百特醫療 (BAX) 2009 Q3 法說會逐字稿

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

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

Thanks, Sean, and good morning, everyone. Welcome to our Q3 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 revelatory 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. Thanks for calling in this morning. While Rob is going to provide more detail on our financial results and outlook in just a few minutes, what I would like to do is take a moment to highlight just a few key points at the outset this morning.

First, as you saw in the press release that was issued earlier this morning, adjusted EPS of $0.98 exceeded guidance for the quarter and increased 11% versus last year. This was primarily the result of continued margin expansion derived from favorable product and business mix, price improvements, and enhanced manufacturing and cost efficiencies, as well as expense leverage and benefits from our ongoing share repurchase program.

Third-quarter sales excluding FX was 6% and excluding transfusion therapies from both years, sales increased 7% generally in line with our sales growth over the last several quarters. I continue to be pleased with the improvement in two key value metrics, gross margin and operating margin. On an adjusted basis, gross margin in the third quarter was 52.8% and operating income as a percentage of sales exceeded 24%. Both metrics showed significant year-over-year improvement and represent new record levels for our Company.

In addition, we are advancing and expanding our global pipeline through investments in research and development augmented by business development initiatives in the quarter, R&D spending increased by 5% on an adjusted basis or high single digits on a constant currency basis. Recent achievements include the following.

First, the commercial launch of HYLENEX in the US for use in pediatric rehydration. As you know, HYLENEX is an enzyme that allows fluids to be administered under the skin or subcutaneously as opposed to intravenously. This facilitates rapid initiation of treatment and delivery of IV fluids for dehydration in children, a potentially serious consequence of viral respiratory diseases including influenza and other conditions that can cause fluid loss.

Second in our renal business, the Investigational Device Exemption or IDE was recently submitted to the FDA for our new home hemodialysis system, which will allow the initiation of a clinical study to collect the safety and effectiveness data required for a 510(k) approval.

Third in our regenerative medicine business, we initiated a Phase III study evaluating the use of ARTISS in facial surgery in the United States. This is the second of three pivotal studies required by the FDA to obtain a broad adherence label. As you may know, ARTISS is the first and only slow setting fibrin sealant indicated for use in adhering skin grafts in adult and pediatric burn patients and is the newest agent in our expanding biosurgery portfolio.

Fourth in our vaccines business, we achieved several milestones including the completion of the seasonal influenza Phase III confirmatory study in healthy adults in the United States. We expect final study reports to be available by the end of the year that will support our regulatory filing in the US in the first half of 2010.

Also in the quarter, we completed the acquisition of the hemo filtration business also known as Continuous Renal Replacement Therapy or CRRT from Edwards Life Sciences Corporation. 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 sitting in the hospital.

Before turning the call over to Rob, let me briefly update you on the status of CELVAPAN H1N1 pandemic vaccine. As you all know, the European Commission granted marketing authorization for CELVAPAN earlier this month. This vaccine is the first cell culture-based and non-adjuvanted pandemic influenza vaccine to receive marketing authorization in the European Union. While our current license calls for two doses of CELVAPAN, the clinical data would suggest that a one-dose regimen may be possible and we've recently submitted this data to the appropriate regulatory authorities for their consideration and approval.

As mentioned at our recent investor conference, initial quantities of CELVAPAN have been delivered to a number of countries for use in their national vaccination programs. Also as previously discussed, we have received orders to date of approximately 80 million doses. I'm pleased to report that we continue to see significant improvements in manufacturing process yields versus our earlier production batches.

While we are confirming our revenue guidance of $30 million to $40 million for the fourth quarter of 2009, we increasingly believe this has the potential to translate into a significant longer-term opportunity for the Company. Having said that, it's premature to speculate in the financial upside beyond this year due to several factors including further optimization of process yields, final dosing regimens, and the virulence of the strain, any one of which may impact future demand and existing purchase commitments. So given these factors, the evolving nature of the global crisis, and our continuing internal efforts, we will provide you with more definition on the CELVAPAN financial opportunity for 2010 at our fourth-quarter earnings conference call in January.

In closing, I would say that building momentum of our pipeline and continuing strong financial results validate the strength of the diversified healthcare model and reflect our ability to achieve the longer-term objectives that we laid out at our investor conference in September. We believe we have established a strong track record of consistently improving our financial profile and executing our strategy, and we are confident in our ability to sustain that in the future. As always, I would be happy to address any questions that you might have during the Q&A.

In the meantime, let me now turn the call over to Rob for a more detailed discussion of our Q3 results and full-year outlook. Rob.

Thanks, Bob and good morning, everyone. As Bob mentioned, our third-quarter results included continued margin expansion and earnings that exceeded our guidance. As we mentioned in our press release, our GAAP results did include after-tax special charges totaling $69 million or $0.11 per diluted share. These were primarily for non-cash, fixed asset write-offs related to the discontinuation of the SOLOMIX drug delivery system in development and costs associated with the planned retirement of the SYNDEO PCA Syringe Pump. As you may recall, SYNDEO has been on hold for some time and therefore this has no impact on the Company's ongoing sales and earnings.

Now 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 $3.15 billion, which was flat to last year and in line with our guidance. Sales growth excluding foreign currency was 6% and was impacted by a change in the timing of plasma orders primarily in Latin America and Eastern Europe versus our expectations. Also excluding foreign currency and transfusion therapy sales from both years, sales increased 7%.

In terms of individual business performance, let me start with medication delivery, which had third-quarter sales totaling $1.2 billion, an increase of 1% on a reported basis. Excluding foreign currency, medication delivery sales grew 7%. US sales increased 4% and international sales and medication delivery declined 2% on a reported basis, but excluding foreign currency, international sales were up nearly 10%.

Turning to the product categories, IV therapy sales totaled $396 million and declined 2%. Excluding foreign currency, sales increased 6% and were driven by increased demand globally for IV solutions and nutritional products as well as improved pricing. Global injectable sales increased 7% to $433 million. Excluding foreign currency, sales grew 13% due to increased pharma partnering sales, growth of select multisource generics, and strong growth of our pharmacy compounding business outside of the United States.

Infusion system sales totaled $208 million and declined 11%. Excluding foreign currency, sales declined 8%. While sales have improved sequentially from the first and second quarters, the decline year-over-year is largely the result of lower infusion pump remediation revenues.

And finally, anesthesia sales totaled $123 million and increased 10%. And excluding foreign currency, sales increased 14% as a result of strong sales of both Suprane and sevoflurane.

Moving on to renal, third-quarter sales totaled $576 million and declined 3% on a reported basis. Adjusting for foreign currency, sales increased 4%. US sales increased 2% and international sales declined 4% on a reported basis, but excluding foreign currency, international sales were up in mid-single digits. Consistent with our expectations and recent trends, global hemodialysis sales of $103 million declined 9%. Excluding foreign currency, sales declined by 1% due to lower HD product revenues.

Globally PD sales totaled $473 million and declined 1% on a reported basis. Excluding foreign currency, global PD sales increased 5% due to patient gains, particularly in Latin America and Eastern Europe, and double-digit growth across Asia. In addition, we continued to see improvements in US PD patient growth resulting in PD revenue growth of 4% in the quarter. This performance is encouraging especially in light of the upcoming reimbursement changes that will begin taking effect next year starting with the patient education programs.

In bioscience, global sales totaled approximately $1.4 billion and increased 2% and excluding foreign currency, Bioscience sales increased 8%. Within the product categories, recombinant sales of $528 million increased 2% on a reported basis and were up 7% excluding the impact of foreign currency. Growth last year of 30% internationally created a tough comparison, but overall we continue to be pleased with our performance, which can be attributed to the success of ADVATE, with global sales advancing by more than 15% this quarter as we remain focused on improved standards of care around the world and driving conversion.

Moving onto plasma proteins, you may recall that our plasma protein portfolio includes a broad array of propriety and differentiated products including Feiba, an inhibitor therapy; ARALAST, a treatment for hereditary emphysema; and FLEXBUMIN, or albumin provided in a flexible plastic container.

In the third quarter, global plasma protein sales were $331 million and declined by 2%. Excluding the impact of foreign currency, plasma protein sales increased 7%. Last year, significant tenders primarily for Feiba contributed to plasma protein growth of 37%, the highest quarterly growth in 2008. Excluding tenders, the timing of which can be uncertain, plasma protein sales increased by more than 15% including robust sales of albumin and ARALAST, both of which grew in excess of 20% of the quarter.

In addition to a difficult comparison, growth was impacted by a change in the timing of plasma orders primarily in Eastern Europe and Latin America versus our expectations. We now expect these sales in the fourth quarter.

To summarize, we continue to see strong demand and favorable year-on-year price improvements across the entire plasma protein portfolio.

In antibody therapy, sales of $336 million grew 9% and excluding foreign currency, sales advanced 12%. This is the continued result of increased demand and higher year-on-year prices. Additionally, we continue to estimate demand growth in high single digits at the high-end of the mid to high single digit longer term guidance we provided at our investor conference last month.

Sales in regenerative medicine, which includes our biosurgery products, totaled $109 million and increased 5%. Sales excluding foreign currency grew 10%, reflecting robust growth for FLOSEAL. And finally, revenues in the other category totaled $81 million versus $89 million last year. The decline is related to lower sales of the FSME vaccine in Germany as we continued to discuss with you in the second quarter of last year.

Also, I pointed out to you that we did not plan -- or I would point out to you that we did not plan for any H1N1 revenues in the third quarter. Although we did start shipments of the vaccine in early August, we expected to recognize revenues in accordance with the terms of our contractual obligations, which included provisions that precluded us from billing customers until receipt of EMEA marketing authorization, which as you saw occurred earlier this month.

As we mentioned last quarter, sales of CELVAPAN, our H1N1 vaccine, are expected to total approximately $30 million to $40 million in the fourth quarter.

Turning to the rest of the P&L and starting with gross margin, gross margin of 52.8% improved sequentially and reached the highest level of the year. Year-over-year gross margin improved by 220 basis points. This performance is driven by margin expansion across all three businesses, improved business and product mix, pricing improvements, and manufacturing and cost efficiencies.

SG&A of $672 million declined 1% compared to prior year. Excluding foreign currency, SG&A increased in low single digits as we continued to tightly manage general and administrative costs.

R&D spending of $228 million increased 5% and excluding currency, R&D grew in the high single digits. As we highlighted at our investor conference last month, we continue to focus on innovation and investments across all three businesses to advance the pipeline. This includes our efforts on bringing to market a new home hemodialysis therapy; 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. As a result of gross margin expansion and operational leverage, our operating margin of 24.1% reflects an improvement of 210 basis points versus the prior year, in line with our full-year guidance of approximately 24%, which represents a historic level for the Company.

Interest expense was $23 million, compared to $20 million last year and other was $3 million of income similar to last year as foreign currency translational gains more than offset miscellaneous expenses. Our tax rate of 18.7% was in line with our guidance. And finally, as previously mentioned, adjusted EPS of $0.98 increased 11% and exceeded our third-quarter guidance of $0.95 to $0.97 per diluted share.

Turning to cash flow, we had another strong quarter. Cash flow from operations totaled $875 million, reflecting an improvement of more than $60 million compared to last year. DSO ended the quarter at 58 days, which is almost three days higher than last year. This increase however is entirely due to our receivables outside the US as our US DSO declined slightly from the prior year period. The international DSO increase is mainly due to isolated nonrecurring factors in select markets.

While we continue to monitor for macroeconomic impacts, to date we have not experienced any deterioration other than a few isolated cases and this has not resulted in any meaningful impact to our overall results.

Inventory turns of 2.2 are slightly below the prior year and the prior quarter, partially due to the timing of plasma orders.

Capital expenditures for the quarter totaled $247 million compared to $251 million last. We continue to expect capital expenditures to total approximately $1 billion for the full year as we invest in appropriate capacity across our businesses to support our future growth.

And lastly, to date we have repurchased 18 million shares of common stock for $965 million. On a net basis, that is net of cash proceeds from option exercises, this amounts to repurchases of 13 million shares or $764 million, in line with our expectation 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 for the fourth quarter and full year before opening the call up for questions. First, for the full year as you saw in the press release, we expect earnings per diluted share of $3.79 to $3.81. More specifically, we continue to expect full-year sales growth excluding the impact of foreign currency of 7% to 8%. Based on our outlook for foreign exchange rates, we expect our full-year sales growth including the impact of foreign exchange of zero to 1%.

By business excluding foreign currency, we continue to expect full-year bioscience sales to increase in the 10% to 12% range, renal sales growth of 4% to 5%, and medication delivery sales growth of 5% to 6%. For the full year, we continue to expect gross profit as a percentage of sales to improve by more than 150 basis points. We continue to expect our 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 a double-digit rate.

While we expect SG&A to decline in the low single digits on a constant currency basis, SG&A is expected to grow in low to mid single digits. For the full year, we continue to expect our operating margin to improve by approximately 200 basis points to approximately 24%. We expect interest expense of approximately $100 million and other expense to total approximately $20 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 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 fourth quarter as we mentioned in our press release, we expect earnings per diluted share of $1.02 to $1.04 and sales growth excluding the impact of foreign currency of 6% to 8%. Based on our outlook for foreign exchange rates, we expect reported sales growth of approximately 8% to 10%.

With that, let me now open the call up for questions.

(Operator Instructions) Mike Weinstein, JPMorgan.

Thank you, good morning. Let me start with the plasma and protein piece. It would probably be helpful if you could quantify the impact of those tenders in Eastern Europe or Latin America following into the fourth quarter rather than the third quarter, which you were anticipating.

Yes, Mike, this is Rob. It's about $35 million that we expect to shift from the third quarter to the fourth quarter.

And so that's $35 million, that would've been the plasma protein line this quarter that should fall into the fourth quarter?

Mike, about $10 million of it is in IGIV or antibody therapy, so the $25 million would be plasma.

Perfect, that's very helpful. And so the guidance for the full year implies that the bioscience business -- and this sounds very consistent -- that the bioscience business reaccelerates back to 10% to 12% growth in the fourth quarter. Am I reading that correctly?

Yes, you are. And I would say that our guidance we've given previously for the full year for plasma proteins of high teens hasn't changed. So we're still confident we're going to see high teens for the full year on a constant currency basis.

Okay, I missed that detail. It's very, very helpful. Okay. So the last piece on the bioscience side I just want to check on is on the H1N1 and you really didn't give us that much that was new here today to try and read the scaling of the manufacturing and the yields as we go into 2010. Can you give us anything incremental that can give us a feel for how much you'll be able to ship in the first quarter, which will obviously be your big quarter next year?

Mike, this is Bob. We'll address that in January as part of our guidance. The takeaway is even from a month ago when we had the investor conference are obviously we got the approval. That's a big milestone. Secondarily, our yield improvements continue even at a better rate than even what we communicated to all of you at the investor conference in September, so we're encouraged by that. The basis for not changing our guidance for sales in the fourth quarter frankly is, as Rob mentioned in his prepared comments, we really can't bill anything until we got approval so that's why there were no sales in the third quarter. And frankly, there's a 30-day lag between shipments and our ability to build them.

So when you stack it up, it's really why we didn't change our guidance for the fourth quarter. This is going to be a significant opportunity for our Company as I mentioned last quarter and reiterated with my comments this morning. But I don't really want to go down a path to be more defended for that in 2010 given the fact that there continue to be a lot of moving parts in this whole discussion.

Okay, let me just follow up with that because I've gotten (inaudible) in the middle of this by a bunch of different investors who just want to clarify in your view on the plasma protein side of the business, IVIG or other proteins, has anything changed relative to your view the health of the market or price of the market?

No.

Okay, the last question I'm going to (inaudible) just jump in here because this is a question here on the finance side of it. The administration appeared to back off this week the elimination of tax deferral on overseas profits. Assuming the White House does not reverse course in 2010, shouldn't we rethink the tax assumptions that were in the LRP that you gave back in September?

Yes, Mike, as I said at the time and I think I even reiterated in several conversations at the conference, the increase in the tax rate was driven by our assumption of what we expected to see coming out of the tax rate change driven by what the administration was proposing around changes to the way the foreign tax credit was calculated and some other loss of deductions. If that doesn't happen, our tax rate over our LRP still will go up nominally, but more probably to the 21% -- 22% range as opposed to the 25% range we talked about. So we really were building in expectations for tax legislative changes that if they don't happen, we will have upside to the LRP.

I would note though one thing. I know a lot of people read what was published in the Wall Street. As we read it, they have agreed to postpone it. I wouldn't say they've agreed to not do it. I think we're still going to see something next year and if you read closely, that's effectively what they were saying as they have deferred it off. We had always frankly assumed internally that this was an event that wouldn't impact us until earliest January of 2011 where we recall we had a phase in of our rate going to 23% and then the full impact hitting us in 2012 to 25%.

So yes, it's an upside, but I think it's too early to dial it in until we actually see what happens over the coming year.

Understood. Thanks for taking the question.

Bob Hoskins, Bank of America.

Thank you and good morning. A question on gross margin to start. Gross margin was as you mentioned strong in the quarter, even with the plasma delays. I'm just curious if those plasma delays had not happened, is it safe to assume that the gross margin would have been up by another 20, 30 basis points or so?

No, actually as you look at our plasma margin, I think this is a misconception. They are much closer to our actual corporate average, so whether we had them or not, it would not have materially moved our margin one way or the other.

Okay, then for Bob on flu, I know you are not commenting on 2010 and still a lot of uncertainties here, but I did notice in your compared remarks sort of some increased optimism relative to the long-term opportunities. So I was just wondering if you could talk about what the drivers of maybe that increased optimism were. And if there's any way of sort of framing in your view the incremental recurring revenue opportunity longer term from flu, either pandemic or seasonal, that would be very helpful. Thanks.

I think it is fair to say there probably is some increased optimism and I think part of it is internal. As a result of our continued progress, we continue to make with yield improvements and their ability over time hopefully to come closer to fulfilling the outstanding orders we have and so on. But I think the other piece of it, Bob, is really more the external environment. We commented at last quarter's call and in fact I think even at the recent investor conference on this opportunity and is it a one-time opportunistic kind of thing or is this a sustainable business?

I think we are increasingly feeling that this is a sustainable business opportunity. You may have read a communication that came out from the WHO. It was either earlier this week or late last week that actually commented to that effect, that it was the view of the WHO that in fact this is something that governments, in fact the world are going to have to continue to live with.

And so in that regard, that probably flavors into our sense of optimism as well. So those would be the comments I would make on that.

Okay, then just real quickly lastly that on -- back on the plasma shipment delays, could you just give a little bit more color sort of country by country what went on there and caused the delays? I know this happens fairly frequently, but I was just wondering if there is any more color that is worth sharing.

Not really. These are several tenders across multiple countries, mainly across EMEA and in Latin America. But I wouldn't say that we look at the individual situations, it is a timing shift. I would point out to you that as we look at already now in October, we have already booked about one-third of those timing shifts in the quarter. So we are seeing it come back and that's probably I think enough to give you confidence that we do see it as a timing effect.

But I would just say add on to that. It purely is timing, Bob. One of the discussions we've had in previous earnings conferences and so on is whether or not given the macroeconomic environment, underlying demand for our products would decrease. Would that manifest itself in parts of the world in terms of fewer tenders or less volume on tenders for plasma proteins and so on? And frankly, we have really seen none of that. It's not like there's tenders that we had last year that aren't recurring this year. So it purely is a timing dimension.

Great, very helpful. Thanks.

Bruce Nudell, UBS.

Good morning. Pardon my voice. Just looking at kind of antibody therapy, it looks here to be that it's around 7% volume growth around the world. And I think one of the things people look at is given the pricings this quarter and last, looked like it was mostly (inaudible) volume. Is there anything to that or are we somehow misreading timing? And does it speak to any trend or is it just luck in the draw in the quarter?

I would say, Bruce, I was having trouble catching the second part of that, but --

In other words, just it looks like volume demand in the US for antibody therapy this quarter may have been in the low single digits for you guys. Or is that just incorrect?

It may have been down a tad in the third quarter, frankly, but that's why Rob commented in his prepared comments the way he did. Our view of the market is this is still certainly a mid to high single digit if not closer to high single digit in terms of underlying market, Bruce. And on the pricing front, as you know, we're not going to comment on that in detail, but I think as Mike asked earlier, our view on that is unchanged from what we've previously communicated. Mary Kay, do you want to add to that?

Yes, Bruce, I would add our volumes were up year-over-year in the US. But what I would say as well is as in the past, we do see Q3 volumes somewhat softer than Q2. And we've seen that historically as well.

Okay, and just a clarifying question regarding H5N1. You noted that you had 80 million doses ordered and you also noted that you may be able to get away with one administration per patient. What does that shift imply in terms of the total number of doses that will be consumed on a worldwide basis and the economics of that shift from two administrations per patient to one perhaps?

Obviously to the degree we have demand that is greater than our capacity and we can get regulatory approval for a one-shot versus two, that represents a material upside, but I think that we have to certainly go through the regulatory pathway, see whether or not we are successful in getting approval in that regard. But if we get approval for one-shot instead of two, then that obviously frees us up to meet other demand that frankly continues to emerge from around the world.

I guess just one final question. We've seen the [GAO] report on the 510(k)s for class 3 devices being something they are not happy with. Is there any risk with regards to the home dialysis that more cautious FDA will push this down a PMA route? Thank you.

I don't know that we have enough information at this stage, Bruce, to answer that definitively. Obviously you know what our preference would be, but I think it's too early to make a call on that at this point.

Thanks so much.

Matt Miksic, Piper Jaffray.

Thanks for taking our questions. So I wanted to look on the sort of front-end of the plasma business, the collections trends that you are seeing, if you could talk about maybe what you're seeing, what you saw in the quarter both in terms of source and recovered plasma. And then also it would be great to understand how that's potentially impacting your costs there. Maybe how we should think about if it's the back half of next year, are you storing more now? Are you changing your strategy for collections, some color there, and I have one follow-up?

Hi Matt, this is Rob. We are seeing our collections slow down, and we are trying to be very plentiful in how we manage our overall collection base, both in terms of number of centers, hours the centers are open, fees we pay, any kind of marketing programs we give. So all of those things are items we are looking at to make sure that we are, again, planful in how we approach this.

The end result of that is our collections are down, and as we look forward, it will result in a lower cost to collect. I would caution you, though, that to try to translate that into a significant margin benefit, to the extent we slow down collections and as a result slow down fractionation, there is an offsetting loss of throughput variance on our plants.

So as we look at it right now, I don't see it as a material upside or a downside. It kind of is just offsetting what we'll move through our fractionation chain next year.

Okay, and then just one quick follow-up here, and then I had a question about your specialty products. Just on the topic of margins and next year and as you get into, I guess, the tail end of 2010 and '11, can you give us again -- maybe just help me understand how that transition of Glendale to LA frac is going to work.

Is there any improvements in margins leading up to that, or is it really just as you begin to shut that down and take those costs out of your overall absorption that we see the benefit in 2011?

As we've talked about in the past, right now we are bearing the full depreciation of the new facility, and we are still accelerating depreciation off of the old, not a meaningful number, but that is there. So we are bearing the full cost of both.

Neither plant is running at full, what I would say full optimum throughput because of the fact we are in the midst of slowing down old LA to transfer to new LA. As we move forward, it's beyond 2011 before we probably would expect to see any kind of meaningful yield benefit as we expect to get up the learning curve in our new LA frac facility. But for now until '11, it's probably going to be a slight drag on overall operations. Part of that will depend on the ultimate timing of how quickly we shut down the old facility.

Just to clarify, so not much yield improvement until beyond 2011, but do you see a margin benefit in 2011 or is that also beyond?

That's probably -- if there's any, it's going to be small. Any kind of meaningful benefit will be beyond '11.

Okay, the last, if you could, any color on ARALAST and Feiba? You gave the global growth. It would be helpful to understand what the trends are here in the US and OUS.

Matt, Feiba in the US is growing. I call it mid single-digit range. Obviously given the Feiba tenders from last year, it's down year-over-year.

Okay, and then ARALAST?

ARALAST, we commented growth is -- over 20%.

And that's mostly --?

It's mostly US. We have very little sales -- actually I don't even think we have sales internationally.

Matt, this is Bob. One thing I would interject is it's -- we find that oftentimes folks externally kind of group all the plasma proteins together or think that the dynamics or the price dynamics move hand-in-hand and so on. The reality is we sell a comparable amount of non-antibody-based plasma proteins as we sell GAMMAGARD, right? And the composition of that, as Rob pointed out in his statement, are a lot of proprietary products like Feiba, like ARALAST, like albumin in a flex container, all of which continue to grow and prices continue to do very well.

So part of our strategy including IVIG over time as we get new indications and new delivery forms is to continue to differentiate those products.

That's very helpful, thanks.

Rick Wise, Leerink Swann.

Good morning, everybody. First, just on the -- back to the plasma protein, on the US side, Mary Kay, you were very clear about saying -- reminding us about the seasonality. The US seasonality in IGIV seemed a shade more this year. Is there anything unusual there in kind of seems a shade more than -- you know it was basically flattish sequentially last year?

No, actually we did see last year our volume growth slow in Q3 versus Q2 as we did this year. I don't have visibility into the rate.

Okay. Bob, just to make sure, I know you're not giving 2010 guidance, but in terms of expected price increases, is it still -- as part of the mix of growth for the plasma protein antibody business, is it still reasonable to expect low single digit price increases in 2010, or is that not a reasonable expectation (multiple speakers)?

Rick, I don't want to get into perspective pricing this morning for reasons you understand, not the least of which is we're in the middle of negotiating contracts with a number of folks and so on. Okay? As I stated earlier, our view on this is unchanged from what we've communicated to you previously.

Okay, then two last ones. First on the H1N1, you stopped taking orders at one point. When do you think you could start taking new orders? When [is your confidence] in your manufacturing process and yields etc. likely to be enough?

Don't know, but as I think it was -- I forget who asked the question earlier, whether it was Bob or Bruce -- but the single dosing variable is a big piece of that, so until there's definition on that, Rick, it's really impossible to answer the question.

Okay and last just a general question, Bob. We have heard some confusing positive, negative signals from other companies about the general environment; procedure volumes generally, pricing generally, capital spending generally, but it seems like what we've heard so far is the environment seems to be sort of stable and seeing some improvement. How would you characterize it for Baxter? Thanks so much.

Yes, I wouldn't necessarily say improvement for our situation because I think our position from the get-go is we didn't see a meaningful impact in the underlying demand for our products and we have not. So what's happening is generally very much in accordance with I think what we anticipated. I do think if you look at hospital activity, if you look at capital spending and so on generally, it's fair to say you are seeing a little improvement in those various parameters.

Thanks so much.

In the US.

Yes, that's what I was referring to. Thank you.

Matthew Dodds, Citigroup.

Good morning, a couple questions. First, I guess a little broader than just plasma, but on recombinant factor VIII in plasma, can you say, Rob, how big does the tender market represent generally? Is it the majority of your OUS sales related to large tenders?

And then in the US, how frequent are the GPO contracts? Is there a point in time where over the next 12 months you see any large ones come up? That's the first set. Then just second quickly on the vaccines, you didn't get any APA revenue this quarter. I just wanted to make sure that's correct.

Okay, Matt, just to make sure I understand the first question, were you asking about recombinant or plasma proteins?

I think -- at least for the US, maybe both, but internationally I assume the tenders are more based on just the plasma.

Yes, OUS clearly a majority of our business is tenders in one form or another. Now I would differentiate we have large government tenders, but outside the US in a lot of markets even at a hospital level they will run it by tender. So it's a mix of both, but it is a majority of our plasma business outside the United States.

In the United States, recall that most of our sales are under GPO contracts or contracts with the alternate care providers. As we talked about in the past, that's not really a tender business. That is where we negotiate annually a contract, which I think Bob kind of referred we are in the midst of some of those now, that run for the year, generally speaking. So it's not like we have graded new contract that come into play through the year in the United States.

Okay, just a couple quick follow-ups on that. In internationally, are the tenders generally annually as well or are they more mixed?

No, they are definitely mixed and probably less annual than semiannual or quarterly or in some cases even more (multiple speakers).

It is fair to say the recombinant tenders OUS are actually longer-term in most cases.

Yes, but I was addressing just the plasma proteins.

But I think Matt was asking -- when he said more broadly than plasma proteins. Matt, were you not specifically asking and wanted some insight on recombinant tenders OUS?

No, actually for the US, I am just trying to understand the GPO contracts.

Okay. Sorry, I misunderstood.

No, it's okay, Bob. They are annual and it seems like there is a few coming up in the fourth quarter. You have more that occur towards the end of the year than during the year. Is that fair?

Matt, I'm not sure I understand your question, but the tenders aren't annual. These are tenders that occur with a couple of months notice for us. Like Rob said, 30% of the orders of these tenders specifically we were talking about have already been placed and we are already -- for the fourth quarter. So we are waiting on hearing from governments on their needs for the rest of the quarter.

But again, these are -- to the way I commented earlier -- in most cases these are not annual tenders for plasma proteins and they are in some cases somewhat intermittent because it's based on a government's need and budget, and that can drive timing.

So for instance what we saw, that drove both in some cases need, in some cases timing drove the shift and this could be literally from the last week of the third quarter into the first week of the fourth quarter to the point that all of those timing tenders we've talked about, 30% we've already gotten the orders in now. So we did see them in fact shift as we expected. So it's not as easy to forecast as just looking at an annual run rate.

NO, I got the OUS perfect. In the US, what I was asking about was the GPOs, since they're annual, are there a larger percentage in the fourth quarter coming up than the normal annual kind of run rate?

Again, we negotiate most of our contracts on an annual basis to take effect January 1, so we are in the midst of negotiating contracts for starting January 1. Through the fourth quarter they continue to be covered by the contracts we have today.

All right, that's all perfect for the plasma and the recombinant. And then just quickly the advance purchase agreement, was there any in the quarter or is that gone?

What agreement?

Advance purchase agreement. We didn't have any in the quarter I don't think.

I think we had some revenue.

Residual that flowed through, yes.

There was some revenue.

All right, thank you.

David Lewis, Morgan Stanley.

Good morning. Bob, there's been a lot of kind of consternation around pricing and through the balance of the year, Baxter remains extremely well insulated versus some of these macro concerns. So pricing aside, given new competitors coming into the US market specifically for IVIG or any sort of GPO contracted dynamics, are you concerned at all about market share issues, not pricing for US plasma proteins or IVIG?

I would say not really. Look, we continue -- one of the things that our improved inventories have allowed us to do is frankly be more proactive in terms of demand creations. We've discussed before PID is still highly underdiagnosed and treated even in developed and mature markets like US and Western Europe. And our improved inventories have enabled us around the world to selectively invest in marketing programs and so on to capitalize on that.

So there's no indication at all that certainly that we're losing market share and we don't plan on losing market share.

Bob, Baxter is generally ahead of most of the competitors on fractionation capacity, so it sounds like you think that is emerging as a competitive advantage here in the marketplace either this year or heading into next year.

What do you mean by ahead of on fractionation capacity?

When you think about Baxter is about to bring on significantly more capacity. Other competitors don't have the same type of capacity dynamics. It sounds like (multiple speakers)

Actually we are not. Just to clarify, David, we're not bringing on significant incremental capacity, certainly not new capacity beyond LA frac, but of course that is a conversion from the old facility to the new facility. So we are not bringing on significant new fractionation capacity in terms of overall capacity.

I would say anybody who's been through that LA frac facility knows that it's absolutely state-of-the-art and this is one of the most highly regulated areas of healthcare. So being in the protein fractionation business and from a compliance, regulatory compliance point of view and making sure you're ahead of the curve in that regard, frankly we feel very good in that capacity.

Rob, thinking about this taxation issue as well as for your free cash, you're getting to a point where CapEx is beginning to normalize, which free cash flow seems poised to accelerate very materially here over the next couple of years, which creates a dramatic amount of optionality for Baxter balance sheet at least in our view.

Does this taxation dynamic affect your ability? It seems like one of the reasons you are able to give the kind of EPS guidance you have given with the increased taxation is dramatic free cash. So depending on what happens with taxation, does that affect your ability to be more acquisitive or be more -- have more optionality on this balance sheet or you see significant optionality regardless of what happens with taxation?

I would say we see significant optionality regardless of the tax. Obviously when we guided on the growth both in terms of our earnings per share and our cash flow at our investor conference, that was assuming the tax rate increase. So overall yes, you would expect to see us have that optionality.

The other thing to note as we think about the tax rate rising, there is not necessarily a dollar for dollar change in your cash taxes paid. Some of this is purely a change in the timing of how you account for your taxes as they flow through deferred taxes. So it's not a one-for-one that as the tax rate moves that in a given year you're going to see our cash taxes move with it, so it's a little cloudier than that. But under either scenario, we have meaningful free cash to deploy.

Just real quickly lastly, there seems to be a significant amount of excitement in the channel regarding Sigma. Is there sort of a quarter we should be thinking about over the next two or three quarters where you feel that that relationship is sort of fully functional either from a capacity perspective or marketing and [granularity] perspective?

Yes, I don't want to comment on the future of the relationship. I will comment on how it's working today, which is very well. We continue to penetrate a number of hospitals with the Sigma spectrum device. It is being very well received not only in terms of the technology and the connectivity features and so on, but of course the fact that it's used with standard Baxter IV sets is a great advantage.

So I would just say we are very pleased several months into the relationship with how it's progressing and we will see where it goes from here, but I don't want to comment as to what the likely endpoint might be.

Glenn Novarro, RBC Capital Markets.

Thank you, good morning. I have two questions. One, last week I saw some commentary out of Grifols that had mentioned plasma softening of pricing and some pricing pressure in Europe. And I know in Europe pricing differs from country to country, but I was just wondering if you can give us any commentary about what you see in general with respect to pricing in Europe on the plasma side? That's question one.

And then secondly, you'd mentioned on the call that you expected to file your seasonal flu vaccine early next year in the US. What is the FDA pathway? Is this a standard 10 to 12 month review? I'm wondering if you could have product approved for the 2010/2011 flu season? Thanks.

Second part, yes, it should be about that kind of timing in terms of the review and approval. I doubt that we will have product available for next year's flu season, Glenn. On the first question on Grifols, look, we are not going to be specific and comment beyond what we already have in our own pricing. We are certainly not going to comment on the competitors' price, so I'm just going to leave it at that.

Can I just ask then one follow-up just on the flu? Can you somehow quantify because you're obviously excited about the multiyear opportunity of H1N1, what is the level of excitement for the seasonal flu opportunity? I'm wondering if you can quantify somewhat how big the opportunity could be for Baxter?

I think the key thing there, Glenn, is if we are successful in getting approval on the seasonal flu, you know it's going to compete with H1N1 in terms of defined capacity in our Bohumil facility. So to some degree, the more sustained the H1N1 opportunity is and the more successful we are in that regard, to be very candid, the less latitude or capacity we have to capitalize on the seasonal flu market.

So let's get the approval on the seasonal flu first. Let's see things continue to evolve on the H1N1 front and I think the take away is there should be some nice opportunities here to optimize that capability in Bohumil to create value for shareholders.

Okay, great. Thank you.

Ben Andrew, William Blair.

Good morning. Just briefly, we haven't talked a lot about the infusion pump systems. You had some kind of difficult year-over-year comps on the remediation side for COLLEAGUE. Is that going to continue in Q4? And when do you think you might be able to give us an update on COLLEAGUE?

It will continue in Q4, probably not to the same degree because it was like midyear last year if I recall, Mary Kay, correct me but we really had the peak remediation revenue because of the cycle. It started to flatten off later in the year. Is that correct?

That's correct. Q3 was really a difficult comp, Ben. And Q4, we should see growth probably more in the mid-single digit range.

Is then mid single consistent with sort of your set growth? Is it kind of separate from the pump growth?

Yes, set growth I would say generally was pretty flat. It was a little down in the quarter, but it was down by less than $5 million in sales.

Okay, thank you.

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