百特醫療 (BAX) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's first-quarter earnings conference call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call. (Operator Instructions).

As a reminder, this call is being recorded by Baxter and is copyrighted material and cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

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

Thanks, Sean. Good morning, everyone, and welcome to our first-quarter 2010 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Rob Davis, Chief Financial Officer.

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

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

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

Thanks, Mary Kay. Good morning, everybody. Thanks for calling in. Our Q1 results that we reported earlier this morning were very solid, with adjusted EPS of $0.93 per share, an increase of 12% versus Q1 of 2009, which, as you know, was in line with our prior guidance.

As you saw, sales increased 11% for the quarter on a reported basis, and on an organic basis, sales increased 5%, which was at the lower end of our guidance.

Sales in all of the major businesses and virtually all of product categories achieved or exceeded expectation, with the exception of plasma proteins in the US.

So on that point, let me jump immediately to the obvious news this morning, which is our decision to lower guidance for the year from $4.20 to $4.28 a share to $3.92 to $4.00 per share. While Rob will provide more details in just a few minutes, it is clearly appropriate for me to address the basis of our decision to lower guidance at the outset this morning.

There is really primarily two key factors that led us to lowering our outlook for the year. The first, of course, is the incorporation of our best estimates for the recent healthcare legislation on the Company for the remainder of the year. This is largely the impact -- and this is primarily in our BioScience business -- of increased Medicaid rebates and also the expansion of the 340B program, which provides access to Medicaid rebates in the form of discounts to certain providers.

So we estimate the total healthcare reform impact for 2010 to be approximately $80 million, which is about $0.10 per share.

The second factor is really I guess what I would describe as the more protracted and pronounced impact of the transition in the global plasma protein market, particularly with the emphasis in the US. We will clearly discuss this in more detail in the Q&A this morning, but what I'd like to do is provide some color as it relates to the existing market dynamics, the basis of our projections for the remainder of the year, but also our longer-term view regarding this business.

In the short term, it is evident that the market is growing more slowly than our earlier estimates, particularly in the US. As I commented last quarter, we also believe that we've lost some unit share, primarily business that we gained in late 2008 or early 2009 due to some competitive supply issues.

As you know, we've not taken prices up this year on Gammagard Liquid, but it remains the premium brand and is frankly subject to some competitive vulnerability, particularly in select segments of the market. So as a result, we have and we will, on a targeted basis, selectively touch up prices.

While I continue to believe that we and the market more broadly are going through a transitionary period, we, in retrospect, were clearly overly optimistic about the short-term market growth, our ability to retain market share and the near-term impact on the market of deploying additional sales resources for those indications that remain underdiagnosed and untreated.

Despite our positive outlook on the growth of the business over the LRP, for the reasons mentioned, we felt it was prudent to adjust down our projections for the remainder of 2010. We do remain confident, as I mentioned, that this business will be an attractive growth vehicle in the coming years due to new and proprietary administration technologies, such as our HyQ Program, which utilizes Halozyme's Enhanze Technology, new indications such as MMN, and of course the potential wildcard of an Alzheimer's indication.

We also, as you know, continue to expand sales force and marketing resources around the world to broaden access to patients who have not been diagnosed with primary immune deficiency.

Having said that, in the short term, we must objectively reflect the current market conditions in our forecast for the remainder of the year. And as I said, Rob will provide more details later in terms of the forecast assumptions in the financial impact. And I know I will get into more detail in the Q&A, but I wanted to get all this on the table up front this morning.

The other BioScience businesses in the first quarter performed well. Recombinants, regenerative medicine, which as you know, is our biosurgery business, and vaccines all generated double-digit sales growth. We are also encouraged by the accelerating growth in the quarter of Medication Delivery and the solid growth of Renal, which I think very much exemplifies the balance of our diversified healthcare model.

Normally at this stage, I would highlight a number of our BD and R&D milestones for the quarter. A number of those, by the way, were called out in our press release, which we issued this morning. But I think in the interest of time and to ensure there is enough time after the end of Rob's and then some of my closing remarks, to make sure there is enough time for Q&A, I think I'm going to dispense from enumerating all of those this morning.

So at this point, I will have to -- ask Rob to get into some of the specifics of the Q1 results, our revised guidance for the year. And then I want to come back after that and provide a little broader context and some commentary on our earnings revision.

So with that, Rob, if you would.

Thanks, Bob. Good morning, everyone. Let me begin this morning with GAAP earnings, which for the quarter were $0.86 per diluted share. These results included a one-time, non-cash special charge of $39 million, or $0.07 per diluted share, representing a write-off of a deferred tax asset resulting from a change in the tax treatment of post-retirement prescription drug benefits under the new US healthcare reform legislation.

As Bob mentioned earlier, adjusted earnings per diluted share in the quarter, excluding the special charge, increased 12% to $0.93 and were in line with our guidance of $0.92 to $0.94 per share, despite absorbing roughly $0.02 per share impact for increased rebates related to the recently enacted healthcare reform legislation, which, as you know, was not contemplated in our earlier guidance.

Now let me briefly walk you through the P&L by line item, before turning to our financial outlook for the remainder of 2010. Starting with sales, worldwide sales totaled $3.14 billion in the first quarter and increased 11%. Sales growth excluding foreign currency was 5%, and as Bob mentioned earlier, was at the lower end of our guidance, primarily due to lower-than-expected plasma protein and antibody therapy sales.

Sales growth in the US was 4%. International sales increased 17% on a reported basis, and excluding foreign currency, sales growth was 5%.

In terms of individual business performance, let me start with BioScience. Global sales in the first quarter totaled approximately $1.4 billion, and increased 9%. Excluding foreign currency, BioScience sales increased 3%. Overall, strong growth in recombinants, regenerative medicine and vaccines offset weak sales of antibody therapies and plasma proteins.

Within the product categories, recombinant sales of $510 million increased 13% on a reported basis, and excluding foreign currency, sales increased 8%, driven by robust growth outside of the US. This is the continued result of our efforts focused on expanding patient access, driving increased diagnosis and improving standards of care around the world.

Moving on to plasma proteins, which includes a broad array of 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 and traditional albumin.

In the first quarter, global plasma protein sales were $292 million and increase by 7%. Excluding the impact of foreign currency, plasma protein sales declined 1%, as lower albumin and PD factor VIII sales more than offset double-digit growth of FEIBA and ARALAST.

In the US, plasma sales declined 4%, as growth of ARALAST, plasma-derived factor VIII and FEIBA were more than offset by lower sales of albumin, where we faced a difficult comparison to last year, when US albumin growth was approximately 40%.

International sales, excluding foreign currency, were flat to last year, as double-digit growth of FEIBA offset lower sales of PD factor VIII and albumin, resulting from lost or delayed tenders.

In antibody therapy, sales of $322 million were down by 4%, and excluding foreign currency, sales declined 7%. As we mentioned last quarter, we faced a difficult year-over-year comparison in the first quarter, as antibody therapy sales increased by approximately 20% last year. In addition to the difficult comparison, however, sales were lower than our expectations due to a number of factors, including somewhat lower market growth, continued inventory adjustments in the channel and continued share erosion.

Sales in the regenerative medicine business, which includes our biosurgery products, totaled $119 million, and increased 20%. Sales excluding foreign currency grew 14% and continued to reflect robust growth of FLOSEAL, COSEAL and TISSEEL. I would also mention that due to the timing of the closing of the ApaTech acquisition, sales of ACTIFUSE were immaterial in the quarter.

Finally, revenues in the Other category increased by more than 30% to $119 million, and included the expected revenues associated with the H1N1 vaccine.

Now turning to Medication Delivery, we are off to a strong start. First, as we look at the first-quarter sales, they totaled $1.2 billion, an increase of 14% on a reported basis. Excluding foreign currency, Medication Delivery sales grew 8%.

Turning to the product categories, IV therapy sales totaled $391 million in the quarter and grew 14%. 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 advanced 22% to $451 million. Excluding foreign currency, sales grew 14%. In addition to an easy comparison to last year, growth was driven by increased pharma partnering sales, growth of select premixed drugs and certain multisource generics, as well as double-digit growth of our pharmacy compounding business outside of the United States.

Infusion systems sales totaled $209 million and increased 5%. Excluding foreign currency, sales declined 1%. Strong sales of the Sigma Spectrum Pumps were more than offset by lower COLLEAGUE and access set revenues. Finally, anesthesia sales totaled $127 million and increased 17%. Excluding foreign currency, sales increased 11%, driven by growth of both SUPRANE and Sevoflurane.

Moving on to Renal, first-quarter sales totaled $584 million and increased 13% on a reported basis. Adjusting for foreign currency, sales increased 5%. US sales increased 3%, and international sales increased 16% on a reported basis.

Global hemodialysis sales of $110 million increased 16% and included approximately $15 million of CRRT sales, which, as you will recall, is the hemofiltration business acquired from Edwards in the third quarter of last year. Excluding foreign currency, hemodialysis sales increased 5%.

Global PD sales totaled $474 million and increased 13% on a reported basis. Excluding foreign currency, global PD sales increased 5%, as we continue to see patient gains in the US, Latin America and Eastern Europe, and double-digit growth across Asia. In fact, Global PD patient growth is trending at about 8%, and we remain encouraged by the continued acceleration of patient gains in the US resulting from the recent reimbursement changes.

Turning to the rest of the P&L and starting with gross margin, gross margin in the first quarter of 51.9% was 80 basis points lower than last year's first-quarter gross margin of 52.7%. All three of our businesses expanded margins in the quarter. However, this expansion was more than offset by three items.

First, the impact of healthcare reform, which as mentioned earlier, totaled approximately $15 million in the quarter. Second, approximately $20 million of write-offs related to H1N1 vaccine inventories. And third, the loss of foreign-currency hedge gains that benefited last year's margin by approximately 100 basis points.

Turning to SG&A, SG&A of $683 million in the quarter increased 12%. Excluding foreign currency, SG&A increased in mid-single digits.

R&D spending of $227 million increased 7%, and excluding currency, R&D grew in the low single digits. Our operating margin was 23% for this first quarter, which is 50 basis points lower than last year as a result of the specific items noted earlier, which negatively impacted gross margin.

Interest expense was $19 million compared to $26 million last year, which was principally a result of higher interest income. And Other was an expensive $2 million, similar to last year, as miscellaneous expenses more than offset foreign currency gains.

Our adjusted tax rate was 19% for the quarter. And, finally, as previously mentioned, adjusted EPS was $0.93 per diluted share, in line with our guidance, an increase of 12%.

Turning to cash flow, the year started off quite strong. Cash flow from operations totaled $279 million, an improvement of more than $40 million compared to last year. Excluding pension contributions from both years, first-quarter cash flow from operations approached $600 million, reflecting an improvement of more than $250 million year-over-year.

DSO ended the quarter at 53 days, which is slightly higher than last year. This increase is entirely due to our mix of receivables outside the US, as our DSO in the US remains under 30 days. Inventory turns of 2.2 turns improved from 2.1 turns in the first quarter last year, reflecting flat or modestly improving turns across all three businesses.

Capital expenditures totaled approximately $230 million compared to $171 million last year, as we continue to invest in appropriate capacity expansions across our businesses to support our growth.

And lastly, we repurchased 7.5 million shares of common stock for approximately $435 million. On a net basis, this amounts to repurchases of 4.1 million shares, or $295 million.

Finally, let me conclude my comments this morning by providing our financial outlook for the second quarter and update you on our revised full-year 2010 guidance before turning the call back to Bob.

First, for the full year 2010, as you saw in the press release, we now expect earnings per diluted share of $3.92 to $4.00 compared to our original guidance of $4.20 to $4.28. As Bob mentioned earlier, our revised guidance now includes the impact of US healthcare legislation, which is estimated to be approximately $80 million for the full year 2010, or $0.10 per diluted share.

The majority of this impact is in the BioScience business and relates to the increase in Medicaid rebates in our hemophilia and plasma businesses, as well as new discounts offered to covered entities of the 340B program, which under the new legislation, is being expanded.

In addition to this impact of healthcare reform, our revised guidance also reflects our current outlook for BioScience, with the major driver being the adjustment of our plasma protein business. But before I walk you through the sales guidance by business, let me take a moment to summarize our revised guidance by line item of the P&L.

First, we expect full-year sales growth, excluding the impact of foreign currency, of 1% to 3%. The reduction in our sales is primarily the result of the two factors mentioned earlier, healthcare reform and lower sales of plasma proteins. Excluding these factors, our sales guidance would have been within our previous guidance range.

In addition, based on current foreign exchange rate outlooks, we expect our full-year reported sales growth of 3% to 5%. Obviously, the foreign-currency benefit on the sales will be greater in the first half of 2010 versus the second half of the year.

For the full year, we now expect gross profit as a percentage of sales to decline 100 to 150 basis points from the 2009 gross margin rate of 52.4%, primarily resulting from the specific items noted earlier and the ongoing impact of healthcare reform. Given our sales and margin outlook, we will intensify our focus on managing costs throughout the Company. Therefore, we now expect SG&A and R&D to be flat to 2009 levels.

We expect interest expense of approximately $100 million and Other expense to total approximately $30 million to $40 million. We expect our tax rate to approximate 19.5%, and finally, we expect a full-year average share count of 600 million shares.

From a cash flow perspective, we expect to generate cash flow from operations of approximately $2.7 billion.

Now, to expand on the sales assumptions for each of the three businesses. First, as Bob mentioned earlier, we are encouraged by the results in Renal and Medication Delivery, and we continue to expect both businesses to perform in line with our original sales expectations of mid-single-digit growth. For BioScience, we now expect sales growth, excluding foreign currency, to be flat to down 2%.

By product category, our revised guidance reflects the impact of healthcare reform and additional sales of approximately $60 million related to the acquisition of ApaTech.

For the recombinant business, we now expect recombinant sales growth in the 4% to 5% range. Second, we expect plasma protein sales to decline in mid-single digits and antibody therapy sales to decline in the 10% to 15% range. Third, we expect the regenerative medicine business to have sales growth exceeding 25%, reflecting the ApaTech acquisition and continued double-digit growth in the base business. And finally, we expect the Other category to decline by approximately 5% due to a more conservative outlook of lower advance purchase revenues now that the H1N1 pandemic has subsided.

For the second quarter, as we mentioned in our press release, we expect earnings per diluted share of $0.90 to $0.93, and sales growth, excluding the impact of foreign currency, of 0 to 2%. Based on current foreign exchange rates, we expect reported sales growth of approximately 3% to 5%.

Now let me turn the call back over to Bob for his closing comments.

Thanks, Rob. First of all, let me say clearly we are disappointed to be in a position to lower our earnings guidance for the year. But as we discussed, and as we will get into more detail in the Q&A, clearly the market realities of the plasma business, they are what they are. We'll talk about that. And we have to be realistic and we have to be as objective as possible in providing new guidance for the year.

On the healthcare reform front, now that that can be calculated, frankly, we reflect it in our base and we move on.

So given the reduction in guidance, an obvious question that I'm sure many of you are asking is what is the impact of this revision on our five-year LRP that we presented as recently as last September's investor conference?

First of all, I think you know we didn't include any impact of healthcare reform in the numbers that we presented this past September, neither the Medicaid rebate, drug and device tax, nor, on the other hand, any impact on demand due to broader coverage which becomes effective later in the LRP.

So in addition, just to give you a little clarity on that -- in addition to the $80 million impact that we've now reflected for 2010, there will be some incremental impact in 2011 for pharma tax. And of course, the device tax, as you know, kicks in in 2013.

Having said that, I would tell you that the $80 million impact that we've reflected for this year represents the lion's share of the cumulative impact over the five-year LRP. So on that front, effectively, that impact would need to be overlaid in our numbers that we presented to you last September.

Our revised outlook for the plasma protein business would also need to be adjusted in the LRP. Now, while as we said and you know, this business is going to grow nicely for us over the long term, the short-term base, which is really this year and into 2011, will need to be down-adjusted in our five-year projection. So the real question is how long will it take to rebase for us to feel the effect of various commercial strategies that we've implemented and will implement going forward, and then of course, get back to a position where we are accelerating growth. That is a question, frankly, I can't answer at this point. But we hope to be in a better position to provide more definition on that as the year progresses.

Before we open up to Q&A and in closing, I would just tell you that we remain committed to grow our earnings over the long-term in line with the rates that we did discuss with you last September. To the degree whether it is the macro business environment is more challenging or the current plasma protein dynamics are more protracted than we've estimated, we'll certainly take actions to ensure that we create sustained growth and value creation for our shareholders, whether that means a different pathway for business development or M&A, a reassessment of our structural cost of our Company, or whatever other responsible measures are necessary for us to achieve our objectives. And I wanted to be clear on that before we open it up to Q&A.

So at this point, Mary Kay, why don't we do that?

Sure. Thank you. Sean, can we open it up for Q&A, please?

(Operator Instructions) I would like to remind participants this call is being recorded and a digital replay will be available on the Baxter International website for 30 days at www.Baxter.com.

Mike Weinstein, JPMorgan.

Let's focus on the issue at hand. So you lowered your earnings outlook for the plasma protein business, largely plasma protein, $0.18 for the year. That is about $135 million pretax. And you lowered the plasma protein forecast from mid-single -- to down mid-single from had been up mid to high, and you lowered the IVIG to down 10 to 15 from up mid-single previously.

So can you talk about what you've seen over the course of the quarter within the IVIG and broader plasma protein market that has changed your outlook as meaningfully as it has?

Sure.

And talk about the assumptions you are making over the balance of the year about the changing economics in your business. Because it is not just a top-line reduction. Obviously, you're assuming much greater bottom-line impact than what just the top line would represent. So if you could just go through all that, thanks.

Just on the last point, Mike, that is clearly -- that's the big question. So we will spend some time talking about that. But just on the last point, in terms of the flow-through on profitability, clearly as the volume declines, this is a business where manufacturing efficiencies, plant utilization, both on the collection side as well as on the fractionation side, are real critical. So as the volumes decline, there is an additional leverage effect that translates into margin that I think probably represents a pretty big piece as you try to reconcile the numbers. So let me just address that at the outset.

But let's take a step back and talk about the market, how we've gotten to this point, what we see going forward. Look, the facts are we miscalled this. Okay? And believe me, we've spent a lot of time challenging ourselves, asking the question why is that.

I think there are several factors that are involved here, which are instructive and helpful that obviously as we not only forecast going forward, but as we implement other commercial strategies, not only to mitigate the effect of it, but to turn it around.

As we look at the market today, Mike, clearly the market is growing much more slowly than we had anticipated, even as recently as pulling together our plan for 2010 and obviously providing the guidance for 2010. You know in this particular market it is sometimes challenging. We have less than perfect market information. It is not like the pharma business, where you got IMS data and you can track things in a much more definitive way. So it is a little bit elusive.

Our best guess is that the US market -- and let's just talk about the US market, because that is where most of this is centered -- it is probably growing no more than 1% or 2% right now. Okay? So we clearly overcalled the market growth. And I think one of the reasons that we did that is if you go back in time, let's say a year ago -- because our year-to-year comps, obviously are very -- a year ago, right now, we were having a very different discussion -- very robust results, frankly, in excess of what we had projected. And the challenge then at that point was how much did we interpret that to be more robust market growth and how much of that was share gains. And again, this gets to -- and this isn't an excuse -- it is just giving you the facts, and you know most of this -- less than perfect market information.

I think we interpreted our strength a year ago, late 2008 and early 2009, to be more a function of more significant market growth as opposed to, I think, we were gaining more share at that time, given the fact that one of the competitors was having some supply issues in the market. So I think that is a historical fact that is relevant.

The other thing was going on to the market in general, as you know, was we were moving, over the course of really about two years, from being in a fairly dramatic product shortage in the market to then moving more recently, of course, to adequate supply, even leading to the point where all of us now are adding sales resources and so on, as you know.

And then of course, mixed in with all of that was the balancing in the supply chain and the distribution channel, and ascertaining what was fundamental demand and what was really rebalancing of channel inventory became the third factor.

So simply -- just to summarize simply, we've overcalled the market growth. It is growing at a lesser rate, and I think there are some environmental factors, clearly, that are leading to that, which I won't expand on. We can follow up on that if you'd like.

The market is growing much slower than what we had anticipated. As I acknowledged on our last call, we've lost some market share. It is largely share, I think, that we gained in late 2008 and early 2009. And since our last call, we've lost, I think, somewhat more market share as well.

As you know, we are the premium brand, as I had mentioned in my prepared comments. So we are -- we have and we are going to continue to selectively touch up prices where necessary to keep our volume, and we are doing that, all at the same time, as you know, we are expanding sales force.

So that is probably about the best I can do in addressing the various dynamics, of which there are several. And on all fronts, we have less than perfect information.

But -- and so going forward, low single-digit market growth in the US market; probably higher growth outside the US, as you know. I really don't want to get into the pricing discussion for reasons that you all understand, beyond what I've already commented on.

And going forward, of course, in the way you change this paradigm in this market is to bring on new products that are differentiated, which clearly we are on the path of, whether it is our HyQ or new indications or actually a 30-gram product that we are going to be launching shortly, and a sub-Q product we hope to launch next year without HYLENEX, and then the HyQ product with HYLENEX (inaudible).

So obviously, we wish we had that new product portfolio today. We don't. But I'm glad we have it in place for the future, which is the basis of our -- I think our optimism for this market longer-term.

So I'm going to stop there. I covered a lot of things, so you can follow up, Mike, with any specifics on that. Okay?

Okay, so you're assuming some degradation in price. You are assuming lower throughput to your facilities, which is obviously having an impact on the profitability of the business.

Right.

Help everybody with the question of what turns this business and what turns this market, and your view on how you as a management team and how we as investors gain visibility on that.

You're saying what turns it in terms of it bottoming out and starting to grow again?

Exactly.

Well, the market growth in the US is as we estimated. The market growth is faster outside the US. Obviously, a big question is pricing.

But for reasons you understand, I'm not going to comment on that beyond what I've said, which is we will touch up prices as necessary to maintain our position. And the other event, of course, that is going on -- I think the other thing, by the way, I think we probably overestimated was the impact in terms of broadening access and demand creation through bringing our sales force on. And you know that is a little longer-term cause and effect, perhaps, than what we estimated.

So I think collectively, not only us but the other players in the business, are out there doing that. As we know, certainly PID is underdiagnosed, underserved. And so to the degree collectively, given the fact now that the industry has sufficient supply, the industry is promoting that. That becomes an event that also, using your phrase, turns the market as well. And then of course, going forward, clearly as our new products track out, that becomes a significant variable in the equation of turning it around as well.

I don't know if Rob or Mary Kay want to add anything to that. I think that is pretty comprehensive.

Okay. I'll let some others jump in. Rob, just real quick, you assume the lower share counts. I assume that means you guys will be buying back stock.

Yes, it assumes we will probably increase the amount of share repurchases we are doing through the back part of the year.

Thank you.

David Lewis, Morgan Stanley.

Bob, maybe just talk about -- you mentioned share gains being sort of a predominant driver here. Can you talk of what is implicit in your guidance as relates to forward-looking share loss?

Go ahead, Rob.

I don't think we want to quantify with specifics what we assume, but I will say we do assume we might lose some additional nominal share. Now obviously, we are going to do everything we can to not have that happen, based on the commercial strategy Bob laid out. But given we miscalled it the first time, we would definitely make sure we are taking a conservative position and build that into our forecast. So hopefully it won't happen, but we are prepared if it does.

And Bob, in terms of the commercial strategy, you mentioned that prior to new innovation, other strategies to reverse this share loss, it sounds like one would be increased investment. But is the other -- is the only other strategy to offset share loss in the interim price reduction?

To turn share around without the effect of our sales promotion and without value of the new products, in theory, that would be the other way to do it, yes.

Okay. And then in terms of inventory, Bob, we have not talked about that here this morning. To what extent did inventory, starting in the beginning of 2009 as it progressed through 2009 and here into the first quarter, where do you think we are from an inventory perspective? Is this really about end market growth rates or secular growth changes in the US marketplace, or do you think it is about an excessive level of inventory in the channel?

I can only speak for us, and there is other public data, as you know, that is available that we all have access to, so I won't comment on that.

It seems to me that the inventories in the market are pretty balanced right now. And I think given the collective promotional effort, not only us but the other competitors, we have inventory levels to a point now we can move forward and promote for new demand creation with a degree of confidence. But I certainly wouldn't characterize the inventories in the market as excessive.

Okay. Just two more quick questions; I'll jump back in queue. The first is just albumin. It sounds like in general, plasma proteins were a little week. Are you seeing strength in albumin that we've seen in the last few quarters, or are we seeing any incremental weakening in albumin either in the US or overseas?

It's kind of a different story. It is weaker in the US and outside the US it is stronger. So kind of mixed message. As you know, there has been demand OUS in markets like China and so on that we and others in the industry have served.

So to the degree there is weakness in the US, obviously, we are able to redirect product to emerging and developing markets.

I do think what is interesting on the albumin question, as you know, we have a high percent of our albumin product in the US that is in the Flex container. And as we sit here today, we are living hand to mouth to keep up with the demand on albumin and Flex container. I guess my point that I'm making is I think it speaks to the power of differentiated packaging, whether it is in albumin or over time in IVIG.

Okay, just last question, Bob; I'll jump back in queue. You mentioned ways of creating shareholder value. Obviously, it could include external M&A. Historically, Baxter has been very focused on incremental share buybacks, actually rather substantial share buybacks. Should we expect that to be less of a focus for the Company over the next six months, or could that be a greater focus for the Company in the short term? Thank you.

No, I wouldn't expect any major change in kind of our historic pattern in terms of share buybacks. I don't think there is any reason to do that. It still provides us -- we still have significant latitude, I think, to do some things proactively on the BD or the M&A front.

Rob has taken you through our capital allocation process, if you will. And despite what we've communicated this morning, I don't believe there is any need to deviate from that at all.

Thank you.

I would just clarify one point there. Long-term, that is the case. We are probably going to do a little bit more this year than we originally anticipated. But to the fundamentals of our strategy is what Bob is speaking to.

Rick Wise, Leerink Swann.

To what extent -- you were, say, overcomplacent, if that's the right word, before about some of these changes in the market. Is it possible you are overreacting a little bit now in terms of taking guidance down? I hardly believe you're not being conservative enough. What factors might make this new guidance, particularly related to plasma, too conservative?

Rick, I'll just be very candid with you, okay? Given the number of moving parts -- all right -- I don't know that we can say we are overly conservative or not. I will just tell you I don't like lowering guidance. This is the first time I've done it since I've been here -- maybe the first quarter I came and since then. As you know, I'm not going to -- I don't want to do it again.

So all I can say is we've tried to pull this together in a way so we don't -- it doesn't happen again. Having said that, this is a market that has a lot of moving parts, and I won't enumerate and summarize or reiterate all those that I took through -- I took Michael through with his question earlier. So yes, I am not going to get put in a corner and say, oh, yes, this is conservative. We will see.

Got you.

That's best I can do, Rick.

I hear you. Just to touch on the other two businesses, Med Delivery and PD, obviously had good quarters. To what extent can strength there maybe offset some of the weaker plasma protein side? You do have a bunch of products launching. Are we seeing any kind of market rebound on the capital side of Med Delivery? Just maybe some color there.

Yes, okay. Let me touch on a few things, and then Rob and Mary Kay can think about this, too, and add to my comments. First of all, the first-quarter results in Med Delivery were very encouraging, actually very strong. Renal was very solid. We -- I have consistently maintained that the diversified healthcare model represents a lot of value in a lot of different ways -- scientifically, commercially. But also from a portfolio point of view, when you have businesses that either slow growth -- slowed -- like the plasma situation to be able to offset that. So clearly, we are counting on Med Del and Renal going forward -- and when I say going forward, I don't mean in 2010, but over the LRP -- and we touched on this in the investor conference -- to pull a greater share of their weight.

And on the Renal front, as you know, given some of the legislative changes and composite rate changes which will be put into effect, it works in our favor in terms of PD. We have the next-generation cycler enterprise, which will be launched in the market within a year or so. We are moving forward very positively with what we call Project Pluto, which is our home hemodialysis device, which, as you heard me comment before, we think can be potentially transformational in terms of how end-stage renal disease is treated.

On the medication delivery side, the Sigma deal that we did last year, the timing of that couldn't have been better. The product is well received in the market. We clearly have a next-generation infusion pump which we hope to get out outside the US hopefully by the end of this year or early 2011, and then subsequently launch to the US as well.

So I won't enumerate all the other new products in both areas, but I think there is a basis of confidence that each of those businesses are going to grow. And we also continue, I think culturally in each of those businesses because of the margins in those businesses and so on, focus on managing structural cost as so on. We've done a good job of that. I think there is opportunity that remains.

So hopefully, in terms of driving bottom-line profitability in those businesses, it can be very helpful to offset for whatever period of time we continue to navigate through some of the plasma challenges. And again, I think it just reaffirms, as I said, the strength of the diversified model. Rob, Mary Kay, anything? Okay, go ahead, Rick.

Just a last one. It is sort of an unfair question, but based on what you know now -- and it's hard to know where exactly consensus range will average out for 2010 after this morning -- but is there any reason to think that you can't still grow EPS double digits in 2011 over 2010, again based on what you know now?

Yes, I'm not going to comment on 2011. It is why in my prepared comments I specifically closed the way I did and referenced what we communicated last September. We remain committed to that over the five years. To the degree the impact of healthcare reform, to the degree the impact in the short term of the vagaries of the plasma protein business, they are what they are. And those present -- both of those present some holes, but we are going to continue to pursue other ways to fill those holes.

Sometimes necessity is the mother of invention, right? So our long-term view continues to be in that range, but I'm going to stop short of frankly getting hooked in terms of a number for 2011. So I know you understand that, Rick.

I do. I appreciate it. Thank you.

Bruce Nudell, UBS.

Thanks for taking the question. Historically, I think that most people on the street at least have thought that underlying US volume demand for IVIG has kind of been in the mid-single-digit range.

First of all, given kind of what you said about the opacity of the market, even for you, who are best positioned to understand it, do you feel that has been historically actually correct?

And then looking to the current situation, could you just give us your kind of gut impression as to why -- if it's volume demand is down at the 1% to 2% level -- is it because of a less intense treatment of patients who were kind of already committed to therapy, saturation of the readily addressable pool -- like that you've reached everybody who has access to care, or is it just the ability to recruit new patients that you've historically been able to do is incomplete? And how does co-pays and/or insurance kind of phase in to that?

Yes, I got it. Okay. Several questions there, Bruce, all kind of focused on the same thing, though. First of all, yes, I think the 5% kind of market growth in the US historically is probably a pretty good number. And then projecting out in time, despite my comment on how we assess the market growth right now -- let's say 1% to 2% in the US -- we believe that going forward the market growth should be every bit as robust as what it has been historically -- let's say that 5% or 5% plus.

And I say that for several different reasons. And again, at the risk of being redundant here, never really in this business have we or the other competitors really amassed sales forces to get out and broaden access through demand creation for a number of indications that continue to be underdiagnosed and undertreated. So all other things remaining equal, that should be a positive factor in terms of overall market growth going forward.

And then of course, all of us in various ways are pursuing approval of new indications and so on, and that is independent of kind of the big wild card of Alzheimer's. So I think as things normalize out, there is no reason to think that this market at a minimum shouldn't grow -- the total market grow going forward, at least as what the level historically. Okay?

So then it brings you back to the question -- and you touched on this in (inaudible) -- what's going on now, and why is it softer? I think so much of this is a settling out of certainly the macroeconomic environment. Healthcare reform is part of that, too, I think, to some degree, as we look going forward -- and coverage. I mean, frankly, I'm hopeful on a number of our products, like hemophilia and antibody therapy and so, not only the broader coverage going forward, but also pre-existing conditions and removal of lifetime caps and so on for these expensive therapies, going forward may very well remove barriers to growth that historically have existed. Clearly, that hasn't been put into play yet.

So I think what is going on to a large degree now is we know we have a lot of use that is off-label. IVIG for many specialists is used -- I hesitate to -- it's almost an experimental treatment. It's almost as a second line or third line therapy when other treatments are less effective. And in a time of more reimbursement pressures and perhaps loss of insurance because of higher unemployment and some of those factors, Bruce, I think that is, to a large degree, what is going on right now.

And so as I enumerated at the outset with Mike Weinstein's question, as what did we miss, what did we miscall, one of the things I think we miscalled was to some degree -- and it gets to the market growth -- was how much of the use of the product to some degree was optional. And I think there is more of the market -- not a large segment -- but some of the market is more optional than what we called, and that is what is being impacted by the economy. So I'll stop there. That is kind of a total [download]. It's probably the best I can do. But that is how we see it right now.

And just two very quick ones. What is the per-patient average co-pay for a year for IVIG? And also, is this spilling over into recombinants?

I don't know that I can answer that. We can get that number -- because that is -- it's highly variable. So I don't know what the average would be.

Is it spilling over into the recombinant or, frankly, hemophilia therapy of any kind? Yes, I think these are general market trends that we've commented on before that are going to continue (multiple speakers). We know that reimbursement is going to continue to be under pressure, and it manifests itself a lot of different ways. Which is why for our outlook for hemophilia, not only we don't forecast price increases, but actually modest evolutionary price declines over time, Bruce.

Thank you.

Bob Hopkins, Bank of America.

Just to follow up on Bruce's question, to kind of [bottom line] it here. You're saying the biggest bucket from a demand perspective is really the macroeconomic environment. That is what you think has had the biggest impact on the marketplace.

To date.

To date.

Yes.

And then I'm curious about your comment in response to Bruce's question about maybe you underestimated that a certain portion of this market is more optional than you thought. Could you provide any more detail there on --?

Yes, I think for a patient, you know, if the specialist gets pushed back from the pharmacist relative to the formulary and the indication, and given how expensive the treatment is, Bob -- and that oftentimes depending upon what the condition may be, it truly can be optional, in terms of just kind of clinical intervention. I think oftentimes IVIG is used almost as kind of a last resort type of thing. And I think when, given the expense of it, if it is not on formulary for certain indications and there is cost pressures within the provider environment, and there is some push-back, I think to some degree, it has an effect on prescribing or utilization.

I would add, Bob, the other aspect of this, too -- and I don't think we see this as a major driver, but it is out there -- is are we seeing where some patients that they are financially strapped or worried about running into a lifetime cap -- obviously, that will be fixed -- reformed in the future -- but for now, will they extend time in between their dosings? We originally didn't think that would happen. As late as last year, we weren't getting signals of that in the marketplace or any indications that was going on.

But now as we look at it, that probably is out there as well.

The other aspect of this, too, is there is a reasonable amount of IVIG used in the hospital, and as other procedures are not done -- so as you see fewer procedures going on in the hospital, it is hard for us to get this, because there is not -- to Bob's point, there is not a lot of market intelligence -- but just from our anecdotal reaches into the marketplace, there does seem to be some correlation that as hospital procedures go down, it also will have a knock-on effect to use of IVIG in patients who are in those procedures. So that is another aspect. I think it's a lot of little things, not one big thing, that is causing this.

Okay, and then just a last question from me is on the comments on incremental share loss from the last quarterly call. And you talked about -- you quantified share loss on the last quarterly call and gave us the history there, which was helpful.

But could you talk a little bit about what you've seen since the last quarter to now in terms of quantifying incremental share loss between now and then? And how much of that is in the neuro indications, if you have a sense for teasing that out?

I don't think we have the granularity, Bob, to cite it per indication. Actually we don't have that. So I can't answer that. I think it's probably fair to say cumulatively from the start we've lost probably 2 to 3 share points of volume.

From the beginning of the year?

Yes.

Okay.

Actually, I would say the fourth quarter -- from the start of the fourth quarter in 2009, to be more specific.

Okay, thanks. Appreciate the comments.

Larry Keusch, Morgan, Keegan.

Bob, just quickly, just to make sure that I fully get this. So it sounds like as you look at IVIG, you are obviously talking about price, you are obviously talking about demand. But it also sounds like you are saying that inventories are not excessive. It does give you some room to pursue some of these underdiagnosed things. But it doesn't sound like you are saying that those need to be worked out radically going forward.

No, that's our view, yes.

Okay. And then away from IVIG for a moment, you guys are sitting on $2.7 billion in cash. You obviously have a very strong balance sheet. I've asked you in the past about your appetite for M&A. Not to say that this changes the corporate strategy, but again, just want to take your temperature on how you are thinking about it, because it certainly seemed like there are assets out there.

Well, look, simply stated, Larry, we are very open-minded, okay? And very receptive. And we have processes in place to identify targets. This is a priority for me. Frankly, it is a priority for our Board; I discuss it with our Board every Board meeting. And so we would like to do some things.

But we are going to remain disciplined, and we are not going to do deals, as we've said before, for the sake of doing deals. But we are well aware of the financial latitude that we have to do deals if the right kind of deals come along. So we can't announce what we are going to do before we do it. All I can do is update you on the process, and we are very receptive to it, and frankly, I am spending more and more of my time on it. And we will see as things unfold.

Okay. And then lastly, on healthcare reform, again, obviously you've talked about the impact on the BioScience business. But what about just as -- again, I know the experience is recent -- but as you've been out there in your other businesses, are you seeing any changes in the way customers are thinking about pricing or pressures, or anything that you might be seeing away from just BioScience?

Listen, I don't think pressures that our customers are -- frankly, are a byproduct of just the general economic condition overall, and the ongoing challenges, specifically as it relates, let's say, to acute care hospitals. And I haven't seen any change in the hospitals' behavior, given the legislation and the definition associated with that.

I think the capital spending continues to be pretty disciplined, reasonably tight in the market. We haven't seen any major change in that regard.

So to Rob's point, surgical procedures are not -- and surgical procedure growth are certainly not -- wouldn't be characterized as robust -- that's for sure. So hospital activity generally is fairly moribund. And beyond that, relative to healthcare, as I mentioned, we are going to obviously get hit by this device tax in 2013. I think a number of you have quantified that and probably done a pretty good job of quantifying it. So you know about what that is.

As I indicated in my prepared comments, we have a few products that will be touched by the drug tax starting in 2011. But as I said, the $80 million of impact that we've reflected in our base for 2010 will represent certainly the significant majority of the cumulative effect of these various things as they cascade out over time.

Okay, great. Thanks very much.

Sean, we want to be respectful of everyone's time today, so we will take two more questions.

Matt Miksic, Piper Jaffray.

I think we've covered a lot of the big issue of the day. But I did just have one final clarification on it, just to make sure I understand it.

Just -- it has obviously been a real focus for investors over the last several years. I guess the fear has been that this market growth and supply and capacity overshoots demand, throws the market into kind of an oversupply condition, similar to what we saw back in 2002 and 2003. And I understand that some of the near-term trends you talked about last quarter. Is what you are seeing in fact more like what happened six, seven years ago, or is this something different?

You know, Mary Kay is the historian in the room, having lived through it a number of years ago. It is fair to say I think the conditions right now are very different than what they were seven, eight years ago, for a lot of different reasons, for a lot of different reasons. These are all things that we've discussed with you. You can guess what they are.

In our own position -- well, seven, eight years ago, nobody was out there deploying sales forces to create demand. Baxter wasn't in a position seven, eight years ago to have, frankly, an array of new products in this area coming out over time, which fundamentally changes the game.

And the nature of the industry in a number of different capacities is different than what it was seven or eight years ago. I don't want to expand beyond that. But Mary Kay, anything you want to add? You are the historian here -- but it's a great question.

Right. Other than some of the dynamics within the industry and the competitive environment and the number of players, et cetera, that we've all discussed many, many times over the years, I'd say Baxter's portfolio has really changed over the years. Back then, it was really a portfolio consisting of IVIG, PD factor VIII and albumin. And I think most of you are aware now, we also have a variety of other differentiated specialty products, including FEIBA, which is really our single largest plasma protein, with sales of over $500 million, that really is not impacted at all by the dynamics that we are seeing today. And it is still growing double digits.

As well as ARALAST, which is also growing double digits, which is a differentiated product as well. So I think we've seen an evolution in our product portfolio, which I think will help us get through this a little bit faster than we probably did back then. And we will see what happens.

Okay. And then second question, just looking in terms of your other business lines, putting aside the impact you talked about related to healthcare reform, in terms of rebates or fees, which products would you point us to over the next 12 to 18 months as you try to get the plasma back on its feet -- which products would you point to to help us offset some of the mix and margin impact of a slower-growing plasma business?

Well, besides the existing growth vehicles of hemophilia and biosurgery and the various product categories in Medication Delivery, like anesthesia and nutritionals, if you just look at kind of near-term new product launches in the various business -- and not to get off of IVIG -- let's start with that. We have a 30-gram IVIG product that we hope to get approved this year and hopefully launch in the US by the end of this year. We have a 10% sub-Q product without Enhanze, without the HYLENEX technology, that we will be submitting shortly and hope to have on the market in 2011.

And then of course HyQ, which incorporates the HYLENEX technology, we are very excited about. And then new indications like MMN and then the whole Alzheimer's thing, which we don't need to get into.

So even within the antibody therapy area, we've got a very nice lineup, both nearer-term and longer-term things, that can really, I think, change the game. And the rest of BioScience, of course, we just got approval for TachoSil in our biosurgery business, which we will be launching. We continue to make good progress with our seasonal influenza vaccine, targeting EU approval this year, and hopefully approval and launch in the US before too long.

What else in BioScience? TISSEEL, I guess, where we are completing a trial right now for a broader hemostasis claim, which could be very helpful for the growth of that product. I mentioned in Renal, both [Enterprise], which is the next generation PD cycler, that we will be launching hopefully by sometime early in 2011, our home hemo next-generation infusion pump platform.

And then in the short-term, a number of market expansion opportunities with existing products -- ADVATE launches in big markets this year, like Brazil, and next year, Russia, following year, China. SUPRANE launch in Japan in -- so I'll stop there. I'm getting pretty granular.

But we have a fairly nice array, continuous array in all of our businesses of new product launches, both nearer-term and then obviously some bigger things longer-term. And in addition to the existing growth platforms, whether it's hemophilia or a recombinant and biosurgery and so on. So I covered a lot, but --.

Okay. Thanks, Bob.

Last question, Sean.

Glenn Novarro, RBC Capital.

In a couple years, I think the industry is going to be adding more capacity -- at least that is what I've heard from some of your competitors. So as we think about the longer-term health of the IVIG/plasma market, how does added capacity coming into the marketplace over the next couple years impact your view of -- of just your ability to maintain pricing? And just thoughts there. Thanks.

First of all, on your question, just a thought. And I'm going to back up to Matt's question, Matt Miksic's question, just a minute ago, in terms of what is different today versus -- I mean, one of the things that is different today is the existing fractionation capacity that exists is not excessive, all right?

So to your point, Glenn, some amount of capacity long-term is going to be necessary to meet ongoing demand, which gets back to Bruce Nudell's question a while ago, is what do we view longer-term market growth to be.

Then you get to the dimension of all the companies deploying sales resources, which is really a new paradigm, focused on broadening access and demand creation. And then of course, one of the questions we frequently get is if you have success with the Alzheimer's indication, my goodness, how are you going to have enough capacity to meet that demand. So that is a countervailing factor to your question.

So look, what we know is -- and this isn't unique to us -- it applies, I think, to all the companies in the industry -- you've got two very expensive capital investment processes that exist in this business -- collecting plasma and fractionating. Big capital investment. And all of us, I'm sure, are motivated to run our facilities as efficiently as possible. It is one of the reasons -- I'm getting back to the first question today that Michael asked -- about the margin flow-through on our declining volumes has a big impact on the plant.

So we are very motivated to run our plants and operations, both collecting plasma and fractionating, in a fairly smooth, balanced way, because it generates real manufacturing efficiencies. And again, I can't speak for the other companies, but I've got to believe -- it is kind of Business 101 -- they are motivated to do the same thing.

So there is absolutely no incentive for anybody to build capacity that they are not going to utilize; that is just bad business. And I think -- well I'll speak for ourselves, but I think it probably applies to other rational players -- you're looking at this and saying, why would we get ahead of ourselves. So everybody else is looking at the same dynamics we are right now. So let's let that play out over time.

Plus, I think what everyone -- sometimes we miss is the global demand still remains strong, even though here in the US, it may be slowing.

That's a great point, and particularly on the capacity piece of this, of the supply piece in terms of plasma, right? Where you've got a lot of plasma that is collected in the US and exported through -- to be fractionated or in a fractionated form. And this really plays into one of our underlying growth strategies of, as you know, geographic expansion, emerging, developing markets. So that also becomes another complicating, but I think positive, characteristic of this whole equation.

One just last question, just for Rob. With currency, is any -- the weakening euro, the strengthening dollar -- is that having any impact on your bottom line this year?

You know, for the ranges they've been moving in so far, the answer is no. It has not really materially changed. While we've seen what has happened, obviously, with the euro, that is one of the currencies, as we talked about in the past, we actually can fairly hedge against.

And then you look across a lot of the currencies in Latin America and across Asia, it is not unilateral weakness you are seeing in those currencies. So it is very specific to specific currencies in Europe right now. And as we look at where it's been trading, even down to the range that it is even today, where I think it has been down to low [135]. we don't see that changing our (inaudible) at deep levels.

Okay, great. Thanks, guys.

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