百特醫療 (BAX) 2011 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 Miss Mary Kay Ladone, Corporate Vice President Investor Relations at Baxter International. Miss Ladone, you may begin.

Thanks, Sean, good morning, and welcome to our first-quarter 2011 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 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'd like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning and thanks for calling in this morning. We're pleased today to announce our financial results for the first quarter and also to provide you with an update for our full-year 2011 outlook.

As you saw in our press release which was issued earlier this morning, EPS of $0.98 per diluted share exceeded guidance for the quarter and increased 5% versus the prior year on an adjusted basis. This performance was the result of better-than-expected sales and gross margin, operational leverage and the benefit from our ongoing share repurchase program.

First-quarter sales growth after adjusting for FX was also up 5% as growth improved on a sequential basis across multiple product categories. And we benefited from the sales of our generic drug business which we had expected to divest in the first quarter and therefore did not include in our original guidance for the year. We now expect to close this transaction within the next few weeks.

While Bob will provide some more details on our first-quarter financial performance in just a few minutes, I'm pleased that our -- that given our current outlook we're in a position to raise our full-year sales and earnings guidance. Our strong financial position continues to provide us the flexibility to invest in and pursue opportunities that expand our diverse product portfolio with innovative products that save and sustain patient lives and position our Company for enhanced growth, always with an eye toward delivering increased value to our shareholders.

Innovation remains our most important strategic imperative and will continue to be the driving force behind our future success. Although R&D spending in the quarter was somewhat below the prior year, we do continue to fund all major R&D programs and have made significant progress in advancing our pipeline over the last several years. I'd like to take a moment just to update you on a few key programs and some recent highlights.

First, during the quarter we submitted a Biologics license application, or BLA, to the FDA for the US approval of TISSEEL fibrin sealant as a hemostatic agent in vascular surgery. This is an expansion beyond the current marketed indications and completes the necessary clinical requirements for a broad hemostasis label, which represents a very significant opportunity for our regenerative medicine business.

Secondly, we announced approval in Europe of PREFLUCEL, a seasonal influenza vaccine utilizing our proprietary Vero cell technology under the mutual recognition process. The 13 participating European Union countries, including Germany, Spain, United Kingdom and the Nordic countries, will formally implement the license on a national level, making the vaccine available for the 2011 and 2012 influenza season.

And lastly, we continue to be successful in driving differentiation of GAMMAGARD LIQUID by offering various dosage forms, enhancing delivery options and expanding the number of indications. For example, we recently introduced the first and only 30 gram dose vial for GAMMAGARD LIQUID in the United States. This new dosage form is the most frequently prescribed dose for primary immunodeficiency patients and enhances user convenience.

As you know, we're currently awaiting FDA approval for GAMMAGARD LIQUID SubQ, which we submitted to the agency last year. We continue to expect approval in the second quarter of this year, allowing us to launch in the US and participate in this fast-growing segment of the market.

In addition, late last year we completed the Phase III clinical trial of HyQ, which allows for enhanced delivery of GAMMAGARD LIQUID subcutaneously facilitated by RECOMBINATE human hyaluronidase. We're currently in the process of preparing our submission for approval in both the US and Europe and expect to communicate final top-line results later this year.

As you know, Baxter is also conducting Phase III clinical trials exploring the use of GAMMAGARD LIQUID as a therapy for two neurological conditions. The first is a trial for the treatment of multifocal motor neuropathy, or MFN, a neurological disorder characterized by progressive limb weakness. We completed enrollment in 2010 and expect to conclude the trial later this year and submit for approval in 2012.

And finally, we continue to advance our Phase III trial for Alzheimer's. Today we've randomized 330 patients and are on track to complete enrollment by mid-2011. With an 18-month follow-up period, we currently expect to complete the trial by the end of 2012. In addition, we plan to initiate a second confirmatory trial before the end of this year.

Also our primary investigator, Dr. Norman Relkin, has now submitted a manuscript regarding the Phase II data for consideration by a leading peer reviewed journal and, if accepted, the manuscript will be published in the coming months.

These achievements depict just a handful of the programs in our pipeline that will present great opportunities for Baxter in the years to come. I'm increasingly encouraged by the progress we continue to make every look forward to updating you on additional R&D achievements throughout the year.

Before turning the call over to Bob, let me briefly comment on the announcement we made earlier this week regarding the acquisition of Prism Pharmaceuticals, a specialty pharmaceutical company that has developed and received FDA approval for multiple presentations of NEXTERONE, an anti-arrhythmic agent amiodarone IV including the first and only ready to use premixed IV formulation.

Given that this drug is typically administered to patients in extremely time sensitive and critical care situations, the benefits of a ready to use premixed IV form of NEXTERONE are clinically significant. For this reason we believe this unique product satisfies unmet clinical need, offers an opportunity to expand the current market and also has potential for application in additional geographies outside the United States.

This transaction demonstrates our intent of being more proactive on the business development front. It also exemplifies the types of opportunities that we'll pursue -- those that complement our existing portfolio and expand our market leading position, leverage our global footprint channel or customer relationships, capitalize on our core scientific or manufacturing capabilities, and provide for low integration risk which provides a higher confidence in achieving success.

As always, I'd be happy to address any questions on these or other topics during the Q&A. But with that I'd like to now ask Bob to review our first-quarter financial results in more detail and also our guidance for the rest of the year. Bob?

Thanks, Bob, and good morning, everyone. Let me briefly walk you through the P&L by line item for the quarter before turning to our revised financial outlook for 2011. Starting with sales, worldwide sales totaled $3.3 billion in the first quarter and increased 5%. Excluding foreign currency sales also increased 5% which compares favorably to the guidance we provided of sales growth in the 2% to 3% range. This is a result of better-than-expected sales in medical products, partially due to the benefit of the generic business that we were -- that were not planned, as well as strong sales of antibody therapies.

In terms of individual business performance beginning with BioScience, global BioScience sales of $1.4 billion increased 3% in the first quarter. Excluding foreign currency BioScience sales increased 4%. Within the product categories, RECOMBINATE sales of $512 million were flat to the prior year and, excluding foreign currency, sales increased 1%.

Excluding the UK tender impact of approximately $20 million, total ad based sales growth was in line with overall market growth of 6% to 8% on a global basis. We expect improved growth in the second half of the year for the RECOMBINATE business as we begin to annualize the impact of the UK tender in the third quarter of 2011.

Moving on to plasma proteins, sales in the quarter were $308 million and increased 5%. Excluding the impact of foreign currency sales increased 8%, which was a result of very strong volume, particularly in the US and Europe, for FEIBA, albumin and plasma derived Factor VIII.

In antibody therapy sales of $374 million increased 16%. Excluding foreign currency, sales advanced 18% and continue to reflect the success we've had with our commercial strategies and a benefit related to meeting demand previously served by Octapharma. Volume growth globally of more than 20% was partially offset by the impact of our pricing touch-ups implemented last year and a 3 percentage point impact from the termination of the WinRho distribution agreement in mid-year 2010.

Sales in regenerative medicine, which includes our biosurgery products, totaled $140 million and increased 18% on both a reported business and after adjusting for foreign currency. These results reflect solid growth, particularly for FloSeal, and a benefit of just over $10 million in incremental sales related to the ApaTech acquisition which was completed at the end of the first quarter last year. Excluding ApaTech sales growth for the category was in high single digits.

Finally, revenues in the other category, which includes vaccines, totaled $74 million and were down 38%. In the quarter strong growth of the FSME vaccine was more than offset by the difficult comparison related to pandemic revenues which were approximately $50 million in the first quarter of 2010.

As you know, last year we combined our Medication Delivery and Renal businesses to form a new business, Medical Products. This new organization aligns common areas of capability within Baxter while creating increased capacity to pursue new growth opportunities. Going forward we will be reporting the combined business as a new segment.

Total global sales in the first quarter for Medical Products were $1.9 billion reflecting an increase of 6% on a reported basis. After adjusting for foreign currency sales increased 5%.

Turning to the product categories, Renal sales totaled $587 million and increased 1% on a reported basis. Excluding foreign currency, sales declined 1% as strong PD growth, particularly due to continued momentum from patient gains in the US, Latin America and Asia, was offset by the expected loss of PD patients to another provider and lower HD revenues.

Sales in the global injectables category increased 15% to $517 million and excluding foreign currency sales increased 14%. Contributing to this performance was very strong growth in our contract manufacturing and compounding businesses as well as strong demand for MINI-BAGs and select premix drugs.

I'd also mention that the global injectables category includes the generic injectables business with sales of approximately $40 million in the quarter. As Bob mentioned earlier, we now expect to complete the divestiture of this business to Hikma Pharmaceuticals during the second quarter.

IV therapy sales totaled $428 million and rose 9%. Excluding foreign currency sales were up 10%. Double-digit growth in US was a result of share gains associated with the new Novation agreement, improved IV pricing, and increased demand for a variety of nutritional products including greater customer adoption of CLINIMIX, our proprietary dual chamber parenteral nutrition therapy.

Infusion system sales totaled $211 million and increased 1% and were comparable to the prior year after adjusting for foreign currency. Lower COLLEAGUE revenues were partially offset by improved sales of access sets and expanded placements of the SPECTRUM pump.

Finally, anesthesia sales declined 7% and totaled $118 million in the quarter. This performance was driven by an unexpected reduction in inventory levels by a major US wholesaler as we finalized a fee-for-service agreement and competitive pricing pressures related to generic Sevoflurane.

Turning to the rest of the P&L, gross margin for the Company was 51% in the first quarter, which exceeded our expectations and reflects a sequential improvement of 100 basis points versus the fourth quarter. Compared to the prior year gross margin was 90 basis points below last year's gross margin of 51.9%.

Favorable mix and margin improvements from across the portfolio and a modest benefit from foreign currency were more than offset by the incremental costs associated with the Castlebar PD solution issue we discussed last quarter and the impact from manufacturing inefficiencies incurred in the plasma business during 2010.

SG&A totaled $716 million in the quarter and increased 5% versus the prior year period. SG&A as a percent of sales was 21.8% which is similar to last year. We continue to aggressively manage general, administrative and discretionary spending areas across the Company and are beginning to recognize the benefits associated with the actions that we discussed last quarter. However, as expected, these savings are more than offset by select investments and several key promotional activities aimed at demand creation and new product launches, as well as incremental pension expense and the pharmaceutical drug tax.

R&D spending of $214 million declined 6% in the quarter as investments in key R&D programs across the portfolio were offset by lower milestone payments to partners, completed clinical work and a modest impact from foreign currency. The operating margin in the quarter was 22.7%, 30 basis points lower than the prior year.

Interest expense was $10 million compared to $19 million last year. The reduction is primarily the result of higher rate debt that matured in the second half of 2010 and higher interest income. The tax rate was 21.1% in the quarter, 210 basis points higher than last year's rate of 19%. This is in line with our expectation and is the continued result of a change in earnings mix between higher tax and lower tax jurisdictions.

And finally, as previously mentioned, adjusted earnings per share increased 5% to $0.98 per diluted share, which exceeded our guidance of $0.92 to $0.94 per share.

Turning to cash flow -- cash flow from operations was strong in the quarter and totaled $371 million compared to $279 million in the first quarter of last year. Growth in cash flow can primarily be attributed to lower US pension contributions this year of $150 million versus $300 million in the prior year period. In addition, free cash flow of $173 million improved by $124 million versus the first quarter 2010.

Capital expenditures in the quarter were $198 million versus $230 million in the prior year period. DSO ended the quarter at 56 days which is higher than last year by three days. This is largely due to our international country mix as DSO in the US remains at approximately 30 days.

Inventory turns of 2.4 improved year over year, this is primarily driven by improvement in BioScience with a reduction in plasma inventories. And lastly, during the first quarter we repurchased approximately 12 million shares of common stock for $640 million, or on a net basis 9 million shares for approximately $510 million, in line with our objective.

Finally, let me conclude my comments this morning by providing our financial outlook for the second quarter and full year 2011. First, for the full year we now expect earnings per diluted share of $4.20 to $4.28. By line item of the P&L and starting with sales, we expect full-year sales growth excluding foreign currency of 3% to 4%.

We currently expect foreign currency to benefit sales growth by approximately 1 point, therefore we now expect reported sales growth of approximately 4% to 5%. This outlook includes first-quarter sales of approximately $40 million related to the generic injectables business, the divestiture which is projected to close in the second quarter. As a reminder, full-year sales for this business totaled approximately $200 million in 2010.

For the full year we now expect gross margin in the 51% to 51.5% range, a modest improvement over the gross margin rate in 2010 of 51.1%. We expect both SG&A and R&D to grow in low- to mid-single-digits for the year. We expect operating margin to improve modestly as savings related to the optimization charge taken in the fourth quarter of 2010 and other mixed benefits more than offset cost inefficiencies in the plasma business, increased pension expense, and the impact of the pharmaceutical drug tax.

We now expect interest expense of approximately $75 million and other expense, which includes non-controlling interest, to total approximately $40 million. Given our mix of earnings we expect our tax rate to approximate 21% to 21.5%. And finally, we expect a full-year average share count of approximately 575 million shares, which assumes approximately $1 billion in net share repurchases.

From a cash flow perspective, we continue to expect cash flow from operations of approximately $2.8 billion. This includes a 2011 pension contribution of $150 million and an outflow of approximately $300 million related to the execution of the COLLEAGUE consent order.

Now to expand on the full-year sales assumptions for each of the businesses. First, on a constant currency basis we expect low-single-digit sales growth for the Medical Products business. Excluding the impact of generic injectables divestiture, sales growth is expected to be mid-single-digits.

Within the product categories we expect anesthesia sales growth in the low- to mid-single-digits, infusion system sales to be flat to down 2%, and IV therapy sales to grow in mid-single-digits. This category also includes parenteral nutrition products which are expected to grow in high single digits.

In addition, we expect global injectable sales to increase in low-single-digits. Excluding the generics divestiture, we expect sales in this category to increase 10% to 12%. And for Renal we expect sales growth in low-single-digits as lower HD revenues modestly offset low-single-digit growth in PD.

For BioScience we now expect sales, excluding foreign currency, to grow in the 4% to 6% range. For the RECOMBINATE business we continue to expect growth for the full year to be in low- to mid-single-digits which includes the annualized impact of the UK tender.

Second, we expect plasma protein and antibody therapy sales to increase in high-single-digits. I'd remind you that our guidance assumes the return of Octapharma in the second half of the year, therefore antibody therapy sales growth will moderate in the back half of 2011.

Third, we expect regenerative medicine sales to grow in low- to mid-teams.

And finally, we expect the other category within BioScience to decline approximately 20% reflecting a difficult comparison in the first quarter from pandemic revenues reported in 2010.

For the second quarter, as we mentioned in our press release, we expect earnings per diluted share of $1.01 to $1.03 and sales growth, excluding the impact of foreign currency, of 4% it to 5%. Based on current foreign exchange rates we expect reported sales to increase in the 6% to 7% range, reflecting a 2 percentage point benefit from currency. Thanks and now I'd like to open the call up for Q&A.

(Operator Instructions). Mike Weinstein, JPMorgan.

Thank you. Just a couple clarification questions first, maybe. The $40 million in generic injectable sales that you reported this quarter, do you think that the Street had backed out that full business at this point? I mean I think we had, I just wasn't sure whether you thought consensus had already taken that business out of the model.

I'll have Mary Kay answer that. Go ahead.

Yes, Mike, I think for the most part, given that our guidance excluded it, we had expected to close it in the first quarter, that most of the models had taken out the generic injectable business.

Okay. And then one other. You're raising your earnings guidance for the year but you're not raising the cash flow guidance. Can you just comment on that?

Yes, I mean, that's something we continue to take a look at. And given that COLLEAGUE, as we indicated, is a pretty big driver here as we execute on the consent order, depending on how that plays out we could see some upside to that approximately $2.8 billion guidance that we've given to date.

Okay. And then I'll go ahead and ask the question you're going to get probably three or four times which is, Bob, do you just want to comment on how you think the Octagam return, whenever that does occur in Europe and the US, how you think that will influence the market, not necessarily just the back half of this year but as we go out 12 months?

I think it's probably difficult to speculate, Mike. I think their share globally was what, Mary Kay, roughly 11%? Is that about right?

Right.

The number is low-double-digits, as you know. So it's meaningful, but in the context of the global market, Mike, it's not that significant. I do think that any time there's a quality-related issue I think it's realistic to assume that customers are going to be somewhat more thoughtful about how they jump in and so on. So, we'll see how it all plays out.

As Bob described in his comments, we're assuming mid-year re-launch. What the scale up capabilities are going to be at their end I think is also speculative at this stage. But I do think customers are going to be thoughtful before they just jump back in the boat. So, we'll see.

Okay. I'll let some others jump in. Thanks for taking my questions.

David Lewis, Morgan Stanley.

Okay, this is actually James in for David. First question is on how growth trends should be developing through the year. Clearly there are a couple of different growth and margin headwinds in 2011. But as you walked through last quarter, it seems like most of these fall more in the first half than in the second.

If I look at guidance though, it looks like EPS growth is actually expected to be declining a little bit in the second half versus the first half. Maybe some of this is related to the return of the competitor to the market in the second half. But is there anything that I'm missing here? And how much do you think this reflects conservatism about the back half of the year versus just very strong results in the first quarter?

Well, let me start by -- maybe all three of us can think about this, because I think there are a lot of moving parts. Obviously as we move out of the second quarter, given our assumption on Octapharma relaunch, and then as we move into the fourth quarter where we had volume from Octapharma last year, that makes the year-to-year comps more challenging in that regard, so that's one item. Bob, Mary Kay, what are some of the other pieces?

Yes, and just to build on the Octapharma thing for a moment, given the long lead cycles in this business we are going to be thoughtful about how we manage throughput in anticipation of them coming back in the market. We've seen very strong demand for our products in the first quarter, we're going to continue to support that demand but again be thoughtful. So we're tempering our growth thoughts in the back of the year related to IVIG related to the Octa situation.

And I think at this stage of the game in any year, as Bob mentioned, there are always puts and takes. And so we did see some slight benefit in the quarter from retaining the generics business that -- we expect to close that divestiture here very, very shortly. So in terms of run rate, we'd have to make a slight adjustment for that and I think a little bit of conservatism as well given that we've just got one quarter under our belt here for 2011.

The other thing I would say, James, is that we're clearly expecting our R&D to ramp up in the second half of the year. The fact that first-quarter R&D spending was below last year in some ways was as much of a kind of timing artifact as anything. As I mentioned in my comments, obviously all of our important programs continue to be funded and our strategic intent is to continue to grow R&D. So that too.

So again, a number of moving parts from the R&D ramp up to the Octapharma and so on. And as Bob said, first quarter of the year started off well, we're pleased but we've still got a long ways to go in an environment which continues to be turbulent and so on. So I think those are all factors that we dialed into our thinking.

That's very helpful. Second question on HyQ. Obviously we're getting a little bit closer to the launch there. Is there anything you can tell us in terms of how you're thinking about speed of lunch after approval, how that might go in terms of share ramp and any type of extra infrastructure required there?

Well, we're still a ways from launch, as you know. As I mentioned, we continue to expect to file for approval in the third quarter in both the US and the EU. And again, I don't want to speculate on what the turnaround time would be on approval, but clearly it's some time in 2012 and more likely in the latter half of 2012, all things considered.

So we're still a little bit away from the launch. I think given the sales force expansion that we put in predominantly in the US last year focused on GAMMAGARD promotion targeted at under diagnosis of primary immune deficiency and so on. We have then in our base really SG&A resources and commercial resources and so on, I think that we can adequately promote HyQ later on next year when hopefully we get approval.

And I would just add operationally recognize that HyQ is going to be essentially our 10% GAMMAGARD LIQUID product kitted with hyaluronidase from Halozyme. So switching over from regular to HyQ is going to be very straightforward from us from a production and logistics standpoint.

Okay. And then one just last one Castlebar. Maybe I missed this earlier, but you broke out the impact financially last quarter. It seems like this is still having an impact on margins. Could you give us a sense of just how material that was this quarter and how that should progress through the year?

Yes, go ahead.

Yes, it was a fairly significant impact in the first quarter; it was about $25 million in margin and we continue to service those customers in Europe from production facilities around the world and incurred some pretty significant freight. We've been able to somewhat normalize our inventory levels. And while we do expect to incur some additional costs here in the second quarter as we look to try to resolve that issue, it won't be quite at the same rate of negative impact that we saw in the first quarter. But $25 million in the first quarter is what we absorbed.

Okay, thanks. I'll jump back in queue.

Larry Keusch, Morgan Keegan.

Good morning, guys. Just a very quick housekeeping. On the US injectables business, you obviously mentioned the $40 million in revenues. Did that have any contribution to earnings?

Not much.

Very low. As you know this is a very low margin business for us, very low.

Yes, great, that's what I had thought. Just two questions for you guys. First off, as we think about the future and how you guys think about fractionation capacity for IVIG, it is my understanding that you guys haven't shut down the Glendale facility as you've moved production into LA frac. And I just wanted to get some sense of kind of how you're thinking about that older facility, what the plans are there?

Okay, yes, several aspects that I think -- obviously our long-term outlook for the growth of the plasma protein business continues to be very positive. And then that's further augmented by the new product introductions including HyQ and new indications and then of course the bigger issue of Alzheimer's. So this question that you asked, Larry, of capacity clearly has been front and center for us for a while.

We have flexibility within our global manufacturing footprint today between Vienna and Rieti, our two European locations, and then in LA. We have kept old LA frac, if you want to use that term, in operation somewhat longer perhaps then we had earlier anticipated. But I will tell you one of the things we are evaluating now, given our projections of longer-term demand, and to put ourselves in a position where we can be flexible for additional demand for new products such as HyQ and Alzheimer's and so on, we are evaluating the merits of making investment to keep at least some of old LA frac in operation for an extended period of time. Okay?

The other thing I would say is that we also have and continue to evaluate the merits of a new greenfield site at some point, which candidly we think is inevitable in the coming years. We've spent a lot of time thinking about how we could do that on a modular basis. But I think both of those variables are things that we are now contemplating in this equation of long-term capacity.

Okay. Bob, just on that one and then I've got one other quick one. But it sounds like on LA frac, at least old LA frac I should say, it sounds like you haven't really committed any meaningful CapEx at this point, although perhaps maybe there are some --.

No, we haven't, but we likely will because it is an older facility and if we're going to keep it in production for the foreseeable future, we are going to need to make some investments there. But obviously, it will be a nice return on those investments given the underlying demand and what we are trying to support here.

Okay, great. Then the last question, again sort of more strategic, is you guys continue to do a great job with your cash generation, obviously. The free cash flow was up meaningful year-over-year. Your debt to total cap is in that low double-digit range, kind of 12-ish percent.

And you've been sort of talking about business development and share repurchase for a while. You're obviously doing some of the share repurchase. But again, just given the leverage ratios of the Company and the free cash flow generation, what's impeding you from doing more?

In terms of more --?

Either more BD or (multiple speakers) greater share repurchase, yes.

Well again, Bob can comment on this; I mean you're very familiar with our capital allocation framework there remains unchanged. Frankly we would like to direct more dollars to business development opportunities. We're pleased that we were able to close the Prism deal recently. This is going to be a nice opportunity for us. Next (inaudible) could be I would say globally somewhere in the range of $150 million, $200 million product and high margins.

And that's why I commented in my prepared comments today, Larry, on this. I think this is the kind of deal that we want to do more of, like the ApaTech deal we did last year. I'd like to do a handful of these kinds of deals every year and I'd like to deploy more of our cash toward those kinds of things that can accelerate our growth going forward.

And I think our whole BD momentum actually is accelerating. We've got a number of deals in the hopper that we're evaluating, but the quick answer to your question of what's constraining us is probably our discipline not to do bad deals and make sure we are very discerning in the kinds of things that we pursue. But I believe that those opportunities do exist. I believe going forward we will do more of them and it will be, again, within the framework that we've discussed with you all many times.

Right, and I do recognize that obviously. A huge chunk of your cash is sitting overseas, so I get that as well. Okay, thanks very much.

Kristen Stewart, Deutsche Bank.

Hi, it's actually Katherine for Kristen. I just have a couple of quick questions. On the slight increase in gross margins and the guidance, can you just break down the different components, how much of that is FX versus the others?

Bob, why don't you handle that? There's a lot of moving pieces.

Sure, as we mentioned, we did absorb within margin a pretty big hit related to the Castlebar issue. The pension issue which we talked about last quarter does affect both margin and SG&A, so year over year that's a drag on margin. We did see positive mix benefits as some of our higher margin product lines grew faster in the quarter, including nutrition products, we mentioned bio surgery, IVIG has slightly higher than average corporate margins. So we did see some mix benefits that offset that.

The FX benefit I mentioned is a modest benefit. As we've talked about in the past, we have a fair amount of natural hedge given our manufacturing footprint around the world and our -- the on the ground nature of many of our operations in countries around the world. So we have a fair amount of local expense we incur that offsets some of that. We do some hedging at a corporate level for the major currencies and so any impact on FX tends to be fairly muted.

As emerging market currencies have appreciated though pretty significantly here over the last several months, particularly Latin America, some Eastern European and emerging Asia countries, we do get a slight benefit from that because we do not hedge. We do have some local expenses but we tend not to hedge in those locations because it's difficult to make it cost effective. But again, it's a modest impact, not significant.

Okay, thanks. And then on upcoming tenders in Europe for RECOMBINATE, could we see another shift like we did last year?

No, at this point there are no significant upcoming tenders in Europe on the magnitude of the UK tender. Certainly a smaller tender later this year in Ireland is really the only one.

Actually I think 2013 early (multiple speakers).

No, in early 2013.

(Inaudible) other, yes.

Yes, and as we said in the past, the vast, vast majority of our global ADVATE franchise is not subject to tenders.

Okay. And then the last one, in anesthesia the unexpected reduction in inventory. How should we look at the impact for the rest of the year?

Well, as we said, we're working to finalize the fee-for-service agreement with the distributor that we mentioned. And certainly to the extent we're successful in doing that, which we expect we will be, we should see a normalization in volume as we move throughout 2011.

Okay, thank you.

We're looking at mid-single-digit anesthesia growth, I think, for the rest of the year.

Okay, great. Thanks.

David Roman, Goldman Sachs.

Good morning, everybody. Wanted just to come back to your comments on IVIG. I think you had said that volume was up 20% against reported constant currency growth of 18%. I'm assuming that that's volume for Baxter as a corporation.

Can you maybe articulate what you see as going on in the end-user markets on a global basis, maybe looking at US and international? Are you seeing similar trends in the overall market as you are in your business and your business is being amplified by benefits from Octapharma? Or is the benefit from Octapharma contributing the bulk of the improvement in your business?

Well, I'll address the -- our view is that the market in the US continues to be in the mid-single-digits from an ongoing growth perspective and then markets outside the US growing at higher single digits. And as we look at the quarter and adjust for Octapharma and this WinRho effect that we talked about, we're still looking at 9% growth for the IVIG franchise with the impact of some price from the touch-up strategy we implemented in the back half of 2010. So given that we're clearly growing faster than the market, even adjusting for Octa, we do feel like we've made good progress there.

Okay, and then maybe a follow-up on the gross margin. Clearly I think better than what most people were looking for this quarter, 51%. And you're sort of guiding to a slight improvement as we head through the course of the year.

What are sort of the puts and takes on the gross margin line? Obviously currency has got -- the dollar has weakened over the course of the first quarter and actually throughout the year. On an underlying basis would the improvement in gross margin for the back half of the year be greater than what you're going to report because of currency?

As I've mentioned, the impact of currency is fairly modest, but given where we're at today, given the strength of many currencies versus the US dollar, it would be a slight benefit going forward. We factored some of that into our guidance certainly. But it's not going to be a material impact to us.

Okay. And then lastly, when you adjust for the puts and takes this quarter on the RECOMBINATE tender or the inclusion of the generic injectables business, it looks like you're still sort of running in the 4% to 5% organic growth range, which is certainly higher than what you've put up the past several quarters.

But do you -- I think a year ago on this same conference call you had talked about revisiting sort of the long-range plan. Is there any update on when we might sort of hear more about your revised sort of long-term targets?

Yes, we're -- David, this is Bob Parkinson -- we're evaluating that. We may do something before the end of the year, not as formal as perhaps we have done in the past, maybe a conference call or something like that. We're still knocking that around. We realize there's a desire to get some line of sight in terms of our longer-term outlook. We clearly have recently, as we do every year, a very detailed long-range financial plan.

As I think I've commented previously though, I think given some of the dynamics in the external environment, the one thing I'm sensitive to is I don't want to get ahead of ourselves. So I just want to continue to monitor the external environment, both the economic environment as it relates to underlying demand for our products and certainly Health Care Reform initiatives that are not, as you know, unique to the US and manifest themselves in a lot of ways in countries around the world.

So we are sensitive to a desire though for you all to get more visibility. And, like I say, we may do something later in the year. If we do it will be maybe an in-depth conference call or something like that. So -- but we haven't made a final decision on that, but we are sensitive to doing that before too long.

Okay, that's great. Thank you very much.

Matt Miksic, Piper Jaffray.

Hi, thanks for taking all of our questions this morning. Just a follow-up on the Octa question and when they're coming back. I wanted to just clarify first, your guidance assumptions in the back half, has it been your planning assumption that they come back with full supply, sort of bringing 11% shares worth of product back to the market? Or is this something that you had expected or built into your guidance as more of a slow build over Q3 and Q4?

Well, of course we don't really have a true line of sight into that. I think given the nature of production of plasma proteins augmented by the fact that I think you know that some of the plasma suppliers to Octapharma had redirected their plasma and sold that to other fractionators, including ourselves by the way.

I don't think as a practical matter there's a scenario that's like turning on a light switch, okay. But on the other hand we don't have any insight in terms of what they've been manufacturing over the last number of months in anticipation of kind of breaking the regulatory log jam for lack of a better way to describe it. So we've assumed retention of a little bit of that business in the second half on a volume basis. Matt, that's probably the best I can do. I mean at this stage I'm kind of speculating.

Okay, and that's helpful. And then from the market on that same topic in the wake of Octa being withdrawn from the market in Europe and US, have you gotten the sense of that hospitals, tenders, any of those things are being looked at or considered in a different way given the risk of having another supplier having a similar issue? Or are customers looking at suppliers differently in the back of that event?

Well look, this is a business that going back over many years has encountered on behalf of a number of the participants regulatory issues, okay. It's part of the nature of a business when you're dealing with human proteins. And every time there's an event like this I do think that customers evaluate and really assess the value of a high-quality sustainable supplier and dial that into their thinking in terms of do they tender, do they contract, if they contract what are the terms of the contract and so on.

And I do think that the recent event with Octapharma, not unique to the US, I think around the world, clearly has stimulated thinking about gee, is there a way to contract with manufacturers in a way that we're not subject to the kind of volatility and risk in terms of supply. That's just natural. But I think at this stage most of that is just kind of anecdotal. We'll see how it plays out.

And one last follow-up on RECOMBINATE and the UK tender there. We've been sort of working through that -- annualizing that tender impact last year. On the back of that -- or first, if you could remind us when we come out from underneath that comp? And then also on the back of that, is that a market that is in the mid-single-digits currently, is it in the low-single, is it in the mid- to upper-? When you start again performing it what's more like a market growth rate? That would be helpful.

Are you talking about globally, Matt?

Yes.

Well, I mean the UK tender is the first part of your question on the timing, fundamentally we come out of it in the third quarter. I don't know exactly what in the -- on the comps (multiple speakers).

I think the full impact of the UK in terms of patient loss really was the fourth quarter (multiple speakers). So really through the rest of this year we'll be working through that and really it won't to be until 2012 (multiple speakers).

(multiple speakers) it ratchets -- it does ratchet down in the second half of the year on the comps.

Yes.

On the year-to-year comps, which (inaudible). And then on the global growth question, again our current view is the US market is the RECOMBINATE Factor VIII market is still growing in the mid-single-digits and at a somewhat higher rate outside the US.

Great, thanks.

Rick Wise, Leerink Swann.

Hi, good morning, guys, it's Danielle in for Rick. How are you? Just to follow up on David's question on the gross margins, thinking longer term, how quickly can you guys get back to the 2009 52% plus levels? And then following up on that, what are the puts and takes that can get you there faster versus slower?

I think, as we've talked about in the past, we continue to see opportunities to expand both gross and operating margins going forward. The Company generated significant improvement in both those metrics from 2004 through 2009. The pace at which -- we're not going to be able to match that as we go forward from this point, but we do see opportunities to continue to improve that.

So, without putting a time line on it, it is something that even in the midst of what you see as a difficult quarter related to the Castlebar issue we absorbed, the pension expense increase and so on, we still see the opportunity through growing our higher-margin businesses faster to continue to drive some positive mix benefit there. So going forward we will improve gross margins I do believe, but I don't want to put a time frame on how fast getting back to 2009 levels.

The world was very different in 2009, that's pre-US Health Care Reform, pre austerity measures in Europe and so on. So that's something we'll continue to work through here. And as Bob mentioned, we'll think about providing some longer-term view on that perhaps later this year.

Okay, great, that's helpful. And just a quick follow-up. The medical products division, can you talk about where you are with integrating med delivery with Renal and sort of when we can expect to see a real impact on both the top- and bottom-line, how quickly, what level of impact? And then one quick Renal follow-up after that.

Okay. Well, on the Medical Products piece, Danielle, it is our belief that there will be -- there's not going to be a big ta da moment there in terms of impact; this is continuous improvement. And getting back to the primary motivation of integrating those two businesses and combining them had more to do with enhancing product development time lines and improving effectiveness in a number of areas.

It was not certainly exclusively -- in fact not even primarily a cost reduction effort, okay, in terms of structural cost and so on. Now having said that, there is meaningful opportunity there. It's something that will impact us and roll out over time. But I would not expect to see some big announcement there about a big chunk of structural cost that we're taking out and some kind of organizational announcement and so on.

It's going to be of an evolutionary nature, not a dramatic nature like that. But I will tell you over the next five years in a lot of different ways we believe the combination of those businesses, and back to your earlier question about margin improvement, will be helpful to bolster gross margin growth.

Okay, great. That's helpful. And then on Renal, can you give us any update -- I might have missed this earlier if you already gave it -- but on the home hemo program? And then secondly PD, what are you seeing as far as uptake in the US post the bundle and any impact from -- we're hearing that maybe Fresenius has brought their products in-house, any impact there? Thank you so much, guys.

Okay on the first -- I mean we're going into the clinic with home hemo in the mid-year, so within a matter of months. And then the second part of the question was what? Why don't you guys take that?

Yes, so you mentioned the PD drivers in the US. So absent the Fresenius issue, I think we had previously mentioned that they have been a customer of ours in the US for PD and had taken the decision to transfer their patients onto their own therapy. We've largely absorbed that issue here maybe a bit more in the second quarter.

Absent that though we are seeing strong US PD patient growth as a result of the change in reimbursement here in 2011 and are very pleased with that. But we will have at least one more quarter of issue there as the last few patients are transferred over.

Okay, thanks, guys.

We have time for one more question.

Rajeev Jashnani, UBS.

Thanks, good morning. I had a question on the RECOMBINATE Factor VIII market in the US. And just looking at PPTA data over the past six, 12 months on a rolling basis, it looks like it's in the low-single-digit range. And I was just wondering if you could provide some updated thoughts on the state of that market and whether you might anticipate some acceleration and perhaps touch on the macro economic activity in that market?

Yes, the PPTA data is pretty much in line with what we just commented on in terms of mid-single-digit. Mary Kay, why don't you expand on that?

Yes, Rajeev, I think the 12-month rolling average in PPTA I believe is at around 4%, which is in line with what we call mid-single-digit range, 4% to 5%. And remember too, we did do de-stocking in the back half of the year, so PPTA growth would be impacted by that as well. So the market net of our de-stocking is probably growing a little bit faster.

Okay, and then is that about the rate you would expect to see going forward or is there --?

Yes.

Are you seeing --?

Yes, no, as Bob commented, we believe that the global market is growing in the 6% to 8% range with the US growing at a slower rate, more like 4% to 5% and international markets growing at a faster rate.

Thanks.

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