百特醫療 (BAX) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's fourth-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 Miss Mary Kay Ladone, Vice President Investor Relations at Baxter International. Miss Ladone, you may begin.

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

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

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

Thanks, Mary Kay. Good morning, everyone. I appreciate you calling in this morning. We're very pleased with our fourth-quarter and full-year 2009 financial results that were reported earlier this morning. As you saw, 2009 was another great year for our company as we again achieved record sales, earnings and cash flow despite an uncertain macroenvironment, and we continue to believe that we're very well-positioned for 2010 and beyond.

Worldwide we succeeded in driving growth through geographic expansion, leveraging the benefits of our diversified healthcare model while selectively pursuing business development initiatives and increasing our investment in research and development. While we met or exceeded expectations in virtually all key financial metrics for the year, we're particularly pleased with the quality of the results and the strength of our overall financial position, which affords us the flexibility to continue to invest in R&D and select promotional activities to enhance future growth and shareholder value.

While Rob will provide more detail on our fourth-quarter financial results and also the outlook for 2010 in just a few minutes, I'd like to take a moment at the outset to highlight just a few key points. First, as you saw in the press release issued this morning, adjusted EPS of $1.03 per diluted share increased 13% versus the prior year and was in line with our prior guidance. Full-year adjusted EPS of $3.80 per diluted share increased 12%, which exceeded our original guidance of $3.70 to $3.78 per share and it's also in line with our longer-term growth objective of 11% to 13%.

Our 2009 performance 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 derived from our ongoing share repurchase program. Fourth-quarter sales growth, excluding FX, was 6% and excluding transfusion therapies for both years' sales increased 7%, very consistent with our sales growth over the last few quarters.

I continue to be pleased with the improvement in two key value metrics, gross margins and operating margin. On an adjusted basis gross margin in the fourth quarter was 51.8% and operating income as a percentage of sales was 23.4%. For the full year both metrics showed significant year-over-year improvement and represent new record levels for our company.

As we previously mentioned and highlighted in detail at our investor conference just this past September, we're advancing and expanding our product pipeline with continued investment in R&D which totaled $917 million for the year, an 8% increase over last year's levels on an adjusted basis and an increase of 11% excluding currency.

Over the last 12 to 18 months we've initiated 14 Phase III clinical trials and advanced numerous early-stage programs that have the potential to profoundly impact the treatment and delivery of care for chronic diseases like Alzheimer's, hemophilia, end-stage Renal disease, immune deficiencies, as well as public health threats like pandemic and seasonal influenza.

A few key highlights from 2009 include the following -- first, we completed patient enrollment in a pivotal Phase III trial for the subcutaneous administration of GAMMAGARD LIQUID with Enhanze to treat primary immune disease. We expect to complete the trial later this year and file for approval in 2011.

We continue to actively enroll patients in our Phase III clinical trial of GAMMAGARD LIQUID as a possible treatment for Alzheimer's disease. More than 50% of the patients have now been enrolled in the 360 patient study and we expect to complete enrollment by the end of this year. Preliminary results are expected in late 2012.

In hemophilia we advanced the development of the first recombinant therapy for people with Von Willebrand disease. This is the first and only recombinant replacement protein for Von Willebrand disease and we expect to complete the Phase I study by the end of this year.

In our regenerative medicine business we initiated a Phase III study evaluating TISSEEL fibrin sealant as a hemostatic agent in vascular surgery and completed a Phase III study evaluating the use of ARTISS fibrin sealant in facial surgery in the United States.

In vaccines Baxter transitioned from pandemic preparedness to full-scale production and supply of CELVAPAN, our H1N1 vaccine. We initiated commercial production within 12 weeks of receiving the pandemic virus strain and received a positive opinion from the European Medicines Agency.

Additionally, our Vero cell culture-based seasonal influenza vaccine, Preflucel, is making excellent progress through the clinical and regulatory process. We've initiated the filing process in Austria and the Czech Republic and expect to file under an expanded mutual recognition procedure in Europe in 2010. In the US we recently completed Phase III clinical trials in adults and the elderly and are currently finalizing details related to the filing process and timeline.

In the Renal business we submitted an investigational device exemption, or IDE, to the FDA for a new home hemodialysis system. We expect to begin clinical trials later this year and launch this technology in select markets by the end of 2011.

And finally, in our Medication Delivery business we introduced HYLENEX for the treatment of pediatric hydration and launched [Olamil], our latest triple-chamber container system for parenteral nutrition in select international markets.

Through continuing focus on innovation, investment and collaboration we remain focused on advancing new therapies, improving the safety and cost effectiveness of treatments, expanding access to care and, most importantly, providing life-saving and life sustained therapies to patients around the world. I'd be happy to address any questions regarding pipeline programs and their status during our Q&A later this morning.

In closing, I would say that building momentum of our pipeline, continuing strong financial results, reinforce the strength of the diversified healthcare model and reflect our ability to achieve the longer-term financial objectives that we presented at our investor conference in September. We believe we've established a strong track record of consistently improving our financial profile and executing our strategy and we're confident in our ability to sustain that in the future.

Before I pass the call over to Rob I'd like to briefly mention that we recently received a not yet published warning letter concerning our manufacturing facility in Lessines, Belgium. The letter identifies improvements that we need to make in certain processes and controls relating to the filling and finishing of GAMMAGARD LIQUID. You need to know that there's been no interruption in our operations and there have been no adverse events or product complaints that have been associated with the issues identified.

Clearly we are working with the agency to resolve any concerns in short order. As this will likely become public in the next few days, I wanted to take advantage of our call this morning to give you a heads up. If you have any follow-up questions, obviously I'd be happy to address them in the Q&A. So, with that, let me turn the call over to Rob. Rob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, we are pleased with the strength and quality of our fourth-quarter results and our financial performance throughout 2009. Earnings per diluted share in the quarter, excluding special items, were $1.03 per diluted share and were in line with our guidance of $1.02 to $1.04 per share. These results reflect strong sales, margin expansion, continued investment and solid operational performance across our [core] business portfolio.

As we mentioned in our press release, our GAAP results included an after-tax special charge totaling $56 million or $0.09 per diluted share. This charge is for actions, the majority of which have already been completed, that are associated with the ongoing optimization of certain manufacturing and business operations around the world and include non-cash fixed asset write-offs and severance.

Now, let me briefly walk you through the P&L by line item before turning to our financial outlook for 2010. Starting with sales, worldwide sales totaled $3.47 billion in the fourth quarter and increased 11%. Sales growth excluding foreign currency was 6% with balanced growth across our global business portfolio.

Sales growth in the US was 5%. International sales increased 15% on a reported basis and, excluding foreign currency, sales growth was 7%. Excluding foreign currency and transfusion therapies transitioned revenues from both years total Baxter sales increased 7%, consistent with the last several quarters and in line with our expectations. For the full year sales increased 2% to $12.6 billion and, excluding foreign exchange, sales growth was also 7% for the full year.

In terms of individual business performance, let me start with BioScience. Global sales in the fourth quarter totaled approximately $1.5 billion and increased 12%. Excluding foreign currency, BioScience sales increased 7% compared to a very strong Q4 of 2008 when constant currency growth was 17%, the highest quarterly growth of that year. For the full year global BioScience sales grew 5% to $5.6 billion. Excluding foreign currency sales increased 10% with solid growth across all major product categories offsetting lower sales of our FSME vaccine, particularly in the first half of 2009.

Within the product categories recombinant sales of $564 million increased 11% on a reported basis and, excluding foreign currency, sales increased 6%. Full-year sales of $2.1 billion increased 5% and, excluding foreign currency, full-year sales growth grew 9%. Overall we were very pleased with the performance of the recombinant franchise. Clearly this can be attributed to the continued success of the ADVATE with 2009 global sales advancing nearly 20% on a constant currency basis to $1.7 billion as we remain focused on improving standards of care around the world and driving conversion.

Moving on to plasma proteins, which includes a broad array of proprietary and differentiated products including -- FEIBA, an inhibitor therapy; ARALAST, a treatment for hereditary emphysema; FLEXBUMIN, or albumin provided in a flexible plastic container; as well as plasma derived Factor VIII.

In the fourth quarter global plasma protein sales were $380 million and increased by 15%. Excluding the impact of foreign currency plasma protein sales increased 10%, primarily due to expected tenders that drove strong international sales. In the US growth of FEIBA and ARALAST offset a difficult comparison to last year when sales of this category grew 18%.

For the full-year plasma protein sales totaled $1.3 billion and increased 17% on a constant currency basis as a result of strong underlying global demand and favorable year-on-year price improvements across the entire plasma protein portfolio.

In antibody therapy fourth-quarter sales of $351 million advanced 14% and, excluding foreign currency, sales increased 10% and were significantly impacted by strong demand outside the US. Antibody therapy sales in the US increased 4% due to a number of factors including somewhat lower market growth resulting from general macroeconomic conditions, inventory adjustments in the channel and some modest share loss.

For the full year antibody therapy sales totaled $1.4 billion and increased 14% on a constant currency basis driven by higher global demand and year-on-year price increases. I'd mention that we remain confident in the underlying fundamentals of this business and have not changed our outlook of mid- to high-single-digit growth in demand over our LRP.

Sales in regenerative medicine, which includes our biosurgery products, totaled $125 million and increased 24%. Sales excluding foreign currency grew 18% and continue to reflect robust growth of FLOSEAL. Revenues in the other category totaled $98 million versus $113 million last year. This expected decline is a result of the difficult comparison to last year resulting from approximately $60 million in sales primarily related to a large order which was partially offset by approximately $40 million in sales of H1N1 we recognized in the fourth quarter of this year.

In Medication Delivery, fourth-quarter sales totaled $1.3 billion, an increase of 12% on a reported basis. Excluding foreign currency Medication Delivery sales grew 7%. For the full year Medication Delivery sales of $4.6 billion increased 2% and, excluding foreign currency, sales also increased 7%, exceeding our full-year guidance of 5% to 6% growth and representing the third consecutive year of accelerating revenue growth in this business.

Turning to the product categories, IV therapy sales totaled $438 million in the quarter and grew 11%. Excluding foreign currency, sales increased 6% and were driven by increased demand globally for IV solutions and nutritional products as well as improved pricing, a trend that continued throughout 2009.

Global injectable sales increased 14% to $479 million in the fourth quarter. Excluding foreign currency, sales grew 9% due to increased pharma partnering sales, growth of select premixed drugs and certain multi-sourced generics, as well as strong growth of our pharmacy compounding business outside the US.

Infusion system sales totaled $246 million and increased 11%. Excluding foreign currency sales were up 7% reflecting positive growth for the first time this year as strong sales of the SIGMA Spectrum pump more than offset lower COLLEAGUE remediation revenues.

And finally, anesthesia sales totaled $140 million in the fourth quarter and increased 7%. Excluding foreign currency sales increased 4% driven by growth of both Suprane and sevoflurane. I'd mention that while we did see some quarterly growth volatility throughout 2009 in this category we were pleased to see improved sequentially growth throughout the year and total approximately $500 million for the full-year 2009, an increase of 10% on a constant currency basis.

Moving on to Renal, fourth-quarter sales totaled $625 million and increased 12% on a reported basis. Adjusting for foreign currency sales increased 6%, also the highest quarterly growth rate of the year. Renal sales for the full year 2009 totaled $2.3 billion and declined 2%. With more than 80% of sales outside the US currency negatively impacted full-year growth by 6 points.

Excluding foreign currency sales increased 4%, in line with our expectations. US sales increased 2% and international sales increased 14% on a reported basis. Excluding foreign currency international sales were up in high single digits. Global hemodialysis sales of $116 million increased 17% and include approximately $15 million of sales related to the acquisition of the hemofiltration business that was completed in the third quarter. Excluding foreign currency hemodialysis sales increased 11%.

Globally, PD sales totaled $509 million and increased 11% on a reported basis. Excluding foreign currency total PD sales increased 5% due to continued patient gains in the US, Latin America and Eastern Europe and double-digit growth across Asia. In fact, global PD patient growth was approximately 8% for 2009, an acceleration from 2008.

Turning to the rest of the P&L and starting with gross margin, adjusted gross margin in the fourth quarter of 51.8% improved by 60 basis points versus last year. Foreign currency negatively impacted the gross margin percentage by approximately 80 basis points, offsetting strong year-over-year operational expansion across all three businesses. For the full year I'm pleased report that our gross margin of 52.4% improved 170 basis points versus the 50.7% margin achieved in 2008 which was in line with our guidance.

Turning to SG&A, adjusted SG&A of $739 million in the quarter increased 10% compared to prior year. Excluding foreign currency SG&A increased in mid-single digits. SG&A for the full year of 2009 was $2.7 billion, similar to last year and, excluding foreign currency, SG&A was up in mid-single digits. SG&A as a percentage of sales was 21.4%, an improvement of 40 basis points over the prior year.

R&D spending of $246 million in the quarter increased 12% on an adjusted basis and, excluding foreign currency, R&D grew in the mid-single digits. For the full year R&D spending of $917 million increased 8% and, excluding foreign currency, growth was 11%. This is the continued result of investments we are making across all three businesses, particularly in many of the programs that Bob highlighted earlier in his opening comments.

As a result of gross margin expansion and operational leverage, our adjusted operating margin was 23.4% in the quarter and 23.7% for the full year, in line with our guidance and, on a full-year basis, an historic level for the Company.

Interest expense was $25 million compared to $14 million last year and other was $7 million of income as foreign currency gains more than offset miscellaneous expenses. Our tax rate was 20.4% for the quarter and 19.1% for the full year. And finally, as previously mentioned, adjusted EPS in the fourth quarter was $1.03 per diluted share, an increase of 13%, and adjusted EPS for the full year was $3.80 per diluted share reflecting an increase of 12%.

Turning to cash flow, we had another strong year. Cash flow from operations totaled $2.9 billion, an improvement of approximately $400 million compared to last year. DSO ended the year at 51 days which is slightly higher than last year. However, this increase is entirely due to the mix of receivables outside the United States as our DSO in the United States declined slightly from the prior year period. As we've mentioned in the past, the macroeconomic environment has not resulted in any meaningful impact to our overall DSO results.

Inventory turns of 2.5 turns improved sequentially and are similar to last year. Capital expenditures for the year totaled approximately $1 billion compared to $954 million last year as we continue to invest in appropriate capacity across our businesses to support our future growth.

And lastly, as we commented in this morning's press release, during 2009 we paid dividends totaling approximately $632 million, an increase of 16% versus last year, and repurchased 23 million shares of common stock for approximately $1.2 billion. On a net basis this amounts to repurchases of 15 million shares or $931 million on a net basis which exceeded our guidance of $750 million in net repurchases for 2009.

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

Finally, let me conclude my comments this morning by providing our financial outlook for the first quarter and full year 2010 before turning the call back to Bob. First, for the full year 2010, as you saw in the press release, we expect earnings per diluted share of $4.20 to $4.28. It's important to note that this guidance does not reflect any impact of potential US healthcare legislation reform. As you know, this is an evolving situation. We will continue to monitor the legislative process and we will provide an update to our guidance if and when it's appropriate to do so.

By line item of the P&L, we expect full-year sales growth, excluding the impact of foreign currency, of 5% to 7%. This includes Transfusion Therapies transition service revenues of approximately $30 million to $40 million versus $74 million in 2009, impacting our sales growth by approximately 50 basis points.

In addition, based on our outlook for foreign exchange rates, we expect our full-year reported sales growth, including the benefit of foreign exchange, of 7% to 9% while sales growth excluding foreign currency will be fairly consistent throughout 2010. The foreign-currency benefit on sales will obviously be greater in the first half of 2010 than in the second half of the year.

Let me also remind you that we faced a difficult comparison in the first half of the year, particularly in BioScience, given higher growth rates in the recombinant, plasma proteins and antibody therapies categories. For the full year we expect gross profit as a percentage of sales to be flat as significant hedge gains recognized in 2009 offset operational improvement of more than 50 basis points.

I'd also mention that foreign-currency hedge gains significantly benefited gross margin in the first quarter of 2009. Therefore we expect gross margin in the first quarter of 2010 to be approximately 80 basis points lower than last year. Our gross margin is expected to improve year over year beginning in the second quarter ending 2010 with a full-year margin similar to 2009.

We expect both SG&A and R&D to grow in mid- to high-single digits driving year-over-year operating margin expansion. We expect interest expense of approximately $100 million and other expense to total approximately $60 million. We expect our tax rate to approximate 19% to 19.5% and, finally, we expect our full year average share count of 606 million to 608 million shares, assuming net repurchases totaling approximately $750 million.

From a cash flow perspective, we expect cash flow from operations of approximately $2.9 billion. Excluding a $300 million pension contribution that was made at the beginning of 2010, cash flow from operations would total $3.2 billion. In addition, we expect capital expenditures to total approximately $1 billion.

Now to expand on the sales assumptions for each of the three businesses. For the full year 2010, we expect Renal sales, excluding the impact of foreign currency, to increase in the range of 5% to 7%. This is the result of solid mid-single-digit growth in PD and HD growth in the low double digits.

For Medication Delivery we expect sales, excluding foreign currency, to also grow in the 5% to 6% range. This will be driven by growth of 5% to 7% for the IV therapy and global injectables businesses and mid-single-digit growth of anesthesia and infusion systems.

Finally, for the BioScience business we expect sales growth, excluding foreign currency, to be in the 6% to 8% range. First, we expect recombinant sales growth in the 6% to 8% range. Second, we expect plasma protein sales to grow in mid- to high-single-digits, and antibody therapy sales to grow in the mid-single-digit range. Third, we expect the regenerative medicine business to again grow in mid teens.

And finally, we expect the other category to grow in mid-single-digits. This guidance includes $85 million of advanced purchase agreement revenues and H1N1 sales compared to $75 million in 2009.

For the first quarter, as we mentioned in our press release, we expect earnings per diluted share of $0.92 to $0.94 and sales growth, excluding the impact of foreign currency, of 5% to 7%. Based on our outlook for foreign exchange rates we expect reported sales growth of approximately 10% to 12%. Now let me turn the call back over to Bob for his closing comments.

Thanks, Rob. Before we open the call to Q&A let me make just a few closing comments.

Clearly 2009 was a very successful year financially, operationally and strategically. While we're certainly not without challenges, we believe our company is very well positioned for 2010 and beyond. While no company, including Baxter, is completely immune to the macroenvironment, given the medically necessary nature of our products, our diversified healthcare model and strong market positions we're confident in our ability to drive improved performance.

Our 2010 outlook is aligned with our long-range strategic plans and the solid underlying fundamentals we see in the markets in which we operate. And we remain committed to driving growth while investing in innovation and business development activities that position us for enhanced growth in the future. So with that at this point let's open up the call to Q&A.

(Operator Instructions). Mike Weinstein, JPMorgan.

Thank you. Good morning, guys. This is minutia, but the 5% to 7% organic top line, that excludes currency, but does that include the dilution or the 50 basis point dilution from Transfusion Therapies?

Yes, it does.

Okay, so 5% to 7% is truly an organic number?

Yes, it is.

Okay. And then what would be helpful, Rob, on the gross margin commentary for 2010, obviously it's tough for us to get exactly right that the swing on your FX hedges and the impact that has on the gross margin line. If we looked at the organic gross margin progression from 2009, 2010, ex the impact of hedges, how would that look?

So, if you just adjusted all that out, we would really run -- and actually maybe go back to '08 just to give you a sense of the trend -- we were 50.5% in 2008, 52.5% in 2009 and we'd be at 53.1% in 2010. So while this one-time impact of these hedges does distort the margin in 2010 from a percentage perspective, if you look at the operational growth in our numbers, it is driving margin expansion going forward.

And the other thing I would note is that while margin percentage is impacted negatively -- but because of those hedges, because we will get the benefit of absolute dollar increase in our sales due to true FX, absolute dollars in margin will grow as it flows through the gross margin line.

Okay, that's helpful. Let me come back with one last question here for Bob. Bob, I want to step back to September and put 2010 in the context of your LRP -- we're fortunate in that you're one of the few companies that has, and articulates, a five-year plan that you share with the Street.

You're guiding over your LRP to organic top line of 7% to 8%, and that's pretty consistent across the three businesses with 300 basis points of gross margin expansion and 400 basis points of operating margin expansion. In the context of the LRP in those five-year guidance comments, how do you think about 2010?

Well, first of all it's only been what, four months since our investor conference, but there's nothing that's changed since then that would suggest we would deviate from our long-term outlook, long-term aspirations. Obviously the guidance we provide of EPS growth in 2010 is right in line with the 11% to 13% compounded EPS growth that we projected over the LRP.

So in the context of EPS growth, 2010 is just another year that I think supports and builds that long-term outlook. You've got a few puts and takes relative to the sales line in organic growth. And just to remind you and I think everyone else, the organic sales growth that -- or the sales growth, compounded sales growth that we projected really doesn't reflect much of anything in terms of business development initiatives and so on.

So we're hopeful that we'll be in a position to maybe do a few things this year as well that will support that top line. But, the EPS growth that we're guiding for 2010 is right in line with the messaging for the long-range plan we communicated in September.

I would just add -- Mike, this is Rob -- that the gross margin percentage also, if you look at what we really were projecting out, it would have worked out to be about a 50 basis point growth year on year going forward for 2014. And as you saw from my comments, we would have had that growth this year and we will have it in terms of operational performance. It's being distorted again because of these hedge gains due to what happened with the currencies last year. But from an operational perspective we're right in line with our expectation on that metric as well.

Okay, so that's helpful, (inaudible) come back to that. So, gross margin progression is -- we'll see in 2010 is consistent with the expectation over the course of the LRPs, just the FX hedges?

Yes.

-- the EPS guidance is consistent with your comments for the LRP. The organic top line is below and this didn't surprise some of us that it's below what you're guiding to for the LRPs. So maybe just want to add just a little more comment on that and I'll let some others jump in.

Well, I think too -- one, recall again the TT, that half point, roughly if you adjust for that we'd be really in the 6% to 7% range. So I'm not sure -- 6% I guess, almost 8% range. So from the way we would compare it to the LRP, or maybe down less than a point from the long-term trend, to Bob's point, that trend will be adjusted for a lot of things, it doesn't have the wildcards in it from our business development activities, it doesn't have wildcards from all of our R&D projects out there.

So as we look forward and look back to frankly what we had projected for 2010 when we built the LRP, pretty much going down to the line items, we're not really fundamentally off from our projections. To Bob's point, there are puts and takes. But I think the real message is we see the profile of what we're delivering in '10 with these expectations to be in line with what we thought and in line with our long-term growth expectations and that's why we're not seeing any move off of what we've already communicated.

Thank you, guys.

Larry Keusch, Morgan Keegan.

Good morning, guys. So, Bob, first question, just on the free cash flow. Obviously CapEx starts to level out here; your cash flow from ops continues to climb. So help us think about how you're thinking about that excess cash that you're throwing off and how does the acquisition strategy fit in? You guys really haven't done much to date. So I'd love to just get some thoughts on that.

Yes, Larry, let me, this is Bob, let me maybe respond to that and then I'll ask Rob to pick up little bit. I mean, we've been -- Rob's been and the Company has been very clear in terms of our capital allocation strategy. We're committed to continuing to give value back to our shareholders both through buybacks, dividend increases -- we took a nice dividend increase this year. It does provide us latitude to be more pro-active in terms of deals.

Frankly I'm hopeful that throughout the course of this year we will do more deals. The flywheel started a little bit last year with the Sigma deal, with the Edwards Life Sciences deal, acquiring the CRRT business. Frankly I'm hopeful and optimistic that you'll see more deal activity out of us this year which will utilize some of that cash. But again, I would reinforce very much in line with what we've communicated previously in terms of the types of deals that we think are complementary to our existing businesses. So, Rob, do you want to add to that?

Yes. I just would add to Bob's point, I think when we gave our long range guidance back in September the capital allocation discipline we put out there, we're marching to that. So CapEx we talked about today is in line with that. And as you look at, to the point we talked about share repurchases will continue as evidenced by what we're going to do (inaudible) go forth in 2010. And the dividend, which grew 16% from 2008 to 2009, we would expect obviously we're going to continue to be committed to our dividend going forward. So I'd say all courses are continuing on the path we've laid out.

Okay. And then just a question on IVIG. I just want to make sure I understand. So it you guys are thinking mid-single-digit growth there. If you could just give some color on how you're thinking about price and then kind of where are we with the contracts in terms of the tenders as you look at all of 2010? And then I guess a comment on market share, why you think you're losing some share at this point.

Okay. Larry, there are several pieces of that. Let me start with our long-term outlook for this business. We continue to believe what we communicated at the investor conference in terms of the long-term growth of this business is very much intact.

Relative to pricing I want to be limited in what I say. I mean, clearly pricing in the market right now is reasonably flat. Going forward I don't really want to comment on that given some of the situations that you're familiar with that have transpired. So I won't embellish beyond that in terms of price.

In terms of volume, without getting too detailed, 2009, particularly the second half of the year, there's really been kind of a confluence of events that have gone on I think affecting both market volume and then also ours, which gets to your share question which I'll conclude with.

First of all, I do think there's been some modest softening in the underlying demand of the entire market due to the macroeconomic environment. While largely Baxter has been fortunate to be relatively unimpacted by the macroenvironment, I do think given how expensive this therapy is, individuals losing insurance, some things like that, I think it has had somewhat of a softening effect in terms of the underlying market growth in 2009.

We also had the dynamic, as you know, earlier in the year with one of the major competitors going private to become a public company. There are always dimensions that are associated with that kind of an event which complicate the market. I also think throughout the year there's been a balancing of the channel inventory with underlying demand, which I think as we go out the year has probably worked its way -- worked its way through.

The other thing I would point out, particularly in our case where we took a fairly significant price increase in January in 2009, in anticipation of that there was a bit of a pre-buy I think from wholesalers to avoid the price increase late in 2008, which clearly didn't occur this year. So on a year-to-year comp basis that's had a bit of a downward effect.

And then finally in the last point, yes, I think we probably have lost a little bit of share. I don't think it's significant. And frankly, to the degree we have, it's probably share that we gained in '08 and moving in -- even early into '09. I don't think there's any reason to believe that that's going to change much going forward. But I think the second half of the year we probably did lose back some of the share gain that we enjoyed in '08 and early '09.

So I'll stop there. I covered a lot of dynamics, but I think it's fair to say 2009 was kind of a transition year due to a lot of different dynamics. But again, the long-term prospects for this business continue to be very positive for a lot of reasons, not the least of which is antibody therapy has such a robust new product pipeline for us with the label expansion and new indications and new delivery systems and so on. So our long-term view continues to be very positive about this business. So hopefully that touched on the various elements, okay?

Yes, that was perfect. Thanks very much.

Bob Hopkins, Bank of America.

Thanks. Okay, good morning. First question, I just wanted to follow up on the warning letter for a second. Could you just give a little bit more detail in terms of what specifically does it address? And your confidence level that won't disrupt the outlook for that product in 2010?

Yes, I don't want to unreasonably alarm people. I just felt that -- first of all we're taking it seriously, as we should. But I don't think there's anything here to be alarmed about. As I commented, there's been no discontinuation of supply. Frankly, we've had no reported adverse events, there are no safety issues that we're aware of. It's really knowing that this warning letter was issued, we were aware of it.

Recognizing that it's going to become public, Bob, probably in the next number of days, and given that we're having our call today, not to raise it in the fashion that I did I think would be a little bit disingenuous. We've always -- frankly, we've tried, I think as you know, to be as forthright and transparent with all of you as we possibly can be. So it's really that simple.

I'm going to ask Mary Kate maybe just to touch on a couple elements of it, just to give you a little more specific flavor in answer to your question, Bob. But obviously when the letter is out it will detail it in greater detail. Go ahead, Mary.

And, Bob, we can talk more about it as well when the letter is public. But basically the warning letter documents some deviations to GMP, which resulted from an increase in the rate of filters becoming saturated or blocked. And the letter cites that we did not have complete investigations of those blocking events and we needed to understand the cause of those events.

And as Bob said, this didn't result in any adverse events, product testing was within all specifications, there's no recall. The facility has an excellent track record from a quality perspective. And we're working diligently to provide a response to the FDA and resolve these issues.

I would add one thing too, just so they can understand. The filters we're talking about here are pre-sterilization filters. So this product, given that it's a biologic, it goes through multiple filters, this is a filter earlier in the manufacturing process before we're actually moving into the sterilization product.

So again, Bob, just to close this out -- just to reiterate, we're obviously taking it very seriously. But I guess I would suggest I don't think there's anything here to be alarmed about.

Okay, thank you. And then just to follow up one more question on antibody therapy for a quick second, just to make sure I understand exactly what you're saying. You guys are suggesting for Baxter mid-single-digit growth on a constant currency basis in 2010. And you're also expecting that's the growth rate for the market, is that right?

I think, Bob -- this is Rob -- generally, yes. I mean we've talked about -- Bob mentioned we saw maybe a little bit of softness in demand coming through the back half. I think we're seeing some of that recover even as we see data now. But to make sure we're conservative we're looking at the market more in that range. But I think longer-term we haven't changed our view that the mid- to high-single-digit growth, it's going to get there and I wouldn't be surprised if you see us getting back to that as we move into the rest of 2010 in the back half.

Okay, and just lastly. On the US business which grew 4%, was there any unit growth in Q4 for you guys in the United States?

No.

No.

Okay. Thanks so much.

And a piece of that, Bob, of course is, as I mentioned, was some of the pre-buy in anticipation of the price increase a year ago.

Right.

Which didn't recur. So that's a piece of it.

Okay.

David Lewis, Morgan Stanley.

Good morning. Bob, a couple questions here on Med Delivery. I guess the first is just looking at the Sigma performance in the quarter, it was much stronger than we would have expected. Does that recommend -- sort of suggest that there was some inventory stocking or customer stocking or do you think that reflects the true demand or underlying demand for Sigma?

Yes, I -- for Sigma specifically? No, I think the product continues to go very well. If you look at overall Med Delivery, I think as Rob commented in the prepared comments, we see the general momentum and growth in this business, which is [billed] which is very encouraging. Obviously the Sigma deal that we did last year has been very helpful because of the obvious void that's existed now for several years with COLLEAGUE.

But, no, we feel good about how the Med Delivery business is performing and are confident that that's going to continue to build out in the future. I would say the Sigma device, we're not going to get into specifics in terms of number of devices placed and so on, but it's being very well received in the marketplace.

We're actually quite pleased with how the device is performing, how it's being utilized. Actually there are a number of very large prestigious academic medical centers that are using the Sigma device right now, which is a great validation I think of the product and the technology. So in general we feel pretty good how things are going in Med Del.

And, Bob, you've talked, both at the analyst day and sort of recently publicly, about in the near-term an increased reliance on Renal and Med Delivery versus BioSciences. Do you think that reliance, as you look at the near-term operating plan, has happened earlier than you would have liked or roughly equivalent to when you would have expected it?

The reliance on the -- or the expectation of the Med Del and the Renal business is growing?

That's right, the reacceleration in those businesses versus BioSciences?

To be very candid, David, if I go back almost six years now when I came here I would have expected and hoped that both those businesses would have would have had a resurgence before now. Okay? We've been fortunate that the BioScience business has performed so strong. Frankly it's provided a little more time to get things aligned in both Renal and Med Delivery.

But I think -- so we'd have preferred -- I frankly would have expected it to happen a little bit sooner. There are reasons that it didn't. But it is happening now and I'm confident that that's going to continue and it's happening at a great time. So I think it speaks to again part of the power and the diverse -- of the flexibility of the diversified healthcare model.

Okay. Just one last question and I'll jump back in queue, just for Rob. I think the fourth-quarter antibody therapy numbers I think were largely expected. I guess -- I think what investors would like to know is heading into 2010 is your guidance predicated on stable share and is your guidance predicated on inventory levels that are flat with the fourth quarter? I.e., what's giving you the confidence that we don't see further erosion in those two dynamics?

The answer to both the questions is, yes, we are assuming generally stable share throughout 2010. As Bob mentioned. Some of the share loss we think we've seen in the back half of 2009 is giving back share gains we had in the past years. As you know, there were competitive issues with the product in the marketplace.

So, we do expect stable share and we do believe that we're starting to see more normalized inventory levels in the channel. So hopefully some of the noise that's created in the back half of 2009 versus 2010, we're not expecting to see that within the -- back half of 2009 versus the first half of 2009 -- sorry about that. But we're not expecting to see that in 2010.

Great. Thank you very much.

Bruce Nudell, UBS.

Thank you. Just turning once again to IVIG. Is it a fair set of assumptions to assume that volume demand in the US for the market next year is going to be in the low single digits, and by an equal amount above the single digits ex US to get you to around 5% volume demand?

I think just to restate your question, Bruce, I guess you're asking, to get to our mid-single-digit guidance are we assuming that there will be a little bit faster growth outside the US than in the US? The answer to that is yes.

Okay. And as the -- is the industry -- what is the industry doing and what are you doing in terms of either patient assistance and/or greater detailing to build markets, which the industry really hasn't had to do before?

Yes, let me comment on that Bruce, this is Bob. I'll just comment on what Baxter is doing, not the industry. We have added a number of sales people with the objective of really broadening access to this life-saving therapy. We've talked about this before.

You know, PID is -- even in developed markets like the US, is highly under diagnosed. And given as recently as a year, year and a half ago when product supply was very, very tight, clearly we were limited in our ability to get out with really sales efforts to educate physicians on the need to broaden access to this kind of therapy.

So we have in the late 2009, second half of the year really started to add salespeople given the fact that now we have adequate inventories so that we can further that. And that really is a new dynamic. Frankly I think it's a new dynamic for the industry. But in our own case certainly it's a new dynamic going forward that I think the long-term prospects associated with that are very positive.

Bruce, I would just add, that's both in the US and outside the US. And importantly, we've been a long supporter of the Jeffrey Modell Foundation and their efforts to educate patients, doctors on how to diagnose, how to understand this. We have supported the opening of Modell centers for instance in Brazil, we're looking at them now in Europe. So we're also doing it by expanding our support of groups out there that are trying to make sure we do get the education done both in the US but, importantly, outside the US as well.

And just to follow up on the vaccine side. Should we be thinking about H1N1 as a recurring theme beyond 2010 or should we really be shifting our attention to the seasonal flu opportunity which is more of an annuity?

Yes, let me take that, Bruce. I want to go back to a comment that I made last quarter where I said we believe that our flu technology provides for Baxter long-term a material opportunity. And as we sit here today I would say the same thing.

While the whole H1N1 experience has evolved in ways that were unanticipated and so on, including now in many countries there being an excess supply, I will tell you and others listening in frankly it's one of the reasons last quarter we didn't get out over our ski tips on creating expectations for sales that I think were unrealistic because we were realized there were as many unknowns as knowns. And in retrospect I'm glad we handled it exactly that way.

I'm not sure how big the opportunity for H1N1 is going forward, but I think the opportunity for Baxter, and it's been instructive through the last few months. I think wealthy countries, as an example, realize that whether it's H1N1 or some other pandemic or even perhaps seasonal flu, because the same manufacturing facilities of the established vaccine manufacturers have to produce seasonal as well as pandemic if in fact there's a need.

Many countries have realized the need to establish some semblance of self-sufficiency. So as we evaluate our technology, which we believe is the leading technology in this area, we think there are great opportunities in terms of tech transfers -- I will just tell you we're having active discussions with several countries around the world right now to partner with them and our technology which will represent value to Baxter.

I think it's also interesting to note that while you read almost every week about excess supply of H1N1 and how it's being returned, we actually are in the midst of a number of active discussions with various countries for advanced purchase agreements -- in other words, where they want to reserve a slot for a percent of our capacity for our technology, which I think is instructive relative to how they've been educated through this process and how they need to be prepared.

So there's going to be an attractive opportunity for Baxter given our leading edge technology. It's just going to manifest itself in a way and at a time that maybe is a little bit unconventional. Having said that, we continue, as I commented in my prepared comments, to advance registrations around the world on the seasonal flu and we think that will provide an ongoing opportunity as well. So I covered a lot there, but hopefully that got your question, Bruce.

Yes. Just one final quick one. Just to put some concreteness towards the M&A side, you are repatriating cash this year?

Yes, we are continuing to repatriate cash. So as we look at acquisition opportunities, as we look at our ability and need to fund the share repurchase, we had contemplated what would be our US cash position in all the plans we have laid out. So we are comfortable we have cash where we need it to do what we want to do.

Thanks so much.

Matt Miksic, Piper Jaffray.

Good morning. Thanks for taking our questions. So one quick one here on the outlook for 2010. My apologies if you covered this. But just to be clear, this 5% to 7% constant currency, that includes a 50 basis point hit because of the discontinuation of Transfusion Therapies' revenues; is that right?

That's correct.

And was there any other sort of one-off comparisons that we should be thinking about or aware of?

No, really that -- as you look going backwards, that is really the last of the historical items we would adjust for.

Okay. And then one on vaccines. You gave what is a $75 million or $85 million number -- $75 million number for 2010. Any color on your expectations for the composition of that, APAs versus actual revenues; maybe what some of your assumptions are there?

Hey, Matt --.

Correct the number, Mary Kay.

Yes. Matt, just a clarification. $75 million was 2009.

Okay.

$85 million will be 2010.

Got it. And the composition or what your assumptions are in there?

You know, I don't think we will break it out because we do have H1N1 ordered primarily in the first quarter, Matt, and then APA revenues throughout the rest of the year.

Okay. And any increase in revenues may offset -- be offset by the discontinuation of APAs; is that the thinking?

I'm not sure I understand your question.

So APAs, in other words, to the extent that you are -- are these APAs, would these be new APAs established in 2010?

Yes.

Okay. And then, Bob, I know you have outlined there's been a number of these wildcard opportunities, and I know it is difficult to ask you to pick among them. But it would be helpful for us with the rehydration launch underway, maybe what is the next thing that you see coming that you are excited about, and the pipeline of products maybe in late stage development in terms of your wildcards? Things not necessarily built into your long-term plan.

Well, in the interest of time, maybe what I'll just do, Matt, is give an example of one in each of the businesses. I mean, home hemodialysis we think has the prospects of transforming the treatment of end-stage renal disease. So we're very excited about the prospects of that.

In our Renal business and Medication Delivery I would say HYLENEX in expanded indications over time, the product's being very well received in the area of pediatric hydration and we continue to evaluate other indications for that technology for drug delivery.

And in BioScience there's really a lot of stuff. I think of the Phase III things, clearly the subcutaneous delivery utilizing Enhanze for the administration of GAMMAGARD is also very exciting. So, again in the interest of time we really can't get in too much depth, but that would be one that would come to mind in each of the three businesses that I'm excited about.

Thanks so much.

Ben Andrew, William Blair.

Good morning. I just wanted to follow up on the Med Delivery side because there was some nice strength there, particularly OUS compounding. Is that a potential area of significant M&A activity for you guys this year? And are there assets out there that would be nicely complementary in accelerating the top line?

Yes. Ben, this is Rob. I mean, that is an area obviously, as many others, we are looking. I don't think I would view this as an area of material sized deals, but clearly as we look at opportunities around the world we're constantly looking to see if there are markets where we can expand our footprint in this area. And we have done some small ones in the past, and my guess is we'll continue to do some smaller ones in the future, probably the size of which might not hit the radar screen but are what's driving the growth we're seeing (multiple speakers).

And frankly, the compounding business really isn't going to be driven by deals. It's really taking established models that are successful in certain countries, Ben, and expanding geographically on a country-by-country basis what's really a proven process and where we can get the kind of returns that we want. So that's really the growth strategy and compounding is more geographic expansion than it would be deals.

Okay. And then on your guidance for Med Delivery, what are you baking in for timing of full return to the US of COLLEAGUE?

We're assuming no COLLEAGUE sales in 2010.

Okay. All right, thank you.

Sean, we have time for one more question.

Rick Wise, Leerink Swann.

Thanks for fitting me in. Good morning, Bob. If I can ask several -- a bigger picture question; it's sort of a two part. This is the first quarter I think since -- maybe since you got there that Baxter didn't exceed consensus. And I'm trying to understand is there any message in this?

I know the environment is complicated, I'm not trying to take away from the excellence of the quarter, but just wondered your thoughts on your either willingness or desire to -- this under promise outperform mode you've been in for the last five years. And more specifically, even though we're still seeing positive leverage on the EBIT line, I mean operating income grew faster than sales -- nicely faster in the quarter and for the year again, it was still the lowest rate of exceeding I think in a few years as well.

Just curious to hear your thoughts on leverage and outperformance. And are you setting the stage -- larger picture here -- for your -- to be able to do some more deals this year which might be dilutive or is this the environment? Sorry for the big question here.

We were feeling pretty good about the quarter. Sorry to disappoint you, Rick.

No disappointment.

Yes, okay, let me take them a piece at a time. I mean, you're right, we didn't beat I guess the guidance on an EPS guidance basis. Obviously our tax rate bumped up. So if you adjusted for that we'd probably beat by a penny or two, I didn't calculate the actual numbers. So if we would have beat by a penny we'd have gotten $0.02 because of a favorable tax rate we probably would've heard that the other way. So I would just leave it at that.

In terms of the leverage and the prospects of the profile improving over time, I'd just reiterate what Rob touched on earlier, both the gross margin and pre-tax operating margin as a percent of sales. There is no reason to expect that we're going to deviate from what we messaged to everyone at the September conference. But, no, there's nothing going on here to set the stage for anything, I mean in terms of deals and so on.

We have the flexibility, the latitude, the financial strength to do what we need to do. We're not anticipating doing deals that are going to be dilutive that we're going to then set the stage and manage that way. We're going to pursue deals that make sense strategically, that create value for our shareholders, that fit within our disciplined set of financial parameters and evaluate those on their own merit going forward. But no, I wouldn't read too much in and try to think there's some magical plan behind all of this.

Thanks. Two other last questions. One, I just wanted to make sure I understood what you're saying on the LRP. Am I right in remembering that the LRP is the base case and does not include business development and wildcards? Is that what you've said in the past? Is that different or the same now? And I'll go ahead and ask my last question, just an update on the Alzheimer's trial data. When do you think we might see that, and maybe an update on progress with the Phase III trials? Thanks so much, Bob.

Okay, Rick. Yes, the LRP growth fundamentally doesn't include -- does not include any BD deals; in other words, we don't have the gap in there that needs to be filled by BD deals. So anything we would do would be incremental. That largely would apply to the wildcards, although obviously certain programs that we characterize as wildcards such as the flu program a couple years ago is starting to translate into value.

And so some of that is represented in the long-range plan, although I would suggest it's probably not an excessive number at all. So I would think largely it doesn't reflect the wildcards as well. So just as a matter of clarification hopefully that helps.

Yes.

On Alzheimer's, Mary Kay, why don't you go into the details of this, make sure I don't misspeak.

Sure. Rick, you know the Phase II 18-month data is due out in the first half of this year either at AAN, which I believe is in April for ICAD in July. We also believe that Dr. Relkin is looking to have the data published in a peer-reviewed journal.

The Phase III I think Bob commented on in his opening comments is going well. We've enrolled more than 50% of the patients. We expect to complete enrollment by the end of this year. We do have 18 months of follow-up required. So it looks that we'll complete the trial in 2012 and we may have the preliminary results by the end of that year, 2012.

Thanks very much, Mary Kay.

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