百特醫療 (BAX) 2010 Q2 法說會逐字稿

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

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

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

Thanks, John, and good morning, everyone. Welcome to our Q2 2010 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Bob Hombach, 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 would like to turn the call over to Bob Parkinson.

Thanks, Mary Kay, and thanks to everyone who are calling in this morning. I am pleased to announce that our second-quarter results that we reported earlier this morning were in line with the guidance that we provided on last quarter's call with adjusted EPS, as you saw, of $0.93 per share. On a reported basis worldwide sales increased 2% for the quarter and on an organic basis sales were comparable to last year.

While Bob Hombach will provide more details on our second-quarter financial results and our outlook for the remainder of the year, we are pleased to confirm guidance within the range that we provided to you last quarter which includes adjusted EPS of $3.93 to $3.98 per share.

While 2010 has been a challenging year for our company, we continue to make progress on a number of fronts. First, as we have previously discussed, Baxter and the market more broadly continue to operate through a transition period in the plasma protein market as the macro environment has presented some challenges resulting from high unemployment, the loss of insurance, and payers focus on ensuring appropriate utilization.

In addition, over the last few quarters, as we previously mentioned, we had experienced some share loss on GAMMAGARD LIQUID, our premium brand, and have implemented new commercial strategies to selectively touch up prices. I am pleased to report that we are seeing some really positive signs that Baxter's share position as a result of the actions that we have taken and the US market growth are stabilizing.

As I have mentioned in the past, we remain confident that the plasma business will be an attractive growth vehicle in the coming years due to the increase in end-user demand resulting from deployment of additional sales resources for those indications that remain under-diagnosed and undertreated; Baxter's introduction of new and proprietary administration technologies, such as our [HIQ] program; expansion of new indications such as MMN; and of course the significant opportunity of a potential Alzheimer's indication.

Second, we continue to fund all key late-stage programs and expand the pipeline with select investments in research and development as evidenced by a number of recent achievements. Just a few examples. We continue to extend our leadership position in hemophilia with the initiation of a global Phase I/II clinical trial studying the safety and tolerability of BAX 817, an on-demand recombinant Factor VIIa therapy for patients with hemophilia A or B with an inhibitor.

We commenced Phase I clinical trial for recombinant Factor IX, a treatment for patients with hemophilia B. The FDA accepted our biologics license application, or BLA, for the subcutaneous delivery of 10% liquid immunoglobulin for patients with primary immune deficiency. The BLA is supported by clinical trial data which demonstrated efficacy, tolerability, and safety of the subcutaneous formulation that were comparable to intravenous therapy.

Finally, we recently received approval in Europe and Canada for the first and only 30 gram dose vial for GAMMAGARD LIQUID. This new dosage form is the most frequently prescribed dose for primary immune deficiency patients and will enhance user convenience. These achievements depict just a handful of the programs in our pipeline that will present great opportunities for Baxter in the years to come.

Thirdly, in the quarter we were pleased to announce the final details pertaining to the COLLEAGUE infusion pump recall in the United States just last week. As we indicated in our press release last week, Baxter will offer replacement Sigma SPECTRUM infusion pumps or refunds to owners of COLLEAGUE pumps and will execute the recall over the next two years.

Our primary goal is to support a seamless transition by providing choices that best address the clinical and economic needs of our hospital customers and minimizes disruption to the delivery of patient care. Toward this end we continue to work with Sigma to increase production capacity of the SPECTRUM pump in order to meet the anticipated demand for this devise.

We are pleased to offer closure and definition to our customers as this has been a very high priority for our company over the last several years. Baxter is a long-standing leader in the infusion pump market and we remain committed to serving patients and hospitals that depend on our products. And as always, I would be happy to address any further questions you might have on this subject during our Q&A later this morning.

Lastly, I would like to briefly comment on several management changes that were made during the quarter including the appointment of Ludwig Hantson to Corporate Vice President and President International. Ludwig joins us from Novartis pharmaceuticals where he most recently served as Chief Executive Officer Pharma North America and prior to Novartis Ludwig spent 13 years at Johnson & Johnson.

Ludwig is extremely well qualified to lead our international organization and given his significant track record of success and unique breadth of international, commercial, and scientific knowledge and expertise I have also asked Ludwig to lead our corporate business development activities going forward.

In addition, Rob Davis was named to Corporate Vice President and President of Baxter's renal business. Rob is filling a role vacated by Bruce McGillivray, who is retiring from Baxter after a 30-year career with the Company. I think most of you have come to know Rob well during his tenure as Baxter's Chief Financial Officer over the last four years.

And concurrent with this change Bob Hombach was named Corporate Vice President and Chief Financial Officer. Bob has been with Baxter for over 20 years and has served in a number of finance positions including Vice President of Finance Europe, Vice President of Corporate Planning and Analysis, and most recently as Baxter's Treasurer. Baxter and I are fortunate to have someone with Bob's capabilities and experience to fill this important role.

So now I would like to ask Bob to review our second-quarter financial results and guidance for the year in more detail. Then I will come back and provide some additional perspectives at the close. Bob, if you would, please.

Thanks, Bob, and good morning, everyone. Let me begin this morning with GAAP earnings which for the second quarter were $0.90 per diluted share.

These results included an after-tax special charge of $22 million or $0.03 per diluted share for the write-downs of accounts receivable increase associated with an anticipated settlement with the government. As Bob mentioned earlier, excluding the special charge adjusted earnings per diluted share of $0.93 was in line with our guidance range of $0.90 to $0.93 per share.

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 $3.2 billion in the quarter and increased 2%. Sales, excluding foreign currency, were flat compared to last year. Sales growth in the US was 2%, slightly better than expected due to strong results cross medication delivery.

International sales on a reported basis also increased 2% and excluding foreign currency, international sales declined 2% as the international performance was impacted by soft sales in Europe across several product categories, most notably lower vaccine revenues.

In terms of individual business performance, beginning with BioScience, global sales in the second quarter totaled approximately $1.4 billion, representing a decline of 4% versus the prior-year period. Excluding foreign exchange BioScience sales declined 5%. You may recall that the second quarter represents our toughest comparison to prior year across the entire BioScience portfolio as sales growth last year, excluding foreign currency, was 13%.

Within the product categories recombinant sales of $525 million increased 2% on a reported basis and excluding foreign currency, sales increased 1%. This quarter recombinant growth benefited from strong advocate Advate sales in the US which increased 8% but were offset by the impact of health are reform and, as expected, lower sales related to the finalization of the tender process in the UK where we received a lower allocation of the award. Excluding these factors, recombinant growth was in the mid-single digits on a constant courtesy basis.

Moving on to plasma proteins, sales in the quarter were $314 million and were down 11%. Excluding the impact of foreign currency, sales declined 12%. Recall that last year plasma protein sales increased almost 40% on a constant currency basis creating a very difficult comparison. As you know, approximately 50% of the plasma portfolio is comprised of a broad array of proprietary products including FEIBA, an inhibitor therapy; ARALAST, a treatment for hereditary emphysema; and FLEXBUMIN, FLEXBUMIN, albumin provided in a flexible plastic container. Contributing to the performance in this category was strong high teens growth of ARALAST and double-digit growth of FEIBA and albumin outside the US.

This growth was more than offset by lower sales associated with lost or delayed plasma derived hemophilia tenders primarily in Eastern Europe and Latin America and lower albumin sales in the US.

While we continue to see strong volume growth for albumin in emerging markets such as China, market demand in the US is slowing due to the anemic trend in hospital admissions and surgical procedures. In antibody therapies sales of $310 million were down 10% and excluding foreign currency, sales also declined 10%, which was slightly ahead of our expectation.

US sales were $211 million reflecting a decline of 17% versus the prior year. Performance was impacted by a number of factors including a four-point impact from healthcare reform, inventory adjustments in the channel, share loss versus last year, and the effect of our new commercial strategies to stabilize share. Outside the US sales of $99 million increased 11% as we continued to see strong volume growth across the regions. This is someone offset by pricing pressure, particularly in Europe.

Sales in regenerative medicine, which includes our BioSurgery products, totaled $133 million and increased 22%. Sales, excluding foreign currency, grew 21% and continue to reflect solid growth of FLOSEAL, COSEAL, and TISSEEL, and approximately 15% -- $15 million in incremental sales related to the ApaTech acquisition we completed last quarter.

Finally, revenues in the other category within BioScience were down 22% to $76 million due to declining [Nice Vac-C] and advanced purchase agreement revenues and lower than expected FSME sales.

In medication delivery sales totaled $1.2 billion, an increase of 9% on a reported basis. Excluding foreign currency, medication delivery sales grew 6%. In the US sales were strong and advanced 12% while international sales, facing a tough double-digit growth comp to last year, were flat excluding the impact of foreign currency.

Turning to the product categories, IV therapy sales totaled $418 million in the quarter and grew 9%, driven primarily by 16% growth in the US. Excluding foreign currency, sales increased 4%. Performance overall was due to increased demand for IV solutions and nutritional products as well as improved pricing.

Global injectable sales advanced 13% to $472 million. Excluding foreign currency, sales grew 10%. Contributing to this performance was strong US pharma partnering sales, growth of select premixed drugs, and certain multi-sourced generics.

Infusion systems sales totaled $216 million and increased 5%. Excluding foreign currency, sales increased 2%. Strong sales of Sigma SPECTRUM pups more than offset lower COLLEAGUE and [access] set revenues.

Finally, anesthesia sales totaled $130 million and increased 8%. Excluding foreign currency, sales increased 6% driven by growth of both Suprane and sevoflurane globally.

Moving on to renal, second-quarter sales totaled $585 million and increased 6% on a reported basis. Adjusting for foreign currency, sales increased 1%. US sales increased 2% and international sales increased 7%. Excluding foreign currency, international sales increased 1%.

Global PD sales totaled $480 million and increased 6% on a reported basis and excluding foreign currency, sales were comparable to the prior year. Global PD patient growth is trending consistently at about 8% including acceleration in the US where providers are driving conversion to PD in anticipation of the new reimbursement changes that become effective next year.

Internationally strong patient gains in Latin America and Asia were offset by lower PD growth and revenues in Europe.

Hemodialysis sales of $105 million increased 9% as CRRT sales, the hemofiltration business that we acquired last year, offset lower sales of dialyzers years in the US. Excluding foreign currency, hemodialysis sales increased 5%.

Turning to the rest of the P&L, gross margin for the Company was 51.3% in the second quarter, 110 basis points lower than last year's gross margin of 52.4%. This decline can be attributed to the BioScience business due to reduced higher margin vaccine sales and cost inefficiencies driven by lower volume throughput in the plasma and vaccines businesses.

SG&A of $693 million in the quarter increased 5% compared to prior year. Excluding foreign currency, increased in low single digits. While we are aggressively managing general, administrative, and discretionary spending across the Company, we are selectively investing in several key promotional activities aimed at demand creation, new product launches, and driving future growth of our higher-margin products.

R&D spending of $219 million declined 5% versus last year due to completed clinical work on late-stage programs, lower milestone payments to partners, and organizational efficiencies implemented within medication delivery. As Bob previously mentioned, we continue to invest in all key programs across the product pipeline.

The adjusted operating margin for the second quarter was 22.7%, 120 basis points lower than last year, driven by lower gross margin. Interest expense was $25 million compared to $24 million last year, while other expense was $3 million as miscellaneous expenses more than offset foreign currency gains. O

Our adjusted tax rate was 19.9% for the quarter, 130 basis points above last year, primarily due to a change in earnings mix between high tax and lower tax jurisdictions. Finally, as previously mentioned, adjusted EPS was $0.93 per diluted share, 3% lower than last year.

Turning to cash flow, cash flow from operations was strong in the quarter and totaled $783 million. On a year-to-date basis cash flow from operations totaled approximately $1.1 billion and includes the pension contribution of approximately $300 million that we discussed last quarter. Excluding pension contributions from both years, on a year-to-date basis cash flow from operations improved by $220 million versus the same period last year. This represents a 19% increase in cash flow.

DSO ended the quarter at 54 days, which is slightly higher than last year. The increase is largely due to a modest increase in the US where our DSO is approximately 30 days. Inventory turns of 2.5 reflect an improvement versus last quarter and last year as we experienced flat or modestly improving turns across all three businesses.

Capital expenditures totaled $237 million compared to $216 million last year as we continue to invest in appropriate capacity expansions and other programs across our business to support our future growth. And, lastly, during the second quarter we repurchased 15.2 million shares of common stock for approximately $677 million. On a net basis this amounts to repurchases of 13.6 million shares or $616 million. Year to date we have repurchased 22.7 million shares of common stock for $1.1 billion or on a net basis 17.8 million shares for $911 million, nearly in line with our objective to repurchase $1 billion of common stock on a net basis for the full year 2010.

Finally, let me conclude my comments this morning by providing our financial outlook for the third quarter and update you on our 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 expect adjusted earnings per diluted share of $3.93 to $3.98. By line item of the P&L and starting with sales, we expect full-year sales growth, excluding the impact of foreign currency, of 1% to 3%. Based on current foreign exchange rates and the strengthening of the US dollar we now expect reported sales growth for 2010 to also be in the 1% to 3% range.

For the full year we now expect gross margins to decline approximately 100 basis points from the 2009 gross margin rate of 52.4%. As we mentioned last quarter, given our sales and margin profile, we will continue to intensify our focus on managing costs throughout the organization. As a result of these actions and the impact of the strengthening US dollar, we now expect SG&A and R&D growth to be down year over year.

We expect interest expense of approximately $100 million and other expense to total approximately $25 million. We continue to expect our tax rate to approximate 19.5%, and, finally, we expect a full-year average share count of approximately 595 million shares. From a cash flow perspective we continue to expect to generate cash flow from operations of approximately $2.7 billion.

Now to expand on the full-year sales assumptions for each of the three businesses. First, we continue to expect mid single-digit sales growth for renal and medication delivery excluding the impact of foreign currency. Within medication delivery this includes solid growth across the majority of the product portfolio and lower infusion systems sales as we execute the COLLEAGUE pump recall and provide SPECTRUM pumps at no cost to our customers. And for BioScience we continue to expect sales growth, excluding foreign currency, to be flat to down 2%.

By product category recall that our guidance reflects the impact from healthcare reform and sales related to the acquisition of ApaTech.

For the recombinant business we now expect recumbent sales growth for the full year to approximate 4%, similar to growth experienced in the first half of the year which includes the impact of healthcare reform and the UK tender. Excluding these factors recombinant sales growth is expected to be aligned with our long-term growth objective of 6% to 8% driven once again by double-digit growth of Advate.

Second, we continue to expect plasma protein sales to decline in mid single digits and antibody therapy sales to decline approximately 10%. Third, we expect the regenerative medicine sales growth to exceed 25% reflecting the ApaTech acquisition and continued low teens growth in the base business. Finally, we expect the other category within bioscience to decline approximately 20% reflecting lower advanced purchase agreement revenues and the first half weakness in the vaccine business.

For the third quarter, as we mentioned in our press release, we expect earnings per diluted share of $0.96 to $0.99 and sales growth, excluding the impact of foreign currency, of 1% to 3%. Based on current foreign exchange rates, we expect reported sales growth of approximately 0% to 2%.

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

Thanks, Bob. Before we open up the call this morning to Q&A I would like to share just a few closing perspectives.

While we are pleased that today we can confirm the earlier sales and earnings guidance for the year, clearly 2010 has been a challenging year. The macro economic environment and associated austerity measures taken by many governments around the world, certainly the impact of US healthcare reform legislation, and of course the plasma protein market dynamics have all contributed to create headwinds.

Having said that, we will still grow both revenue and adjusted EPS in the low single digits versus 2009. We are pleased that we now have definition going forward regarding the COLLEAGUE matter, which has been ambiguous for several years now. This is most important for our customers who now have direction and therefore can plan accordingly. We will look for every way, of course, to assist them in that regard.

As I mentioned in my earlier comments, we are encouraged that we have seen early signs that we have stemmed the share loss in antibody therapy and we also see some indications of turnaround in general market growth. Our balance sheet is very strong; cash generation remains robust. This enables us to both return value to our shareholders while retaining flexibility to pursue business development opportunities that complement our businesses and create shareholder value.

Most importantly, our new product line pipeline continues to be very exciting, especially as we move closer to significant new product launches. With all of that said and in recognition of the challenges that we face this year, we remain committed to accelerating earnings growth going forward, albeit off an adjusted based reflecting the dynamics of 2010.

Our diversified business model, our global presence, our emerging new product pipeline, and our continued drive to streamline our cost structure will enable us to achieve our long-term objectives.

So with that why don't we open up the call to questions?

(Operator Instructions) Rick Wise, Leerink Swann.

Thank you very much. Good morning, Bob. You talked about on the BioScience side US market growth and Baxter shares, stabilizing I think was the word you used. Can you talk a little more detail about some of the factors you discussed last quarter and the share regaining or stabilizing activities?

You talked about touching up price and some other initiatives. Have you -- are you passed that, have you achieved the goals? And maybe just more broadly, what do you think, given your comments about plasma down mid single digits and antibodies down 10% for this year, what is the risk of further deterioration? Thank you.

Okay, several aspects of that, Rick. As I know you appreciate, I am a little bit limited in terms of getting too specific for competitive reasons and other reasons. But as we acknowledge and as we had discussions subsequent I think people recognized that we have over the last six months incurred share loss in the US in the antibody therapy area, largely because of the pricing premium that we had established with our GAMMAGARD product.

We experienced some amount of share loss starting probably late last year and certainly into 2010. And as we acknowledged on the last call, we had made a decision to implement what we referred to as pricing touchups to make sure that we stemmed the share loss to competition due to lower pricing. And so my comments this morning really speak to the progress I think we have made since then.

I will tell you we monitor this very closely really on an account-by-account basis. We are reasonably confident at this stage that we have, in fact, stopped that share loss as a result of our actions. I would emphasize that in many cases, if not most cases, we still have somewhat of a price premium with GAMMAGARD LIQUID versus some of the competitive brands. Just not to the magnitude that had existed at one time where I think late last year it got to a point where it was maybe 8%, 9% price premium, which for segments of the market and many customers was just too large of a gap to sustain.

So we are pleased with the response and the result of that. The last part of your question in terms of how much further could this go, I think it's too early to claim total victory here with our efforts but we are encouraged by the progress that we have made. The other thing is we have also seen some encouraging signs in terms of the general market growth trends overall in terms of volume growth.

So, look, it's still early in what we have characterized as this transition period in plasma proteins, but I think it's very appropriate given some of the early signs of success that we have experienced to share those with you this morning. Obviously we are going to keep a high degree of focus on this because of the importance that is has for the Company.

Right. And just a separate, quick follow-up. You seem to be optimistic or feeling good about the new products in the pipeline over the next 12 months. You talked about moving closer to product launches. Just in your mind, as we look for some of those new products that could really make a difference, what is top of your mind? Is it on the plasma side? Maybe just go through some of the things that you think are most important.

Yes, let me give you some examples and they range perhaps from maybe more tactical to more strategic. First of all, in terms of major new products or large products that we have right now, we are going to be launching Advate in Brazil, a big market, sometime before the end of this year. We anticipate we will launch Advate in Russia next year and China after that.

So as we look at the long-term recombinant business clearly emerging developing markets, Rick, we think are a significant opportunity as growth in the more established markets begins to slow a bit. We also anticipate a Suprane launch in Japan in 2011, so I would start with that in terms of significant products we have today and launches in major geographies over the next 12 to 24 months.

In the BioSurgery business we hope to launch TachoSil shortly. We have received approval for that product. That will be a nice expansion to our BioSurgery portfolio.

As I mentioned in my comments, the 30 gram formulation of IVIG was approved in the EU and we will be launching that in the third quarter. We are going to submit in the US in the fourth quarter and hope to have that out in the market in the first half of 2011.

The 10% sub-Q -- now this is not with the Hylenex technology -- we anticipate approval in the first half of 2011 so we are excited about that. And then I would say the big ones that are on the famous list, Rick, that I have showed over the last couple of years clearly is the 10% [HIQ] with the Hylenex technology. And so we would anticipate we will have preliminary results of our clinical studies before the end of this year.

We will file sometime in 2011, hopefully earlier than later, and I am not going to project what the approval cycle will be on that, but we think it will be a clean filing and we are optimistic that that should be timely approval. So may not get that to the market in 2011, but we are hopeful certainly no later than early 2012. So -- and that is really in the BioSurgery business.

In the other businesses, of course, with the [Olamill] launches, which is our next-generation nutritional product, which exhibited global very strong growth in the second quarter, we are rolling that out in a number of European markets as we get approval. And then our home hemodialysis technology, we are beginning clinical evaluations sometime before the end of this year, and we hope to have it launched in a number of markets outside the US next year.

So I will stop there. I could keep going, but those are really -- those are some of the nearer-term things that I think are some of the source of our excitement with our new product pipeline.

Thanks very much.

Bob Hopkins, Bank of America.

You mentioned, Bob, that you plan on returning to growth in 2011 off of lower base. I'm just wondering if you can make any comment, do you think that the kind of growth that you can return to is more in line with the long-range plan that you talked about at the last analyst meeting?

Look, that certainly is our aspiration over the LRP. I think the practical question is kind of the rebasing of the dynamics. Obviously, as it relates to health care reform, the lion's share of that will already be reflected in our actuals for 2010, although as you know the pharma tax takes place in 2011, and 2013 is the follow-on device tax. We estimate each of those to be somewhere between $30 million to $40 million, I think we've communicated previously. So those aren't in the base.

The bigger issue, of course, is what I call the rebasing of the plasma protein business. And as I alluded to in my response to Rick Wise's question, despite some encouraging signs I think it is too early to say, okay, this has been totally rebased and is starting to grow.

And, frankly, until we see a little more visibility on the global plasma protein business I think we have to be cautious as to the exact timing of, again, what I would say the rebasing of our business. We clearly think the lion's share of that -- we are in the process of incurring that in 2010. But once we get that stabilized, I think, given our diversified healthcare model, geographic reach, opportunities, emerging, developing markets, the pipeline which continues to be very encouraging, certainly it's our aspiration to get back to a trajectory in line with what we have communicated to all of you previously.

Then just the follow-up question for me is on the recombinant side could you talk about what gives you the confidence in getting back to more mid single digit type growth in the back half of the year relative to what you saw in the second quarter specifically?

And then would you say that December for the IVIG business is a critical time period to really gauge the competitive response to what you have done on pricing, because that is obviously contracting season. Would you agree that December is the critical month to really gauge the competitive response?

Yes, I think that is fair. Let me start with that and then Mary Kay and Bob can maybe help with your first question on the hemophilia outlook.

Yes, I think that is fair. I think there will be more cards played certainly between -- over the next six months. And, as you cited, Bob, given the anniversary dates of a lot of these contracts, yes, it will provide more visibility into this question of to what degree has the antibody therapy business had been rebased. I think we will also get more data certainly and insight as to market growth turn around, if any.

As I said, we are seeing some encouraging signs of somewhat accelerating growth of the market. Will that be sustained and if so to what degree? We will get a lot more visibility on that over in the next six months. So I would like to be in a position to be more specific today but I can only tell you what we know and what we see. It's still -- the dynamics are going to continue. But I think year-end clearly there will be more visibility and this contracting issue you raised is a very practical one.

On the hemophilia piece, let me start off and then maybe I will ask Bob to support with some more facts or Mary Kay. Look, the hemophilia, the recombinant business in the US Western Europe market growth is slowing down somewhat. I think the one thing we have going for us in all markets, but certainly in the developed markets is if you look at patients going on therapy what we refer to as the PUPs, previously untreated patients, in virtually every developed market around the world our share of that segment with Advate is higher than our recombinant share is in the market overall.

And so as those patients grow and given this is dosed on a bodyweight basis and so on that is a good, I think, leading indicator that should continue to sustain growth for Advate in developed markets. And then, of course, emerging developing markets I cited some approvals and launches in some of the large developing markets with Advate.

Then, of course, longer term this is the number one area of priority in terms of our pipeline, our recombinant (inaudible) factor I had mentioned in my prepared comments this morning of initiating clinical trials on both the Factor VII, Factor IX. I won't get into too much detail but we have at least three or four different pathways we are investing in in terms of our next-generation longer half-life Advate. So the hemophilia franchise, specifically the recombinant franchise, I think continues to be -- looks very good over the long-range plan.

Having said that, it's extensive therapy and as governments look to austerity measures, various healthcare reform initiatives, and so one, as we have continually commented, this is an area that will be under reimbursement and some pricing pressure selectively.

Now back to the nearer term, because your question was really for the second half of the year. I guess my comments were really more longer reaching. Bob, give some maybe facts that you can check on that.

Sure. Just to clarify, our guidance is effectively a continuation of the current trend. So we have guided towards approximately 4% growth for the year which is what we have experienced on a year-to-date basis. The headwinds of healthcare reform and the tender process in Europe that we described, those are pretty well defined. Absent those we continue to see an underlying trend that is consistent with our longer-term expectation.

Okay, thank you.

Larry Keusch, Morgan Keegan.

Good morning. Bob, not to belittle any of the hard work the organization has been doing on addressing the IVIG issues and controlling the expenses, etc., but I am curious if you can comment on how you, the senior management team and the Board, is really thinking about how you create shareholder value.

You are sitting on a lot of cash. You obviously have had some setbacks here, so what can you do? What are the thoughts at the top of the organization?

On that, and Bob can add on to this after I comment, Larry, in terms of our capital allocation framework which we have shown you previously, going forward we look to continue to operate within that framework which means returning value to our shareholders in terms of buybacks, in terms dividend and dividend increases. But we still have latitude to do some things in terms of business development.

It's an area I have commented previously. I am spending a lot more of my time on; the Board is spending a lot more of it's time. And so we continue to be proactive to look for deals that we think truly can create incremental shareholder value. But we are going to be disciplined about that and the easiest thing to do, I suppose, is given some of the challenges we face in 2010 is maybe to overreact a little bit and say, given the strength of our balance sheet, given the latitude that we have there, okay, let's be more proactive on deals.

We may be but I think that there is always a danger that you lose your discipline and lose your focus. And we are going to do everything not to let that happen. But the quick answer to your question is really a combination of those things I mentioned in terms of share repurchase, dividends, and [BD] that makes sense.

Bob, I don't know if you want to add anything to that? I think that is probably pretty comprehensive.

Yes, I think it is, yes.

Is there anything specific within that, Larry, you would like me to follow up on?

Yes, I guess the two other parts of the question would be -- I guess it wasn't lost on me that you have basically completed your share repurchase objectives for the year and we are only at the midpoint of the year. So any thoughts about what you might again utilize that cash for it and maybe there is an opportunity at the stock levels to do a little bit above and beyond.

Then the other part of that question is do you really need to spend $1 billion in CapEx?

Why don't you do the first part, Bob, and I will address the CapEx question?

Sure, as Bob mentioned, we continue to evaluate how we deploy cash. As you might expect, we did accelerate the timing of our share repurchases in the second quarter and made significant progress towards completing our goal for the year. To look at the back half of the year, evaluate our other investment opportunities and how we might deploy that cash, we will continue to evaluate whether additional share repurchase makes sense.

One thing I would mention that we continually have to balance here is the location of our cash. The majority of our cash is outside the US and as we look at our repatriation plans and the impact that might have on our tax rate that is an issue we continue to balance as well regarding the timing of our buyback.

On the CapEx piece I think you can be assured that just like SG&A spending and R&D spending, given the amount we spend on CapEx, it is being heavily scrutinized this year as well to see are there things we can defer and so on. But the reality is -- and you know this, Larry -- we are in capital intensive businesses.

The plasma protein business is about as capital intensive has any area of healthcare because you have got two significant kind of manufacturing trains, if you will, here, both collection of plasma and fractionation. The IV business, the peritoneal dialysis business, these are capital intensive businesses as well.

So the majority of our CapEx, as you know, frankly, is to support growth going forward and that is a positive story. Another significant piece of that is associated clearly with maintenance of what is a large and complex global manufacturing footprint. But having said that, we are looking at every element of CapEx as well.

One piece that is in CapEx which we haven't talked a lot about is our funding of our ERP system which the Board approved last year. Obviously that has several objectives, most notably to generate process efficiencies in manufacturing, in finance, supply chain, and so on, which is an opportunity for continued cost improvement going forward.

But that also has been a fairly big element that has been incorporated on our CapEx last year, this year as well. But we are looking at that and we are looking for ways -- if we can pair that down we will do that.

Okay, terrific. I appreciate the thoughts, guys.

Okay, Larry. Thank you.

Matt Miksic, Piper Jaffray.

Sure, so I will apologize upfront, I think there is a lot of us who have been hopping back and forth here between a couple of calls, but I hope you haven't answered this question yet. One on plasma; you have stabilized it sounds like or on your way to stabilizing your share trends there, and appreciate you sharing that progress.

But I guess stepping back, best guess at market growth, US and OUS, for IVIG at the moment and maybe some sense of what inning you are in here, Bob, in terms of your touchup strategy that you have talked about?

Okay. Probably the middle innings, how is that? But I would say that it's evident that we are being, as I said, successful with the strategy which we monitor on really an account-by-account, a customer-by-customer basis. So given the way you asked the question I guess I will answer it accordingly, I would say the middle innings.

In terms of market growth, Matt -- Bob, Mary Kay, help me out in terms of our latest thinking here.

Hi, Matt. It's Mary Kay. In terms of just our assumptions from a guidance perspective, we are still assuming low single-digit growth for the year within the market, but I am sure most of you have seen recent PPTA data. The last two months were encouraging; we were encouraged by that.

So early signs but we haven't come off of our assumption in terms of low single-digit growth for the year at this point.

Fair enough. And then worldwide?

Worldwide we are seeing strong volume growth outside the US, really across all of the regions. I don't want to quote a market growth from an international perspective at this point, but Baxter itself is seeing very strong growth from a volume perspective.

So maybe a little better overseas?

Correct, it is much better.

It's definitely better overseas.

And then one question on COLLEAGUE, and again apologies if it has been asked already, but --.

It has not, so go ahead.

Okay. So a question just from a practical standpoint how you are approaching this process with your customers and when along the way will we start to get some confidence that this is going -- some clarity maybe as to which way this is going in terms of your ability to hold share or the potential that you may lose a bit of share? How should we -- what does the process look like and what can we look for?

Well, first of all, it's definitely too early to answer any of those questions. We are too early in the game. We are pleased -- I would say, by the way, we had a very collaborative process with the FDA ending with the consent order and the specific terms that we communicated last week or the week before, whenever it was. And we are pleased that we have a two-year time period to execute this conversion.

It also provides time to obviously scale up production of the Sigma pumps, which frankly has been underweight for some number of months now, but it gives us a little bit more of a runway to do that. But it's too early. I would say maybe six months on, at the end of the year certainly we will have a better view of that.

We are in the process of pulling together transition guides for our customers right now. Those will be available before too long. And until that is communicated I think most of the customers right now are kind of sitting on the fence a little bit. So it's too early to answer the specific questions right now, Matt.

I think I commented on this last call, if I am not mistaken. I think that given the advantage of the Sigma pump being able to be used with the standard Baxter's sets as does COLLEAGUE is a significant advantage not only economically but in any many ways clinically.

And so given the very attractive financial terms I think of access to the Sigma pump given the ongoing economics, which is its a lower-cost system than the competitive systems that require captive cassettes, and given some of the clinical advantages, we have a high confidence level that certainly the vast majority of our customers are going to convert to Sigma. There also is, I am sure you know, some ambiguity in terms of competitive devises and so on in the market. So as we get the transition guide out to our customers shortly, get response, and clearly like my comment earlier on the pricing (inaudible) we will also be monitoring this on an account-by-account basis. So we will have specific information to be in a position to answer your questions more effectively in the future.

Very helpful. Thank you.

Bruce Nudell, UBS.

Thanks so much. Bob, just turning to your estimate of volume growth for recombinants in the markets US and ex-US. I know that recombinant Factor VIII is a very important product on a profitability basis. How are you thinking about the competitive environment? I am sure you saw the Biogen Idec release that they are going to Phase III.

If you could just comment on volume trends and expectations US, ex-US and the competitive dynamics that would be great.

Okay, let me address both parts. First of all, in terms of volume trends this is a little bit maybe redundant to one my -- the earlier questions.

We see the volume growth in established and developed markets will start to slow down a bit but our outlook is still in line with what we have previously provided to all of you. The opportunity longer term clearly is in developing and emerging markets that adopt next-generation technology, which is why we are encouraged that we are going to have launches shortly in markets like Brazil, Russia, China, and so on.

But clearly this is an area that given how expensive the therapy is and so, as governments adopt austerity measures and so on, there is going to be downward pressure in terms of pricing and conversion and so on. But certainly we still seem to the recombinant piece of the hemophilia market still growing in line with (multiple speakers). Go ahead, Mary Kay.

I was going to add, Bob, at the investor conference in December we have commented -- or Bruce, I am sorry -- that the long-range plan included 6% to 8% growth for recombinant. That growth was lower in the US so probably mid-single digits and much higher outside the US. Right now that is what our expectations are still going forward.

If you look -- so on the second piece of your question, Bruce, obviously emerging technologies, next-generation products, it's our highest priority from the R&D point of view. Just starting with our own technologies, over the last couple of years we have formulated a number of agreements including one on pegylation technology with Nektar, a deal that we launched or announced with [BAX 855] with [vypoxin], an oral product as well. This [NAS] technology which we referred to.

Deals that we did a couple of years ago with [Linnell Technologies] (inaudible) and so on and so on. We have about five different plays at this to try to get to the next-generation technology. Of course we follow very closely all the competitive developments including the one that you mentioned, and we place bets where we think there is the highest probability of success.

I am not going to comment specifically on competitive technologies, but rest assured that through our tech assessment processes we assess all these very diligently which has led to the array of deals that we have done over the last couple years. And I think it's fair to say our highest priority in terms of our R&D efforts is what is the next generation hemophilia technology.

So I will leave it at that I guess.

And I guess one follow up not related to IVIG. Looking at PD therapy I was kind of interested in your commentary that patient growth is 8%, constant currency, revenue growth year to date something like 2%. Is there any dynamic there in terms of a tough pricing environment or should we be thinking about this as patient growth equals revenue growth?

Yes, I think there is -- one dynamic, Bruce, is that the highest growth in terms of patients is in emerging and developing markets and we get somewhat lower prices. So you have what I will call a geographic mix effect which reconciles much of the difference between patient growth and dollar growth. That is probably the biggest factor.

Thanks so much.

David Lewis, Morgan Stanley.

Good morning. Bob, just first question, just given trends in renal that we saw in the quarter and recent management changes can you talk about the renal strategy or specific pressures, whether you are encouraged or less encouraged about the progress you have made in renal care recently?

Well, I am encouraged by a number of developments that have not either been implemented -- well, have not really been implemented yet. The first is we would expect almost any day or any week definition on the new composite rate reimbursement in the US which we have commented on previously, which will take effect in January of next year.

And without having the specifics at this stage we know enough about the direction to suggest that the change in the reimbursement methodology in the US clearly will level the playing field economically between hemodialysis and peritoneal dialysis. We believe that that will be a catalyst for PD growth going forward.

We have also seen recently in the US a pick up in our patient growth, probably over the last six to nine months, at a level far in excess of what we have experienced over the last five years. So I think Bruce McGillivray and his team deserve a lot of credit for that and I am confident that Rob in his new role will not only carry on but accelerate that further.

The other dynamic, of course, that we look forward to is to start the clinical trials with our home hemodialysis therapy, which not to use too much hyperbole here but I think certainly could be transformational in terms of how patients within end-stage renal disease are treated. So that is not an immediate front-burner opportunity, but as we said earlier we hope to begin our clinical evaluation of that technology before the end of this year and have product launch sometime in 2011 primarily in European markets.

So those are really the catalysts. The renal business, of course, has been a slower grower for us over the last few years. We have been patient in this business waiting for events, whether it's reimbursement in the US or new technologies like home hemo that could be game changers of sorts, and I think we are close to that. So I think -- I am optimistic we are going to be rewarded for our patience in that regard.

Great, very helpful. And just maybe two more quick ones. The first is, Bob, I noticed a lot of focus on this call and obviously last call on plasma specifically, but as you think of sort of your global growth rates across your major franchises are you still convinced that your existing level of capital spending, your existing level of R&D spending is generating returns that you expected? And do you think later on in the year we could see sort of a redefinition of what you have to spend to generate sort of the new growth rate for the business?

Okay, different elements -- R&D and capital. In terms of R&D, as I and Bob commented as well in his prepared comments, we have feathered back our R&D spending this year in view of some of the economic challenges that we have but however I would emphasize a couple of things.

We have not [set] back investment in our key programs. If you look at our list of key programs right now, very few, if anything, has fallen off over the last year or two. As we have ramped up R&D spending considerably, as you know, in the Company over the last five years, a lot of that has been focused on later stage stuff and so the returns are not as quick as perhaps the portfolio of R&D programs might have been in the Company say five, six, seven years ago.

But I think the opportunities are more significant, whether it's any of our new hemophilia investments, new technologies like home hemo, the Alzheimer's program, and so on and so forth. So I feel good about the pipeline and what has not fallen out. Very little, if anything, has fallen out and everything largely remains in play including things like our seasonal flu vaccine and so on.

So as I sit here today I still feel very good about our pipeline. I feel very good about the prospects of attractive returns for the investments we have made over the last five years. But also pragmatically in the context of our shorter-term economic challenges we have gone back and we have pared back a little in terms of early-stage exploratory stuff and we have been more discerning in that regard.

So I think it's the right balance of doing that but not compromising the funding on programs that we think can make a difference. In terms of -- so that is the R&D piece.

On the CapEx piece, as I said in answer to one of the earlier questions, being in the plasma business is capital intensive so it gets down to our ability to support global demand over time. And unlike IV production where we have smaller IV plants in numerous countries around the world because of the logistics costs, the plasma protein business is very different.

Our focus is on just a handful of facilities. Obviously the best way to increase capacity over time is with yield improvements. But the global market growth -- we commented earlier on response to an earlier question on antibody therapy growth in the US versus OUS. Clearly, antibody therapy is a double-digit grower in markets outside the US and much faster than that in emerging, developing markets.

These are therapies that as economies develop more and more patients are going to get access to these kinds of therapies. And there is not a lot of people that can do this and do it well. I think we do it very well.

So it's why I restated earlier our positive outlook long-term about this business. The best bet to place is on yield improvements, which is the best way to increase capacity, but we are going to have to continue to invest long-term in capacity.

On the other hand, we are not going to get ahead of ourselves, right? We all know that we have a bit of a conundrum and what I will call a high-class problem, I suppose, if and when we are successful with an Alzheimer's indication and the ability to support the demand for that. So we are really trying to balance this to the best of our ability.

I think you can be assured we are not going to get ahead of ourselves in installed capacity, either in the collection or certainly in fractionation, that we don't believe is going to be effectively utilized. On the other hand, we have to take a long view as it relates to a market which we think is going to be an attractive grower for years to come.

Just maybe one quick financial question and I will jump back in queue. In terms of this quarter we saw better-than-expected gross margins throughout the better part of the year. Should we expect greater SG&A containment or cost cutting, or do you think that the second quarter reflects an appropriate SG&A spending level?

Go ahead, Bob.

Yes, we have talked about our aggressively looking at our spending and we certainly have implemented processes to get after that. So we do expect the benefits of those actions to accelerate in the back half of the year and drive additional savings in SG&A.

Great. Thank you very much.

John, we have time for one more question this morning.

Mike Weinstein, JPMorgan.

Thank you. I am going to apologize upfront because there have been two other conference calls this morning, but I just want to follow up on a couple of items.

So the antibody therapy business in the US was better than you guys were guiding to and I wanted to understand just what drove that and did you change any of your assumptions relative to the healthcare reform impact on that business?

And then the comment to Mary Kay, I think you indicated that the last month or two had seen some encouraging data points. I just wanted you to maybe just highlight what those data points were. Was it the PPTA data or is there something else you are looking at?

Okay. A couple things and Bob and Mary Kay can chime in here too. Healthcare reform assumptions haven't really changed from what we communicated, Mike, last quarter so no change associated with that.

In terms of volume being strong, it may have been a little stronger than what we anticipated. I think it came in pretty close in terms of our own sales in terms of what we forecasted. It wasn't that big of a --

No. Mike, I would comment that our volumes were sequentially about the same as they were in Q1 which gives us confidence around some of the comments Bob made on seeing early signs of stemming the share loss.

In terms of the positive signs, we do see the PPTA data -- I know you guys do as well. But we also have our own intelligence in terms of what we are seeing in terms of end-user demand for Baxter products, which we coin as redistribution data, so we have access to that as well. That also gives us some confidence and we did see some stabilization and some improvement, quite frankly, in that regard.

Okay. So do you think you have a broader view beyond the Company of the overall health business, of either the US or overseas markets?

Well, as we commented earlier, and that may have been when you were off the call, Mike (multiple speakers). We are encouraged by the progress both in terms of share retention, some signs, as Mary Kay just indicated, that the market growth may be picking up a little bit here. That is all good news but we are going to need some more visibility on this. And I forget I think it was maybe Bob Hopkins that had asked the question earlier. I think likely by the end of the year clearly we will have a lot more visibility.

So early on some encouraging signs. We believe our marketing efforts that we have described earlier are working effectively, but let's get a few more months under our belt.

Okay. The infusion pump sales were relatively strong in the US and certainly stronger than we were expecting, and your IV therapies sales were also strong. Just some added thoughts on that, infusion pump surprisingly strong in light of what is going on with COLLEAGUE and I know you are trying to get Sigma out there but still --.

Really in the quarter for infusion systems it was really Sigma which we have been pushing very much. Obviously with the consent order those dynamics change.

I would say more broadly, Mike, we are clearly encouraged by the ongoing performance of medication delivery. Not to minimize the COLLEAGUE issue, which we will manage through now over the next couple of years, but medication delivery I think consistent with what we have been messaging is accelerating in its growth.

Fortunately, given some of the challenges in BioScience, we did have strong growth globally in virtually all product categories in medication delivery in Q2, particularly in the two strategic categories which we have commented frequently, which is parenteral nutrition and anesthesia, which are higher-margin businesses. Both of which grew very strong in the second quarter as well as in the first half of the year.

So we got a lot of positive things going in the medication delivery business.

Mike, I would also just add in terms of medication delivery we did have somewhat of an easy comp in the US compared to last year, particularly in the infusion system business. But to Bob's point, COLLEAGUE did add about $20 million of revenue. I am sorry, Sigma did add about $20 million of revenue.

Yes, yes. So last question, financial question. Previously, if we went back to the September analyst meeting, the assumption has been that the Company's tax rate regardless of what the government did on US tax reform would migrate higher starting next year and over the course of the next few years. Is that still the expectation?

Yes. Yes, it is and I think you have seen that it's doing a bit of that this year as well. We are comfortable with the 19.5% assumption for this year but we would expect something in the 50 basis point range of an increase as we go into 2011 driven primarily by mix of earnings.

And, Mike, really nothing has changed in terms of our long-range plan and what we had stated last year around the tax rate increase regarding reform in the US. If that doesn't happen, then that obviously would be an upside to what we provided in September.

Great. Thank you, guys. Appreciate it.

Okay, you bet. Thanks.

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