Therapy improved Q2 versus Q1. They improved in the US as well as O-US.

So our position consistently has been the outlook for this business continues to be robust. Our position has not changed at all on that over the recent months. So we continue to be very confident about the future growth of this business. So that's about as detailed as I'm going to get on the pricing discussion this morning.

Okay. Then, there has been some commentary obviously related to the failed merger in this space relative to some of the comments from the Department of Justice. I was just wondering, what is your opinion on where that might be headed? At this point do you have any sense as to whether or not there might be a formal look at signaling in the industry? Or at this point are you not seeing any evidence that that type of investigation might be taking place?

Yes, I have no idea. Obviously given the merger, the FTC was not only involved with the two companies in question, but we've received a request -- as did other companies in the industry -- as part of that overall assessment by the FTC. But anything above and beyond that, not really going to comment on.

Okay. Then just lastly on the same BioScience area, obviously you had really strong growth in Plasma Proteins this quarter.

Right.

Can you talk to any of the maybe one-time items that might have contributed to that growth? And what specifically was that contribution, and where might that go for the rest of the year?

You know, actually we are forecasting, Bob, continued strength, as I mentioned, for the rest of the year. The business becomes a little bit spiky sometimes based on tenders that may hit in particular quarters. But if you look at the components of the broader category, including FEIVA and Aralast, albumin, plasma-derived factor VIII for some of the reasons that I mentioned in my response to Matt's earlier question and so on, frankly growth in all the subsegments of Plasma Proteins -- including obviously Antibody Therapy -- continue to be very strong.

So I don't think there was really anything -- Rob, Mary Kay, maybe you could help me -- that was inordinate. I know we had a couple tenders that hit in (multiple speakers) help me out here?

Yes, we did have some tenders that hit in Q2. But I would tell you that even if you excluded those tenders, the growth in the quarter was extremely strong for our Plasma Proteins.

Great. Thanks for taking the questions.

Ben Andrew, William Blair.

Just following up on the plasma topic for one and then I've got a second question. You mentioned mix opportunity in IVIG, Rob, as one of the drivers here. Where are we on that conversion on the lyophilized product to liquid in various geographies, just as broadly as you can?

Overall, I think we're about 60% converted. It's less outside the United States. Clearly we are more converted in the United States.

Really the issue here is going to be as we continue to grow capacity, which is where we have made some of our investments. We hope to be able obviously to expand that, but right now it's as much driven by capacity constraints as we look at it.

But just to give you kind of the total numbers liquid -- I'm sorry, I was actually speaking to the FLEXBUMIN. Liquid is actually about -- over 90% converted everywhere. Sorry about that; so it's over 90%. I was thinking of the FLEXBUMIN.

FLEXBUMIN is 60%. Okay.

Then I would add that we won't be 100% converted until completely bring up new LA frac, which will be next year.

Next year?

Yes, we have been holding pretty consistent, actually, on the liquid conversion.

Okay. Then as you look at the PD growth in the quarter, can you broadly characterize, if you exclude the tenders, how much of that is volume versus mix and price? Is it half-and-half or is it more volume?

PD growth, Ben, did you say?

PD growth, please.

It's almost all volume.

It's virtually all volume.

Okay. Then a separate line of questions. Can you characterize, Rob, just roughly what percentage of your Company revenues come from the Southern Hemisphere?

And I am curious about the H1N1 trends that we're starting to hear out of there relative to some changes in procedure volumes and such. So is that 5% of volume for the Company, or 10%?

Well, in the first part of your question, the way we've characterized in the past, last year -- and it's grown a little bit -- roughly a little over $300 million has come from the major markets we have in Latin America. Those are growing, but that's holding about consistent. That is a full-year number.

On your second question, repeat the second question. I'm not sure I understood what you were asking.

Well, I mean just overall Southern Hemisphere revenues. So Australia is probably one of the bigger markets.

Okay.

(technical difficulty) South America. I'm just trying to get a rough estimate, North and Southern hemisphere. Is it 90 (multiple speakers)?

I don't have it. To be honest with you I don't -- we don't tend to think of our business split that way. I would have to calculate it.

Okay. Have you seen any impact in the Southern Hemisphere because of the outbreak that seems to be picking up speed down there?

Across the rest of the Baxter business?

Yes.

No, I wouldn't -- there is no demonstrable change in our business performance as a result of what's happening in those markets with the pandemic.

I do think what you are seeing, then, obviously, is a reinforcement that this truly is a pandemic. You are seeing what is happening in Argentina and Chile and so on. Obviously, everybody is anticipating what is going to happen in the Northern Hemisphere this fall.

And we continue to see countries that, frankly, heretofore we didn't have active dialog with on pandemic vaccines, now initiating contact with us for obvious reasons.

So who knows where this whole thing's going to go? But there continues to be breaking, emerging news on multiple fronts it seems every day. But it truly is manifesting itself in a number of the Southern Hemisphere markets as you mentioned.

Just briefly following on that, Bob, I guess as you look at the opportunity, you have got orders for 80 million. Is it many, many multiples of that if you had the capacity and say this were to continue into next year -- that you might actually be able to serve those sort of orders?

Well again, our ability to serve is obviously a function of the yield optimization and so on, so I'm not going to say more than I did in my prepared comments. I mean the total demand obviously, as you have read the numbers coming out of the US and awards that have been given -- basically orders that have been provided to other companies in the space and so on, obviously it's approaching 1 billion or billions for reasons we understand.

So, the issue is how do we optimize yields? How are we able to produce more doses in our plant in [Bolomil]? And we are confident that there will be demand for whatever we're able to produce over the long term.

What we're able to produce over the long term, it's too early to quantify that.

Okay, thank you.

It's really that simple.

Mike Weinstein, JPMorgan.

Thank you. Good morning, Bob. Let me circle back to the Plasma Proteins business. You actually this morning, if I'm right, you raised guidance for both Plasma Proteins and Antibody Therapy for the year. I think prior guidance had been mid-teens growth and now you're calling for high-teens growth (multiple speakers).

Correct. That's right.

And obviously within that, that is probably your strongest comment about your thoughts about the outlook for the various markets, I assume, that (inaudible) to raise in guidance?

Yes.

Okay. The vaccines piece, I did want to focus a little bit more on that. So if we look at the announcements that we've had so far from various countries, the UK, France, Ireland, relative to those contracts, should we think about this as a $500 million-plus opportunity? Is that how we should think about it from a dollar standpoint?

You know, I don't even want to go there until I know what volumes we can make.

What yields are going to be? Okay.

Okay? You know, what the demand is in terms of the opportunity. Okay? For the market, or at least you can range it. The demand for the market, obviously, is far in excess of the number that you cited.

Yes.

It comes down to -- and there has been -- as you, because I know you follow this closely, Mike. Over just the last few days, we've seen reports that have come out, individuals of the WHO that have been quoted and so on. The industry at large is challenged.

It's not a cell-based or an egg-based thing as much as it is a strain-based phenomenon that is challenging all the manufacturers to scale this up with the kind of productivity that we've experienced on -- well, seasonal flu vaccines or, as I mentioned in my comments, H5N1 and so on.

So I think all of us are in the mode of trying to define as a practical matter what our real capacity is, and that's the fundamental issue. It clearly isn't the demand.

So trying to put a value on the opportunity is more a byproduct of what all the producers can get through their plants, not the demand, as I said earlier.

Right. I was speaking specifically to Baxter, given your (multiple speakers).

Again, I don't want to go there. I mentioned in my comments that this is a material opportunity for Baxter, okay? It's about really when that manifests itself.

And given again some of the unknowns that we're managing through, I don't want to go there. But it's both an exciting and a material opportunity for our Company.

Let me ask you, if we think about this singular opportunity and what has arisen with the pandemic, it looks like -- based on the discussions we've had with various people -- that this could go on for one, two, three years. Most expectation is somewhere around the two- to three-year period.

If you think about the opportunity you're going to have here and the potential revenues and profits that would generate, how do you think about your vaccine business going forward? Do you use this as a launching point to get more into the seasonal vaccine business, which you are not in at this point?

Yes, I guess a couple things, Mike.

How would you (multiple speakers) that? How would you build out from there?

Yes, a couple things I would say. Obviously, we continue to have our sights set on participating in the seasonal vaccine market in both US and rest of world as an ongoing and hopefully a fairly stable business for Baxter going forward.

On the pandemic front, I'll just give you my view on this. This is more than a one-time event that people will produce products and the need to the market get addressed and then we move on. I think what the world is in the process of recognizing is the threat of pandemic is with us and it will likely stay with us.

As recently as six months ago, the focus was H5N1, avian flu. And all of a sudden here comes H1N1. If you talk to -- whether it's our scientists or externally, clearly there is a high degree of concern that the strains are going to continue to evolve and manifest themselves in different ways. It's very possible that the vaccines that are being produced for H1N1 right now will not be effective as the strains mutate and evolve over time.

So I think this pandemic situation is with us and it's here to stay. How that will manifest itself I think is difficult to forecast at this point. So I think we ought to -- I will just tell you how we are looking at this. We are looking at this as more than a one-time short-term opportunity.

I think you are a going to see sustainable business here. It may not be as constant as let's say the seasonal flu vaccine business is. But I think it will be less intermittent than perhaps many people thought at one time. Those are my (multiple speakers).

Okay, last question and then (inaudible) jump in. You did announce yesterday that you completed enrollment in the Enhanze Phase III program. I don't want to front-run your analyst meeting in September, but where does subcu delivery of immunoglobulins rank in terms of your pipeline or your level of enthusiasm that your -- let's call it your (multiple speakers)?

We've talked about this before. It ranks very high. I think what I have commented publicly before, if effective, I think this delivery mode potentially could be transformational. The notion of being able to administer IV immunoglobulin subcutaneously instead of intravenously, and the convenience or inconvenience that is associated with IV delivery, enabling the patients to self-administer and so on, it's very, very exciting.

Great. Thank you.

Rick Wise of Leerink Swann.

Morning, Bob. Let me just change the subject for a second. A couple of smaller things. Injectables up 17%, ex-FX, that is the strongest quarter in some time. Can you give us a little more color on what is driving it?

Yes, I'll have Rob -- let me have Rob comment on it.

Yes, there's a couple things. We had a government order for PROTOPAM in those numbers, and that's part of it.

Then also, we took some price increases on a few of our products that flowed through in the quarter as well.

Compounding business.

Yes.

And the compounding business would be another thing that is driving the total number of what we are seeing outside the US.

So last year ex-currency it grew like 3.5%. Is this combination of things suggestive that the business could grow a little faster going forward?

We are going to see it maybe grow a tad bit faster, but clearly this will be the highest quarter, largely due to just the phasing in of this, the government tender I mentioned, as well as how the price increases flow through. So this is a little bit of a spike, what you saw in Q2.

One more question on the vaccine, Bob. Can you give us -- obviously, there is a lot of -- how big can this be and when? But can you give us any color, any ballpark perspective on pricing per unit or margins relative to Baxter as a whole? Anything? Any color would be welcome.

Well, first of all, we are precluded from our contracts with the various governments of discussing pricing, so I can't go there. Even if I could, to comment on margins ultimately as a function of throughput and yield. So you know, given where that's at and how highly variable, Rick, that is at this point in time, those are additional reasons why frankly it's really impossible to give you a specific sense in terms of margins. Sorry.

No problem. I will ask another margin question. BioScience margins improved sequentially. Again, any perspective? Can this trend continue?

And maybe some perspective on what's driving it. Is it the pricing? Is it LA frac? Is this likely to continue into the second half and 2010?

Well, yes. I mean I think it's part of our general outlook for the growth of the category, which again we consistently described as robust. I mean we see the margins not only holding but improving over time due to a variety of factors. Whether it's product upgrades, whether it's yield improvements, pricing stability, and so on. We can only say that so many different ways, I guess.

Rick, this is Rob. This is something obviously in September we will address as we look at what is our longer-term expectations and the drivers of our margin as a whole both within each business and the total Company.

Looking forward to it. Okay, last quick one if I could. Just, Bob, some larger-picture overview. Two big topics.

Healthcare reform, your perspective on so far where does it stand relative to Baxter?

And maybe some update of just your latest thoughts on acquisitions. More coming? You've done a few. What should we expect? Thanks.

Yes, okay. Let me try to be fairly brief because each of those individually could be protracted responses, I suppose.

It's tough to keep up with what's coming out of Washington on healthcare reform nowadays. So let me just focus on a couple of basic things.

First of all, in terms of various reform initiatives or proposals coming forward as it relates to underlying demand, again, given the medically necessary nature of our products, very candidly we don't see anything really fundamentally affecting demand.

The other piece of that, of course, is pricing and reimbursement. The area that you are all familiar with, that I think is probably most significant for us, has to do with the Medicaid rebates. Which, of course, doesn't apply to Medication Delivery or Renal, but does apply to select products to a limited degree within our BioScience business. We'll see where that ends up. But as we have addressed before, we believe that we certainly can absorb that.

There are other pieces of reform that are being brought forward and considered and so on. But I guess at this point I'll stop there because until they define themselves more clearly I don't want to react in terms of what may be or might be at this point.

So we think that in general the implications of healthcare reform will be certainly manageable by the Company, from the Company, but for the reasons we've mentioned previously.

On the M&A front, again we are opening up the throttle here. There's a number of things that we are looking at. They weren't the biggest deals in the world, but I think the Sigma deal that we announced in the first quarter and more recently the CRRT deal that we did with -- that we announced with Edwards more recently, certainly are both indications of adjacencies, bolt-on kinds of deals that not only are we going to continue to do; I would like to think we will accelerate the pace of that.

So again, our targeting is in those kinds of companies or products that frankly are extensions of our core business, not the big megadeals as we've talked about. But I will tell you that we are as an organization spending more time now focusing on M&A and BD, and we see that as an important opportunity to look for ways to accelerate our growth going forward. So when we do things, we will announce them.

That's good. Thanks.

Glenn Novarro, RBC Capital.

Thanks, good morning, guys. I have two questions. One, for Bob. You mentioned that the flu vaccine is going to be a material opportunity and down the road it will be a very profitable opportunity. I'm just wondering how this opportunity is starting to change how you view Baxter over a longer period of time.

Are there pipeline opportunities now that could get funded that maybe previously couldn't get funded? Does it drive more share repurchase? Does it drive an acceleration of plant expansion? Just qualitatively -- I know you're probably going to save some of this for September. But maybe just share with us how you're thinking about the longer-term opportunities now for Baxter given this development. That is question one.

Then just quickly for Rob, on currency. Based on our analysis, if the dollar stays where it is, it looks like currency for Baxter will be a tailwind come 4Q. Is that accurate? Thanks.

Okay. Yes, Glenn, let me kind of take a stab at the first question. First of all, I think the flu -- both pandemic and the flu vaccine opportunity, both pandemic and seasonal -- is more broadly indicative of, I think, where we're trying to take the Company, which is really back to basic science and technology.

At the end of the day, whatever opportunity is derived on the pandemic program is really a byproduct of some wonderfully innovative science, our Vero cell technology. Which may have application, by the way, in other areas.

But I think more generally it is indicative of where at a high level we would like to move the Company long-term, which is toward more clinically focused differentiated products that have their roots in science. Again I won't go through all those in detail. You will see more discussion of those kinds of things that are in our pipeline when we get together in September.

So I think in some ways, what is going on with the vaccine program is in many ways representative of how the personality of our Company is changing and will continue to change over time.

It's also aligned with our continuing ramp-up in R&D spending. Again this quarter on an organic basis we grew R&D investment at a much faster rate than organic sales growth and so on. As I've commented before, that's a strategic imperative going forward.

So I think this all ties together conceptually or strategically. So with that, Rob, I'll turn it over to you.

Yes, Glenn, you're correct. Obviously it will depend on the mix of our sales actually plays out. But it's definitely going to be approaching neutral to potentially a slight positive in the fourth quarter depending on sales mix.

Okay. Just one quick follow-up, Bob. So is it fair to say that this vaccine opportunity does enhance your longer-term growth potential?

Yes. When we had our last investor conference, both pandemic and seasonal flu vaccine were on my famous list of kind of breakthrough product opportunities -- right? -- that weren't in our base case LRP. So here we are over two years later and the progress we've made on both fronts, seasonal and obviously pandemic, are significant.

So as we look out in time, I would think that those are going to be the kind of thing that can accelerate our top-line growth over time.

Okay, great. Thank you.

We have time for two more questions.

David Lewis, Morgan Stanley.

Good morning. Bob, I hate to do it, but one last question on swine flu here. Isn't it safe to assume that once we got through, let's call it 20% to 25% of production, whatever the pricing happens to be, whatever the market size happens to be, but once you get through 20% to 25% of the production you would be back to steady-state vaccine margins?

Oh, yes.

Okay. That's helpful. Then, Bob, we talked a lot about the pipeline here heading into the R&D day. There's a lot of areas where you are ahead of competitors. One area which has been positive for mix has been ADVATE. There are some competitive program slightly ahead of where your programs are on long-acting ADVATE.

Does that really reflect setbacks in some of these programs or merely your belief in the opportunity for pegylated or long-acting ADVATE?

Yes, I mean obviously this is a space that other companies are focused on, but have other programs in various stages of clinical development. As you know we have our own internal programs -- programs, plural. Different pathways to develop a next-generation recombinate hemophilia product.

Clearly an area of focus for everyone, ourselves and the other players, are extended half-life and less frequent dosing and so on is what I think generally people are identifying as the next-generation advancement in the space.

Look, we continue, obviously, to watch the competitive programs very closely. I would never suggest that we are not concerned. But on the other hand, I would not suggest that in this race as we sit here today we're at a disadvantage at all. Okay?

So beyond that I don't really want to get into specifics of the competitive technologies, where they're at, the timing of the programs, potential risks, and so on. I mean I could do that; we assess that very closely. But it's not appropriate to get into that, I don't think.

Okay, just one last question. Rob, just thinking about two dynamics in this quarter, you had very strong US Plasma Proteins and slightly weaker O-US IVIG, at least versus our model. Just clearly again, you are not seeing any emerging market weakness, pricing or volume, on the IVIG front internationally? And there is nothing going on in US albumin or broader proteins that drove a very strong quarter?

The answer to both is frankly no.

Okay, very clear. Thank you very much.

Last question.

Matthew Dodds, Citigroup.

Thank you. Good morning. A couple questions. First, I know, Bob, you don't want to comment on the pricing for the vaccines. But generally is it locked and loaded price? Or do you have some flexibility on like the profitability of these contracts? So if it is low initially, you don't get hurt by that based on the contract price.

No, the contract prices are generally defined when we agree to a stockpile arrangement with governments. I guess all I would say is we are not going to, for the reasons I mentioned, cite the specific prices. I think there is sufficient latitude to deal with whatever inefficiencies are derived from our manufacturing operations as we scale up the production.

Then a question for Rob. You said on Med Delivery Infusion Systems -- I think you said this quarter access sets were the weakness. It wasn't COLLEAGUE or pumps. A, is that correct?

And B, is that related to the impact to COLLEAGUE finally? Or is it something else with access sets?

No, the answer is it is largely access sets and it is -- you know, we haven't seen a material erosion of share, but we are continuing to see a slight erosion of share. And that is impacting the sets.

So that is a continuation trend in the guidance?

Yes.

Perfect. Then, Bob, one last one for you.

Yes.

I know it's early, but on (inaudible) IVIG is there anything we should think about, assuming it is successful, on the yields? Potentially better yields from that product, tougher yields because of the extra piece? Generally, will that have any impact if you are successful in having a subcu product?

Well, do you want me to --

Go ahead, Rob.

I'll jump on that one. This is not a co-formulated product. It is a kitted product. So the production of the IVIG is unrelated to the production of Enhanze; and then they are kitted together at the time of delivery. So it is not a production issue with how we do IVIG.

Okay, the advantage here is price, potentially price on a premium product?

Correct.

Price and share.

Share, too. All right. Thanks, Rob. Thanks, Bob.

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