百特醫療 (BAX) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's Third-Quarter Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call.

(Operator Instructions)

As a reminder, this call is being recorded by Baxter and is copyrighted material and cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Mary Kay Ladone, Corporate Vice President, Investor Relations, at Baxter International. Ms. Ladone, you may begin.

Thanks, Sean. Good morning, and welcome to our Q3 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, contains forward-looking statements that involve risks and uncertainties and, of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more details concerning factors that could cause actual results to differ materially.

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

Thanks, Mary Kay. Good morning. Thanks for calling in.

We're pleased today to announce financial results for the third quarter and also to provide you with an update on our full-year 2011 outlook. As you saw in this morning's press release, adjusted EPS of $1.09 per diluted share increased 8% versus the prior year and was at the high end of our guidance of $1.07 to $1.09 per diluted share. Third quarter sales growth was 8% on a reported basis and after adjusting for FX, sales growth was 3%. Excluding the sales that were related to the generics injectable business that we divested earlier in the year, sales growth was 10% on a reported basis and 4%, excluding the impact of foreign currency.

The evolving global macro-environment will exert ongoing pressures on our business, creating challenges that we will manage with disciplined execution of our strategies. We continue to benefit from the diversified and medically necessary nature of our portfolio, our broad geographic reach, and strong financial position, which provides us with the flexibility to invest in innovation, advance our new product pipeline and augment future growth with select business development initiatives. In the third quarter, R&D spending accelerated 15%, supporting progress of investigational therapies in late stage clinical development and success in obtaining approvals and launching innovative products in the marketplace.

Some recent achievements include the following -- in the quarter, we received FDA approval for GAMMAGARD LIQUID 10% SubQ and recently launched the therapy in the United States. This allows Baxter to participate in this fast-growing segment in the PID market in the US for the first time. We're pleased with the initial market acceptance of SubQ, as we've secured both share gains and conversion of Baxter patients to this new therapy. We expect to continue to capitalize on the differentiation we've achieved with this product's favorable tolerability profile, speed of infusion, and low infusion site reaction rate -- observed in our clinical trials -- of 2.7%.

We submitted applications to the FDA and the EMA for approval of HyQ, allowing for the enhanced subcutaneous administration of immunoglobulin with recombinant human hyaluronidase for patients with PID. We recently received notification from both agencies that the files have now been accepted for review. Both submissions were based on results from a Phase III trial, which met both its primary and secondary end points. The final results will be presented at the annual meeting of the American College of Asthma, Allergy, and Immunology in Boston in early November.

As you know, we're also conducting Phase III clinical trials exploring the use of GAMMAGARD LIQUID as a therapy for 2 neurological conditions. The first is for the treatment of multifocal motor neuropathy, or MMN. We've now completed our clinical trials in the US and Canada and expect to submit for approval in early 2012. As a reminder, Baxter is the only company with approval for the MMN indication in Europe, and we've also been granted Orphan Drug Status for the therapy in the US.

We continue to advance our Phase III trial for Alzheimer's. As we previously mentioned, we completed enrollment in our first Phase III trial with more than 360 patients in the second quarter of this year. With an 18-month follow-up period, we currently expect to complete the first Phase III trial by the end of 2012 and begin our second confirmatory Phase III trial in the coming months.

In our hemophilia franchise, we've achieved a number of recent milestones. For example, we've now completed the global Phase I/II clinical trial of BAX 817, a recombinant factor VIIa therapy, and plan to advance into Phase III in early 2012. We've also completed enrollment in the Phase I/III clinical trial for BAX 326, our recombinant factor IX treatment for hemophilia B and expect to complete this trial and file for US approval in 2012 as well.

In addition, we recently announced the initiation of the Phase III trial of BAX 111, the first and only recombinant von Willebrand factor, which provides an alternative treatment option to currently marketed therapies that are plasma-derived. The Phase III multi-center open label clinical trial is enrolling 36 patients with severe von Willebrand disease and will assess the safety, efficacy, and pharmacokinetics of BAX 111 for the prevention and treatment of bleeding episodes. This is an exciting opportunity for Baxter with global market potential in excess of $300 million.

And finally, on the business development front, we announced the definitive agreement, as you know, to acquire Baxa Corporation for $380 million. Baxa is a privately held company that develops automated pharmacy compounding technologies that enhances the efficacy and safety of oral and IV dose preparation and delivery. Baxa's product offering complements Baxter's global portfolio of nutritional therapies and drug delivery systems, leverages our global footprint and leadership in the hospital pharmacy, and supports patient safety. Annual sales for Baxa were approximately $150 million in 2010, and we expect future top-line growth of this business to be accretive to our sales growth profile. We've now received clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvements Act and expect to close the acquisition before the end of the year. As always, I'd be happy to address any questions on these programs and initiatives during our Q&A later this morning.

Before turning the call over to Bob, I wanted to update you on some positive developments related to 2 items that we've previously discussed with you. First, I'm happy to report that we've successfully worked with the San Juan district office to resolve concerns at 2 of our manufacturing sites in Puerto Rico, and we've now closed out the warning letter that was received earlier this year. Secondly, earlier this month, the Irish Medicine Board, or the IMB, completed a thorough evaluation of Baxter's in-depth root cause investigation of impurities detected in some peritoneal dialysis solutions manufactured at our Castlebar, Ireland, facility. This included a rigorous inspection of the rebuilt production lines and review of the extensive preventative and corrective actions put in place over the last several months.

Late last week, we received confirmation from the IMB that they have no objection to the resumption of production and the release of PD solutions manufactured on the new production lines in Castlebar. Over the coming months, the introduction and market replenishment of Castlebar PD solutions will be made with continued collaboration with the IMB and Ministries of Health in various countries. We remain committed to ensuring that there's minimal disruption in delivering PD therapy to our patients as we transfer production back to this facility.

So with that, I'd now like to ask Bob to review our third-quarter financial results in more detail and also our guidance for 2011. Bob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the quarter, excluding special items, increased 8% to $1.09 per diluted share, which was at the high end of our guidance range of $1.07 to $1.09 per share. As we mentioned in our press release, our GAAP results included an after-tax special charge totalling $48 million, or $0.08 per diluted share, to account for the resolution of long-standing litigation pertaining to average wholesale price and certain historical rebate and discount adjustments.

Let me briefly walk you through the P&L by line item for the quarter before turning to our financial outlook for the remainder of 2011. Starting with sales, worldwide sales totalled $3.5 billion in the third quarter and advanced 8%. Excluding currency, sales grew 3% and after adjusting for the divestiture of the US generic injectables business, constant currency sales growth was 4%. Sales in the quarter were driven by balanced growth, both in the US and abroad, despite a challenging global macro-environment.

In terms of individual business performance and beginning with BioScience, global BioScience sales of $1.5 billion increased 9% in the third quarter. Excluding foreign currency, BioScience sales increased 4%. Within the product categories, recombinant sales of $552 million grew 5%. Excluding foreign currency, sales declined 1%, as growth of 4% in the US was offset by the expected impact from recent tenders and somewhat slower demand across Europe, given strong performance in the previous quarter. On a year-to-date basis, excluding the impact of tenders we've discussed, global recombinant sales growth, excluding currency, is in mid-single digits, consistent with global market demand.

Moving on to plasma proteins, sales in the quarter were $372 million and advanced 8%. Excluding the impact of foreign currency, sales grew 4%. Growth across the various plasma proteins was significantly offset by lower Albumin sales as a result of temporary supply constraints and delays in the clearance of shipments in China, as a result of new testing guidelines that were implemented there late last year. Combined, these 2 items impacted sales in the quarter by approximately $20 million.

Sales in the US improved sequentially across multiple products in the portfolio -- including FEIBA, PD Factor VIII and ARALAST -- but were down 8% year over year, driven primarily by the supply constraints of Albumin, whereas international sales climbed 10%, driven by strong demand for FEIBA and PD Factor VIII, despite certain tender delays in eastern Europe. In antibody therapy, sales of $380 million increased 13%. Excluding foreign currency, sales were up 11%, driven by robust demand for GAMMAGARD LIQUID and the launch of SubQ. Growth in this category of 11% also reflects an ongoing benefit related to Octapharma of at least $20 million in the third quarter.

Sales in regenerative medicine, which includes our BioSurgery products, totaled $143 million and increased 10%. Excluding foreign currency, sales increased 5%, driven by high single-digit growth of fibrin sealants. This performance was offset by lower active use revenues triggered by the temporary disruption in the US channel resulting from the planned transition to a direct sales model from [Ampatek's] former distributor model that we mentioned last quarter.

Finally, revenues in the other category, which includes vaccines, totaled $70 million, increasing 43% versus the prior year. Excluding foreign currency, sales increased 15%, due to strong growth of the FSME vaccine in Europe and receipt of a milestone payment related to our influenza collaboration in Japan with Takeda. In medical products, global sales in the third quarter totaled approximately $2 billion, reflecting an increase of 7% on a reported basis. After adjusting for foreign currency, sales increased 1%. Excluding sales related to the US multi-source generic business, reported sales growth for medical products was 10%, or 4% on a constant currency basis, in line with the first-half 2011 growth of mid-single digits.

Turning to the product categories, renal sales totaled $646 million and increased 9% on a reported basis. Excluding foreign currency, sales growth was 2%, driven by global PD growth of 5%. This performance was partially offset by the expected loss of PD patients to another US provider and lower HD revenues. We continue to be pleased with the momentum in patient gains in the US, given recent reimbursement changes and solid patient growth across Latin America and Asia.

Sales in the global injectables category advanced 5% to $494 million and, excluding foreign currency, sales were flat. Excluding the divestiture, growth of this category was 20% on a reported basis and 14% on a constant currency basis. Contributing to this performance was very strong growth in our contract manufacturing and compounding businesses, as well as strong demand for Mini-Bags and certain injectable drugs. IV therapy sales totaled $453 million and rose 9%. Excluding foreign currency, sales were up 3%, driven primarily by strong growth of IV solutions in the US.

As expected, our global nutrition business, with annual sales in excess of $700 million, has now lapsed previous share gains associated with competitor supply shortages and will face difficult growth comparisons over the next few quarters. Infusion system sales totaled $222 million, reflecting growth of 4% and sales increased 1%, excluding foreign currency. Growth was primarily driven by expanded placements and sales of the Spectrum Pump. Finally, anesthesia sales of $129 million increased 2% and, excluding foreign currency, sales declined 2%, as high single-digit growth internationally was offset by lower demand in the US and competitive pricing pressures for generic Sevoflurane.

Turning to the rest of the P&L, gross margin for the Company was 50.9% in the third quarter, which is 60 basis points lower than last year. Operationally, gross margin was in line with our third quarter expectations and better than the prior year, primarily due to mixed benefits in medical products and improved margins in the plasma business. However, this operational expansion was completely offset by 2 items. First, costs associated with the Castlebar PD solution issue of approximately $20 million, which was slightly higher than we originally expected; and secondly, unexpected negative impact of foreign currency, which was driven by volatility, particularly in emerging markets during the quarter. Excluding the Castlebar and foreign currency impacts, the Company's gross margin would have been 100 basis points higher.

SG&A totaled $708 million in the quarter and increased 6% versus the prior-year period. This growth was driven entirely by the impact of foreign currency. Excluding currency, SG&A was flat to the prior year, as incremental pension expense and investments in a number of promotional activities were offset by business optimization savings and aggressive management of discretionary spending across the Company. R&D spending accelerated in the third quarter to $239 million, representing an increase of 15%, as we continue to fund and advance a number of late stage programs, a few of which Bob mentioned earlier.

The operating margin in the quarter was 23.7%, a sequential improvement of 20 basis points and the highest quarterly operating margin during 2011. Interest expense was $14 million compared to $24 million last year. This reduction is primarily the result of a benefit from higher rate debt that matured in October of 2010 and higher interest income. The tax rate was 22.3% in the quarter, 120 basis points higher than last year's rate of 21.1%. This is driven by an increase in reserves related to anticipated tax settlements, which is partially offset by a benefit in non-controlling interest. And finally, as previously mentioned, adjusted EPS increased 8% to $1.09 per diluted share.

Turning to cash flow, cash flow from operations in the quarter totaled $922 million, compared to $1 billion in the prior-year period. The reduction versus the prior year is the result of $111 million in payments made in the third quarter, primarily related to the infusion pump recall. DSO ended the quarter at 55 days, an improvement both sequentially and year over year. Given the challenging macro-environment in our international country mix, we continue to expect our DSO in the near term to drift somewhat higher. Inventory turns of 2.5 are comparable to the prior quarter and modestly higher than the prior year, driven primarily by improvement in BioScience.

Capital expenditures in the quarter were $235 million versus $232 million in the prior-year period and are also trending somewhat below 2010 on a year-to-date basis. And lastly, during the third quarter, we repurchased approximately 6 million shares of common stock for $292 million. On a year-to-date basis, we've repurchased 26 million shares, or $1.4 billion, or on a net basis, 18 million shares for just over $1 billion, in line with our full-year objective.

Finally, let me conclude my comments this morning by providing our financial outlook for the fourth quarter and full-year 2011. First, for the full year, we now expect earnings of $4.29 to $4.32 per diluted share, which is at the high end of our previous guidance range of $4.27 to $4.32 per diluted share. By line item of the P&L and starting with sales, we continue to expect full-year sales growth, excluding foreign currency, of 3% to 4%. We currently expect foreign currency to benefit sales growth by approximately 2 points for the full year. Therefore, we expect reported sales growth of approximately 5% to 6%. This outlook includes 2011 sales of approximately $60 million related to the US multi-source generic injectables business versus approximately $200 million in 2010. The divestiture negatively impacts the Company's full-year sales growth by approximately 1 point.

We continue to expect the full-year gross margin for the Company to be 51% to 51.5%, with a modest improvement over the gross margin in 2010 of 51.1%. We continue to expect both SG&A and R&D to grow in mid-single digits for the year. We expect interest expense for the year to total approximately $50 million to $60 million and other expense, which includes non-controlling interest, to also be in the $50 million to $60 million range. Given our mix of earnings, we expect a tax rate of approximately 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, on a constant currency basis, we expect low single-digit sales growth for Medical Products. After adjusting for the divestiture, organic sales growth was expected to be in mid-single digits for this business. By product category, there was no material change from our previous expectations.

For BioScience, we continue to expect sales, excluding foreign currency, to grow in the 5% to 6% range. This includes recombinant sales growth for the full year in low single-digits. We now expect plasma protein sales to increase in mid to high single-digits, which reflects some delay in the timing of tenders as we exit the year. We now expect antibody therapy sales to increase in low double-digits and regenerative medicine sales to grow approximately 10%, as we continue to work through the transition to a direct sales model for ACTIFUSE. And finally, we expect the other category within BioScience to decline approximately 10%, reflecting the better-than-expected FSME vaccine sales and the difficult comparison from pandemic revenues recorded in the first quarter of 2010.

For the fourth quarter, as we mentioned in our press release, we expect earnings per diluted share of $1.15 to $1.18, and sales growth, excluding the impact of foreign currency, of 2% to 3%. Based on our outlook for foreign exchange rates, we expect reported sales to increase in the 1% to 2% range. Thanks. I would like to open up the call for Q&A.

(Operator Instructions) Larry Keusch, Morgan Keegan.

Bob, I'm wondering if you could just talk a little bit about the plasma protein market broadly and the including antibody therapies? Just how you're thinking, how you're seeing pricing play out in the US and O-US markets and then any of the competitive markets you could speak to in Europe for IVIG?

Okay. There's a lot of pieces to that. I'm not sure if you directed that to me or to Bob Hombach. We'll wade into this because there's a lot of dimensions to your question. Fundamentally, I would say the market, as we look at it today, and future prospects, Larry, haven't changed from what we've recently discussed. The long-term outlook for the plasma protein business broadly defined and all components of that continues to be very positive. It's one of the reasons, as we've commented before, that we're keeping [OLA] for active commission.

We have some capacity expansions in our Rieti facility and I think, as we commented last quarter, we also are making plans to establish a new greenfield site for long-term demand. So, the long-term outlook overall for plasma protein growth continues to be, I think, very bullish and in our case, augmented by some exciting new products like HyQ and then the new indications for GAMMAGARD over time. Then more granularly and in the short-term, US growth, O-US growth is consistent with what we've discussed before. Go ahead, Bob.

I was just going to jump in. On the pricing front, I'd say no change in the US. In Europe, I think over the course of the year, we've seen a firming up and maybe a slight drift-up in prices. Now Octa has come back as of the third quarter, but on a somewhat limited basis, so we haven't really seen much of an impact or change there, yet. But it's something we continue to monitor closely.

I'd also add, Larry, that in terms of overall growth, I think we've commented that antibody therapy or IVIG growth, from a market perspective, is somewhere in that 5% to 8% range, and we continue to see, basically, the market is supporting that growth.

Okay.

Really no changes from what we've discussed previously, certainly last quarter.

Okay, and then 2 quick ones for you. Obviously, you're going into the more traditional contracting period for IVIG. Any thoughts around that? And then, Bob, there have been a lot of puts and takes in the gross margin through the course of the year. If you wouldn't mind just sort of helping us think about what moves through that piece of the income statement as we move forward, would be helpful as well.

Okay. I'll handle the first part, then turn it over to Bob Hombach, Larry. The reality is we're in the early stages of the contracting for 2012. So, I guess we don't really have a lot to report in that regard, but again, I don't think we see any surprises. We certainly expect to extend the contracts that we have in place, certainly maintain our share in terms of pricing, we're not going to get into comment on that. Actually, I think Bob Hombach touched on that earlier. It's still early on that, but we don't see any surprises. Do you want to comment on the gross margin, Bob?

Certainly. Yes, definitely some moving pieces here. The 2 that I highlighted in my prepared comments I think are the most relevant, relative to the expectation that we gave in July. Recall in July that we had strong performance in the front half. We indicated a couple of tail winds that we had benefited from in the front half that we didn't expect to benefit from in the back half; namely foreign exchange and also strong seasonal vaccine sales in the second quarter. And so the vaccine situation played out as we expected, given the seasonality. But FX we thought would be neutral to us in the back half and actually, given some dramatic moves primarily in emerging market currency rates during the course of the quarter, turned into a bit of a headwind for us in the quarter.

And as I mentioned Castlebar as well, while we're very pleased to have it resolved and be back in a position to resume production for supporting the PD patients in Europe, during the course of the third quarter, we did incur more costs than we anticipated and that negatively impacted the margin relative to our expectation. But going forward in the fourth quarter, those costs will be greatly minimized. We will still have some residual costs as we ramp up production related to Castlebar. But that's a headwind that, hopefully, we're beginning to put behind us.

Okay.

Other an that, the general mix benefits we tend to see, improvements, as I mentioned in the plasma business relative to running at pretty high rates of operation, we're definitely seeing those flow through as well.

Okay, perfect. Thanks very much.

Mike Weinstein, JPMorgan.

Could you just spend a minute on your supply constraints and your limitations in the Plasma business? (multiple speakers)Your supply constraints in plasma proteins obviously, in particularly, antibody therapy.

Yes, I think this is an important one to spend a little bit of time on. As we've talked about, we took collections of production down pretty significantly in 2010. We got to a point, kind of late third quarter, where we were feeling good about where we were at and then we saw 2 things happen -- market demand for our product started to firm up pretty nicely as we did our pricing touch-ups and Octa left the marketplace and we almost immediately went from slowdown mode to having to try to ramp up pretty quickly. I think we have successfully ramped up to the point now where today we're operating at a run rate higher than our 2009 peak from a fractionation standpoint. That's the good news.

We also saw very strong demand in the front half of 2011 here, particularly in the US you saw 20% plus growth rates, which well exceeds what we expect normal market or even Octa volume would have represented. We found ourselves in a situation where we've ramped up significantly, but demand has ramped up as well and we've been very tight on inventories. As we entered the third quarter, just doing something as normal as our 2-week summer shutdown that we do in pretty much all our manufacturing facilities around the world, put at even further tightness within the business for a period of time. We did actually exit the third quarter in a backorder situation in IVIG and Albumin, as we mentioned, somewhat minor backorder's, but backorder's nonetheless, which we expect to clear up here in the month of October and move into hopefully a somewhat more normalized inventory position. But as long as Octa's out of the US market from an IVIG standpoint in particular, we will remain in a tight situation.

What I want you to just maybe touch on as well is your ability to increase your throughput going into 2012. Basically, what are your constraints on capacity on the assumption that maybe Octa's off the market for a longer period of time? If they are off the market for an extended period, what's the upper limit on your ability to produce product without getting into real issues with customers?

So a couple dynamics there. As we come out of our normal year-end shutdown this year, we will continue the process of ramping up the new LA [frac] facility. I think we've talked about that running at 60% to 70% capacity, at this point, as we are transitioned from old to new. As we go into next year, that will go up more towards 80% plus utilization, so we'll get additional volume there. Now, the idea previously was we would ramp down old LA, but as we've talked about, we've decided we're going to keep that open and extend the useful life and we're working through the process of investment and timing around when to make that happen.

But that will provide us, once we get through that, some additional capacity there to meet market demand in the near-term. And as Bob mentioned, based on an investment we made several years ago, we will see some additional capacity begin to come online in the back half of 2012 at our Rieti, Italy facility that will add us additional capacity in late 2012 and then into 2013. So those dynamics, I think, will allow us to meet expanding market demand for our products, particularly as we think about the HyQ launch in the back half of 2012.

Okay, great. Let me ask one pipeline question and I'll let some others jump in. Could you just spend a minute on 326 and your view of the competitive profile of that product and the potential role in the market? You are getting close to a filing of that product in 2012.

Yes. We're very excited about that one in the sense that it's moving nicely through the clinic and we expect, as you said, to he be able to file in 2012. Given our broad Hemophilia portfolio to begin with, we think this will be a very nice addition, especially as we look at tenders outside the US, in particular. The Factor IX market, up to this point from a recumbent standpoint, has been 1 player and so we think the sooner we can get to the market with our broad offering and a product we think that will have some nice enhancements, that looks like a nice opportunity for us going forward here. So, we'll move forward with the Phase III and look to file in the middle of next year.

I would also add, Mike, once we have the base Factor IX product in the marketplace, we will be looking to enhance the half life of that product and look at a longer acting Factor IX as well.

Yes, understood. Thank you.

David Roman, Goldman Sachs.

I just wanted you to see if you could expand in a little bit more detail regarding your commentary on share gains with the subcutaneous IVIG product in the United States? Maybe help us frame what that market looks like from a sizing perspective and how we should think about the opportunity over the next 12 months? Then as HyQ comes into the picture, how that might change dynamics in the market both in a share perspective and overall penetration standpoint?

David, it's Mary Kay. I'll make some comments and then turn it over to Bob and Bob for additional commentary. I think as we've talked, and we've had this question many times, today we believe the current Sub-Q market is probably in the, call it, $400 million, $450 million range. Basically, the Sub-Q product is applicable to the PID patients, which represents about 25% of the total global market, which is, call it, 6 billion. And today, as part of that PID market, the Sub-Q market represents about 30%.It's 30% penetrated today. So, given that we now have a product in the US, we can now start to enhance that penetration, especially as we start to seed the market for our HyQ product, which we expect approval for next year. Bob, I don't know if you want to add on the launch?

Yes, we're already seeing with the Sub-Q product, as Bob mentioned in his prepared comments, the infusion site reaction and infection rate benefits that our base product has, the clinical data supports that as well for HyQ. Not only from a convenience standpoint, but from a safety and tolerability standpoint, we've got a good story there and the opportunity to grow in the fastest growing segment of the PID market is exciting to us. This gets us a foot hold and familiarity with the marketplace here with Sub-Q. Again, it's early days, but we've already seen pretty nice uptake and some switching. Roughly half of the patients that we have today on our Sub-Q are switches from a competitive product.

It's fair to say it's more than met our expectations in terms of how the product's been received, so we're very pleased with that.

Okay, and then maybe just a little bit more on the gross margin and currency. Bob, can you maybe help us think about the impact currency has, in a little more detail, as we head into a period of time when FX actually turns into a headwind and assuming that rates stay at current levels that would be a headwind likely in 2012? I know in emerging markets, you brought up that issue for this quarter and if I remember correctly, those are currencies that you don't hedge. So there's more a straightforward drop-through. Maybe more generically speaking, how we should size up the impact of FX on a go-forward basis?

Sure. So to your point, historically we've talked about the fact that we do financial hedges for the developed market major currencies, like the euro, the pound, the yen, to a lesser degree the Aussie dollar, the Canadian dollar and so on. We're able, through natural hedges, through manufacturing facilities in all those markets and locations, as well as on the ground expenses augmented with financial hedges to largely mute the bottom line impact from currency fluctuations on a go-forward basis in those markets. But as you point out, historically, we have not hedged in the emerging markets and as those continue to grow and become a larger part of our overall portfolio, for the most part, as those currencies have modestly, over time, appreciated against the dollar, the impact has been fairly small. When you have snap-backs like this where the dollar appreciates dramatically and currencies like the Brazilian real moves 20% in a quarter, that is a straight drop-through to the bottom line.

We do have some local manufacturing in places like Mexico and Brazil and currencies in Eastern Europe and some in Asia and so on, but there is more of a drop-through impact. The issue really, in the third quarter, for us was the euro and some of the major currencies moved somewhat. The emerging markets moved quite a bit. We've bake that impact, as a headwind, into our Q4 guidance and we estimate that's probably $0.02 of a headwind that's in our expectation here in the fourth quarter. As we go forward, history would say that these snap-backs and dollar appreciation against emerging markets tend to happen periodically, but not be very long-lived and more of a 1 to 2-quarter phenomena. We'll have to see how that plays out. As we approach giving guidance in January, we'll update on you our views there going forward.

Okay, thank you very much.

Rick Wise, Leerink Swann.

Couple questions -- I'll just ask them upfront. First, on the home Hemo trial, any color, any update on restarting that and updated timing of approval and launch? My second question is, there's been some concern and recent discussion about that recent reimbursement policies. We understand they apply to a very specific, very narrow population, but are you now more concerned that this might be a potential negative headwind or trend, or is there greater potential for similar actions from other insurers that might be now more aggressive in directing patients toward specific products at specific prices? Any larger perspective would be great. Thank you.

Okay. Rick, this is Bob Parkinson. Let me take a stab at both of those. Then Mary Kay and Bob can augment my comments. On the HHD trial, we did initiate the trial in August with the first patient, which I would say responded very well to the therapy. However, we did observe a specific technical issue with the device. And so, as really precautionary measure, I guess you'd say, we decided to take the time upfront to kind of assess and rectify the issue before we broaden the trial and brought on more patients. We temporarily delayed further treatments until we have this issue resolved.

I would tell you that we now understand the root cause, we validated the mitigation and we've communicated that to the FDA. Where we stand right now is we are awaiting go ahead from the FDA to re-start the trial, which could happen really at any time. That's really where that stands. I would say that we don't believe that the delay will impact what we had communicated previously in terms of the time line either for the CE Mark in 2012 or for the filing of a nocturnal indication in the US in 2013. That's really where home Hemo stands.

On the reimbursement front, I guess at a high level, and then Mary Kay, I'll let you get more granular here. I think we all need to accept the fact that the broader economic environment and affordability of countries to provide access to healthcare is going to continue to put reimbursement pressures on everything. That's a dynamic in the environment. I think it's going to be more evolutionary in nature over time. But that's the world we live in today and going forward. In terms of some of the specific things in the US, Mary Kay, maybe I'll let you comment on what we've seen recently.

Rick, I'm assuming you're talking about the Aetna issue that was raised last week?

Exactly.

Yes, so I think as we communicated last week, there's really no new news related to Aetna. They implemented this policy late last year, went into effect January of this year. Really, it covered the patients covered under the pharmacy benefit of their plans, which accounted for about 10% of the patients. So in the other 90% of the patients that are covered under the medical benefit, there is no preferred supplier that's been identified and there's open access to all the therapies. The reason that Aetna moved that way is, our understanding is, that there was, for the pharmacy benefit, some new state regulations in less than a handful of states that required that a preferred supplier be selected. So they did go ahead and do that. Baxter was not selected. However, we have not seen any conversion of any patients from our therapy to another therapy because of the reimbursement change that was implemented there.

Just to quickly follow up, so just again, what's the risk that these market dynamics change and we see greater restrictions on all patients, not just pharmacy patients? And broadly, are you more worried about that, Bob or Mary Kay?

I'm not more worried about it than what I did. But as I said, at a high level, directionally, these are expensive therapies and the payers are going to look for ways to ratchet down their costs. That's just the environment that we live in. Having said that, Rick, I don't think we see a specific event that's going to accelerate it. I just think it's just going to continue to evolve over time, but we don't see a dramatic short-term impact or change in our outlook.

Thanks, Bob.

David Lewis, Morgan Stanley.

Quick question, one for Bob P. and one for Bob H. For Bob, one of the things that's surprised us in the first few months here of the Grifols-Talecris integration is how aggressive they seem to be in terms of their integration in the US on sales and marketing. They're actually keeping a dramatically higher sales force in the US than I guess we would have expected. In terms of raw body count, it seems actually larger than Baxter and CSL. They are seeming to be setting up for a larger US presence over the next couple of years. At the same time, Bob, you have a highly differentiated product coming out in 2012 and into 2013 with HyQ. I wonder if you would just with us your view of US market dynamics with 3 major players, one of which was going through integration, their increased sales focus and your significantly new product enhancement.

Well, really, David, I think everyone has recognized that you still have, particularly in PID, you have a lot of undiagnosed patients. We've added sales force for the past as well just to make sure that we penetrate the market to the degree possible. So I think all the players have actually added sales force as it gets back to basic demand creation. So I can't comment specifically on the number of people that Grifols-Talecris will have in their sales force after they complete the integration. But to the degree it's more, candidly, I'm not surprised by that, because I think there is opportunity to continue to develop the market. I think that's very aligned and consistent with what we've communicated previously. As it relates to the opportunity that we will have hopefully in the second half of next year in terms of HyQ, obviously that's a product unique to us that we're very excited about. And the sales force that we've built up over the last couple of years, we should find ourselves well positioned, I think, to capitalize on that opportunity because of how we've staffed up over the last couple of years in our sales resources.

Okay. Very, very helpful.

Is there anything more specific than that you'd like our comments on?

No, that's very clear, Bob. Thank you. Maybe for the other Bob, just heading into 2012, I know we're going to stay away from giving full 2012 guidance, but I wonder, Bob, if you'd help us understand a couple of specific items. Obviously this quarter, gross margins would have been 100 basis points higher if it wasn't for one-timers. So the outlook for GMs, at least in my mind, looks better in 2012 than certainly for 2011. I wonder if you could just remind us of things to keep in mind in 2012, headwinds and tailwind's on gross margin and any thoughts you can share with us on pension at this time would be very helpful?

Sure. Sure. On the gross margin line, one obvious tailwind we should have next year is with the resolution of the Castlebar issue going into next year. That won't be in front of us, so that should help margins for sure. In terms of headwinds, we have the Australia recombinant Factor VIII tender, which that continues to play out slowly. Our expectation is that since we were not named as 1 of the 2 recipients of that tender, that by the middle of next year, we would be in position that we would not be participating in the market. But I think there's still some open question there, but that's one that would definitely negatively impact sales and margin going into next year. This decision around extend the useful life of the LA facility, which, long-term, absolutely the right thing to do for us, there will be a period of time there where we will incur some inefficiencies while we do that. Timing that and sizing that is something we'll do as we move towards January.

Octapharma's return is going to be a variable that will impact top line and margin as well a bit, depending on how and when they return to the US market. And then finally, on pension, interest rates have come down dramatically, although they have bounced back up a little bit. I've seen some estimates that have been thrown out there that are higher than the impact this year, which is $0.08. My sense is, at this point, given where interest rates are at, it would be a bit less than that, but still kind of in that ball park. We're continuing to evaluate options around how we might mitigate that or how we might think differently about managing and reporting pension expense going forward. That's one that we'll continue to give some thought here and watch interest rates as we move towards the end of this year.

Great. Well, thank you very much.

Bob Hopkins, Bank of America.

I can't help but follow up to that question on gross margins and just finish the thought. So when you think about all those things, plus currency, are the tailwind's and headwinds about equal, or are there more headwind's than tailwind's? How do we think about that?

Currency is such a variable here. But a couple things -- one, earlier this year, we actually hedged the majority of our euro exposure, as an example, for 2012. So I think we've got a pretty good floor in on what are the key currency that impacts us. As I said, we don't hedge the emerging markets, but the volatility around those tends to be kind of a 6-month phenomena, at least history would say so. We'll have to see how that plays out. I'd hate to speculate on whether that turns into a minor headwind, a major headwind or no headwind at all. Because I think all 3 of those are possibilities from where we sit today, depending on what happens in the macro environment. But, I'd say headwind's and tailwind's at this point, given everything we know, are reasonably balanced going into next year, with maybe a slight tilt toward headwinds with this FX issue. If rates were to stay exactly where they're at today, that would be a bit of a headwind for us.

Okay. That's great. Then can you break out in this quarter and maybe thoughts for fourth quarter on gross margin what the exact impact was on a year-over-year basis in terms of basis points from the emerging market currency fluctuation?

Yes, it's hard to say in terms of just looking at that item, but relative to our expectation with about a 50 basis point impact us on in the quarter.

For all of FX, not just emerging markets.

And I would say, as I've mentioned, that we hedged the majority of our euro exposure, for the Euro, the Yen, the Pound, the Aussie dollar and so on. As a matter of policy, we only hedge 80% of what we think our net exposure is. There's always going to be a slight residual impact on those major currencies, as well, in our results.

Then in your Q4, the full year guidance, what do you assume for Octa in Q4?

We assume that they're not in the US, so we get the full benefit we've been running through and that they've largely returned in Europe and that we retain a small amount of benefit, but not much.

Just remember that we did have a $30 million benefit last year in Q4 related to Octapharma.

Right.

So the extent we lose anything in Europe, it's a slight headwind from a growth rate standpoint.

Then, just finally, 2 of the bigger picture questions, the HyQ full data presentation that's coming in a couple weeks in Boston, what should we expect from that, that's new, that hasn't been discussed before? How important is that release? Also, if we could get some bigger picture thoughts on Europe from a BioScience perspective, how confident you are that Europe won't slip as we move forward? Thank you.

Go ahead, Bob.

So as it relates to HyQ data, I think it's early November in Boston, as you mentioned. Frankly, we were very pleased with the strong data we shared on an interim basis back in October of last year in Istanbul. I think what you'll see is the full data confirms the very strong results as it relates to comparability to IV, from an amount of product used, infusion time, et cetera. As we mentioned, the infusion site reaction and infection rates are much lower than competitive products in similar profile to IVIG and Sub-Q. So we'll be pleased to confirm that those interim results were, in fact, what we see in the broader population, which we think are very strong, period. Nothing new.

As it relates to Europe, we did see some softness in a few key products in the third quarter. We are expecting some slight rebound in a few areas, including recombinant's as an example. It's something we continue to monitor very closely, but at this point, there's nothing that's obvious or announced in terms of whether governments try to do anything at the end of the year from a window dressing standpoint. But as you look at our guidance for the fourth quarter, and a $0.03 range, one of the reasons it's a $0.03 range, is there's a little uncertainty around year-end government reaction and a little bit of uncertainty around FX. So that's kind of somewhat baked into our expectation there in terms of the range.

Great. Thanks for the solid results.

Matt Miksic, Piper Jaffray.

Wanted to just clarify 1 thing that was said here just on gross margins, you mentioned about 50 basis points of FX. Could you give us a sense of how much the Castlebar, the overage that you mentioned, Bob, on Castlebar impacted the margins?

Well, in absolute terms, it overall was 50 basis points, but in terms of the overage, was more like 30 basis points, 25, 30 basis points.

Okay, so those 2 things together may be 80 basis points of the impact?

Yes.

Also, on gross margin, you mentioned some headwind's and tailwind's. Can you talk about where we are in terms of the productivity of your plasma business? I'm imagining that you're starting to see some of the inventories running at higher productions coming through your P&L. Are we there? Are we getting there, to see some of those benefits?

Yes, certainly, we saw some of that in the third quarter. We're seeing some of that in the fourth quarter, which is going to offset some of the impact. Basically, by giving the full year guidance, we've implied that we have a better gross margin percentage rate in the fourth quarter than we had in the third quarter, despite the fact that we're going to have, if rates stay where they're at, a full quarter's worth of FX downside related to the emerging markets. Some of that offset is going to be mix, some of that offset's going to be manufacturing efficiencies that we've gained in our plants here over the last 9 months.

There was a question on contracting and it strikes me that we hit this cycle every year and every year, you don't really want to say much, and ought not want to say much, which I understand. But this year is a little different for a couple reasons. And one is, as part of the integration of Talecris and Grifols there is some changing around of hands of some volumes in the US, particularly in IVIG, a new player [Cadrion] entering this cycle of contracting. Also, of course, it's different because Octa is not quite back. I'm wondering how you feel like you're positioned with respect to those 2 dynamics?

In general, we feel pretty good about how we're positioned. We've demonstrated an ability to step in when a competitor is out of the market and deliver significant volume to the marketplace. As I said, 20% demand growth in Q1 and Q2 of this year that we've been able to step up to. So I think continuity of supply is key. I think the quality of our IVIG franchise is evident in the infusion rate number that we've been talking about, infusion site infection rate number that we've talked about. Then we have the whole HyQ dynamic to discuss with our customer base for 2012 as well and that's a clear differentiation that I think changes the outlook for us, relative to whatever else competitors might be thinking about.

As is as well-received as the 10% Sub-Q has been. Given the acceptance of that product, and as Bob said, the prospects of HyQ, give us some things to talk about this year that we haven't talked about before as well. So I think that contributes to our sense of confidence that we'll secure things going forward.

Finally, I appreciate that, on pumps, I don't know if we touched on where you are there? One of the things we've been looking for you to give us, and I think you've been unable to because you're still in the midst of this transition in Colleague, is when are we going to get a sense of where all the share settles out? How you feel about your ability to retain your previous customers with SIGMA and so on?

Well, let me comment and Bob or Mary Kay can add on. First of all, we're on track consistent with the agreed upon consent order in terms of getting the Colleagues out of the market by approximately mid-year. Next year, SIGMA scaled up their production capacity very nicely, so that's all, that's all working well, Matt. I would tell you the SIGMA device is being very well-received in the market, and we're pleased with the progress. The second part of your question, how is this all going to settle out, obviously a lot of moving parts here, including field corrective actions by competitive devices and so on. So, as is always the case in the infusion pump business, there's a lot of moving parts. But I think we feel pretty good about our position right now in terms of, A, replacing the Colleagues in the field, B, the acceptance of the SIGMA device, and I guess C, as we move into the later stages of next year, hopefully being able to play a little bit more offense in this space than we have over the last few years.

Yes, Matt, I would just add that if this were a 9-inning game in terms of customers deciding where they're at and which way they're going to go, we're in the 8th inning. So, it's pretty far down the track. We're very pleased with how things have played out, relative to our initial expectations. It's a little tough to pinpoint a share number because there have been competitive bids out there that have nothing to do with Colleague and we've done well in some of those related to SIGMA gaining some business that we didn't previously have, in any case. So it's a moving target for sure, but again, generally very pleased with where we're at. As Bob said, back half of 2012, it's a new world.

Thanks so much for the color.

Kristen Stewart, Deutsche Bank.

It's Rob [Wisnoski] filling in for Kristen. I just have a quick question on PD. Could you maybe expand on what are the competitive issues there and whether you expect to see headwinds going forward, and whether there are any tenders coming up?

No, I think we're experiencing the head winds we're going to experience here in 2011, as frankly Fresenius has moved some of the patients previously. They served with our product onto their product. So, we're pretty far down the track of that conversion away from us occurring. Absent that, though, we're seeing high single-digit, double-digit patient growth in the US, with our other customers, because of the reimbursement change. So we continue to be very excited about the opportunities to reinvigorate PD penetration in the US. In terms of tenders, outside the US, those go on all the time. Some of the bigger ones would be Mexico, although it's not clear at this point whether Mexico is going to specifically tender or continue to do more of the one-off contracting that we've seen over the last couple of years. Really nothing else that I'm aware of that's material to talk about.

All right. Great. That's all I've got. Thanks a lot.

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