百特醫療 (BAX) 2012 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 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 first-quarter 2012 earnings conference call. Are joining me today are Bob Parkinson, CEO and Chairman of Baxter International, Bob Hombach, Chief Financial Officer, and Dr. Norbert Riedel, Chief Science and Innovation Officer. Before we get started, let me remind you that this presentation including comments regarding our financial outlook, new product developments and regulatory matters contain forward-looking statements that involve risks and uncertainties and of course our actual results could differ materially from our current expectations.

Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, in today's call, non-GAAP financial measures will be used to 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 our financial results for the first quarter and also provide you with an update on our full-year 2012 outlook. As you all saw in our press release that was issued earlier this morning, EPS of $1.01 per diluted share exceeded our guidance, and increased 3% versus the prior-year on an adjusted basis. First quarter sales, after adjusting for FX, increased 4% and exceeded our sales growth guidance of approximately 2%. Our strong financial position continues to provide us the flexibility to make investments to grow our core product portfolio, expand further in developing in emerging markets, advance our pipeline, and pursue opportunities that will position us for the future all with an eye toward delivering enhanced value to our shareholders.

R&D increased 10% this quarter, as our sustained focus on innovation has supported us with a meaningful new product pipeline that's as strong today as any time in our history. And I remain encouraged with the progress we're making which has resulted in a number of recent accomplished with that I'd like to briefly highlight this morning. First of all, within our leading hemophilia franchise, we've achieved a number of milestones. As you know, ADVATE was approved in December by the FDA as the only recombinant Factor VIII prophylactic treatment for both children and adults. This approval was based on a study demonstrating that ADVATE significantly reduced median annual bleed rates from 44 bleeds when treated on demand to one when treated prophylactically and included the approval of a new dosing schedule that offers some patients the choice of fewer infusions versus the current standard prophylaxis regimen.

The initial response from customers has been very as evidenced by the strong double-digit growth of ADVATE in the United States during the first quarter. We remain encouraged regarding the long-term growth prospects of our hemophilia franchise as we've secured both competitive gains and conversions from on-demand therapy to prophylaxis and we'll continue to invest in additional marketing activities to promote our competitive advantage and drive awareness of this expanded label. Also in hemophilia, we announced the initiation of a Phase I clinical trial of BAX 855 a longer acting PEGylated Factor VIII therapy based on the full-length ADVATE model molecule. The Phase I results will serve as the foundation for advancing this important program through clinical development and determining whether BAX 855 can offer a treatment regimen requiring fewer infusions than ADVATE.

In our regenerative medicine business we initiated a Phase III trial to evaluate the efficacy and safety of an individual's own CD34+ stem cells to increase exercise capacity in patients with chronic myocardial ischemia or CMI. CMI is one of the most severe forms of coronary artery disease causing significant long-term damage to the heart muscle and disability to the patient. It's often diagnosed based on symptoms of severe chest discomfort that do not respond to conventional medical management or surgical interventions. In addition, in the quarter we received approval for TISSEEL fibrin sealant for vascular surgery, providing a broad hemostasis label in the United States. This is an expansion beyond previously marketed indications and represents a significant opportunity for this franchise going forward.

In antibody therapies, we filed GAMMAGARD LIQUID for Multifocal Motor Neuropathy or MMN, representing our first neurological indication in the United States. If approved, GAMMAGARD LIQUID will be the first and only licensed immunoglobulin therapy for MMN in the US, where we've been branded orphan drug status by the FDA. This will complement the approval we received last year for MMN in Europe. Also, we initiated a second global Phase III trial evaluating the use of GAMMAGARD LIQUID in treating patients with mild to moderate Alzheimer's disease, following a successful futility analysis that was conducted by the Data Safety Monitoring Board in January. This trial complements our first Phase III trial which is firmly enrolled in looking through conclude by the end of 2012.

We've also announced an extensive study for those patients who completed 18 months of treatment in the first Alzheimer's Phase III trial and meet the required inclusion and exclusion criteria. This study is intended to provide additional data related to longer term safety, efficacy, and pharmacoeconomic impact of immunoglobulin treatment in these patients. These achievements that I just mentioned depict just a handful of the programs in our pipeline that will present great opportunities for Baxter in the years to come and we look forward to updating you on further R&D achievements as the year unfolds.

Before I turn the call over to Bob in just a minute I'd like to comment on the announcements this week regarding HyQ and also the one issue this morning regarding the site selection of our new plasma fractionation facility to support future growth of plasma proteins. First, we remain very positive regarding the long-term growth prospects of our plasma-based specialty therapeutics business, including GAMMAGARD LIQUID, FLEXBUMIN, FEIBA, ARALAST, and GLASSIA. As you know, many of these therapies are used in treating diseases that continue to be both undertreated and underdiagnosed globally. Our continued confidence stems from our global market position, the safety and efficacy profile that our products command and our unique differentiation strategy focused on new delivery options, expanded indications, and broadening access to care in developing markets.

While we are committed to supporting global market demand in the near term, we've selected a site in Covington, Georgia, for a new state-of-the-art plasma fractionation facility to support longer term growth. Construction will begin this year and will include operations supporting plasma fractionation, purification, fill-finish, and a testing lab. Commercial production is scheduled to begin in 2018, with the new fractionation facility adding up to 3 million liters of new capacity annually when fully operational. The investment at the Georgia site is expected to total more than $1 billion over the next five years, and provide us with the flexibility and necessary infrastructure to expand even further in support of additional global market needs.

Second, earlier this week as you know, Baxter and Halozyme announced that the FDA has requested additional information to complete its regulatory review of HyQ. The agency is requesting additional data on the use of hyaluronidase for chronic administration, specifically in relation to the HyQ Biologics License Application. Just to be clear, there were no safety concerns cited by the FDA with the respect to immunoglobulin therapy which as you know has a well-established safety profile and has been approved for chronic administration for patients with primary immune deficiencies. Baxter and Halozyme intend to work closely together to further understand FDA's request and develop a plan to provide additional data. In addition we expect to participate in a future meeting of the FDA's Blood Products Advisory Committee to obtain clarification on next steps.

In light of this request we now expect a delay in the anticipated regulatory review and approval timeline, which could delay the launch of HyQ beyond 2012. As you know, the change in the anticipated timeline for approval of HyQ is not material, financially material to our 2012 guidance. And of course, as we obtain additional information, we'll continue to update all of you on our plans and expectations. As always, I'd be happy to address any questions you might have on that or other topics during the Q&A this morning, but first I'd like to ask Bob to review our first quarter financial results and also our guidance for 2012. Bob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the first quarter excluding special items increased 3% to $1.01 per diluted share, which exceeded our guidance range of $0.98 to $1.00. As mentioned in the press release, our GAAP results included a net after-tax benefit from special items totaling $19 million of income or $0.03 per diluted share for costs and adjustments related to recent business development transactions. Specifically, we recorded a special after-tax charge totaling $34 million, or $0.06 per diluted share, primarily related to the upfront cash payment to Momenta for the development and commercialization of biosimilar compounds. This charge was more than offset by a gain of $53 million or $0.09 per diluted share resulting from an adjustment to estimated milestone payments associated with the 2011 Prism Pharmaceuticals acquisition.

Now let me briefly walk you through the P&L by line item for the first quarter before turning to our financial outlook for 2012. Starting with sales. Worldwide sales totaled $3.4 billion in the force quarter and increased 3%. Excluding foreign currency, sales increased 4% which exceeded our sales growth guidance of approximately 2%. Better than expected sales materialized in a number of key product categories in both medical products and bioscience, and we also benefited from the Synovis acquisition, which closed earlier than planned. As a reminder, the benefit from recent acquisitions, which includes Synovis and Baxa was partially offset by the divestiture of US multisource generic injectables business. The net benefit of acquisitions and divestitures on sales in the quarter was less than $20 million.

In terms of individual business performance, beginning with bioscience, global bioscience sales of approximately $1.5 billion increased 4% in the first quarter and excluding foreign currency, sales increased 5%. Within the product categories, recombinant sales rose 4% and totaled $533 million. Excluding foreign currency, sales increased 5% as double-digit growth of 10% in the US was partially offset by the impact of the Australian tender. Excluding the impact of the tender, recombinant sales increased 8%. As Bob mentioned we are very pleased with the strength of our US business, where we are driving benefits associated with the new expanded label of ADVATE.

Moving on to plasma proteins, sales in the quarter were $316 million, and increased 3% versus the prior-year period. On a constant currency basis, sales increased 4%. US sales declined 3%, due in part to lower plasma derived Factor VIII sales resulting from the continued convergence to recombinant therapies and lower sales of albumin as we aggressively manage our global supply. This resulted in strong growth in plasma proteins outside the US, driven by double-digit growth of albumin particularly in China and robust demand for FEIBA.

In antibody therapy sales of $388 million increased 4%. Excluding foreign currency, sales were up 5%, as we continue to experience very strong demand for GAMMAGARD LIQUID, particularly in the US, and we remain well-positioned given our successful launch of our Sub-Q therapy where we continue to seek momentum in share gains given its favorable tolerability profile and low infusion site reaction rate. In addition, as you know, Octapharma returned to the market on a global basis last year. As previously communicated the estimated benefit of the Octapharma impact in the first quarter 2011 was approximately $30 million. Excluding the benefit from the prior year, growth in antibody therapy was 14% on a constant currency basis, significantly higher than estimated market growth, suggesting that we've retained market share on a global basis that was gained during Octa's absence.

In the first quarter, sales in regenerative medicine, which includes our BioSurgery products, totaled $154 million and increased 10%. Excluding foreign currency, sales grew 11% as a result of double-digit growth of FloSeal and the incremental benefit from the Synovis acquisition of just over $10 million. Finally, revenues in the other category totaled $71 million in the quarter and declined 4%. Excluding foreign currency, sales declined 3% as growth of vaccines were offset by lower third-party plasma revenues. In medical products, global sales in the first quarter totaled $1.9 billion reflecting an increase of 3% on both a reported and constant currency basis.

Within the product categories, renal sales totaled $588 million and were comparable to the prior-year period. Excluding foreign currency, sales increased 1%, as US PD growth accelerated to mid-single digits supported by solid patient gains. This momentum was offset by lower HD revenues. IV therapy sales advanced 10% to $472 million. Excluding foreign currency, sales increased to 12% driven by higher demand for IV therapies in the US, strong performance globally of our nutrition franchise, and the benefit of the Baxa acquisition with sales totaling approximately $35 million.

Sales in the global injectables category of $505 million declined 2% on both a reported and constant currency basis. Excluding the net headwind of $30 million from Baxa and the impact of the US multisource generic injectables divestiture, organic growth was in mid-single digits on a constant currency basis. Performance was driven by our pharma partnering and compounding businesses as well as significant growth of certain injectable therapeutics like cyclofosfamide, a generic oncology drug. Infusion systems sales totaled $208 million and declined 1% on both a reported and constant currency basis. This expected decline is a result of lower access set sales as we complete the transition to Spectrum and near completion of the COLLEAGUE consent order.

Finally, our anesthesia franchise posted robust sales of $138 million, reflecting a 17% increase versus the prior year. Excluding foreign currency, sales were up 18%. While growth was enhanced by easy comparison to the prior year, we did experience very solid demand for both sevoflurane and Suprane on a global basis. This growth in volume more than offset continued pricing pressures for generic sevoflurane. Turning to the rest of the P&L, gross margin for the Company was 50.8%, in line with our expectations, and lower than last year's gross margin by 20 basis points. Margin expansion resulting from mixed benefits was more than offset by headwinds, including incremental pension expense, austerity measures, and dilution from business development transactions.

SG&A totaled $743 million in the quarter, and increased 4% versus the prior-year period, as a result of incremental pension expense, promotional and marketing expenses, and investments we're making to enhance our global presence particularly in emerging and developing markets. These investments were partially offset by business optimization savings and aggressive management of discretionary spending. R&D spending accelerated 10% to $236 million as we continue to fund and advance a number of late-stage programs including investments in our leading hemophilia franchise, Alzheimer's programs, and our Phase III adult stem cell trial.

The operating margin in the quarter was 21.9%, 80 basis points below prior year, due to a lower gross margin and higher SG&A and R&D that's expected to enhance future sales growth and profitability. Interest expense was $18 million compared to $10 million last year. This increase can be attributed to interest expense associated with a $500 million debt issuance in December of last year and lower interest income. Other income totaled $4 million in the quarter, compared to expense of $11 million last year, driven primarily by the impact of foreign currency. The tax rate was 21.7% in the quarter, which is higher than our prior-year due to a change in our earnings mix and slightly higher than our full-year expectation. And finally, as previously mentioned, adjusted EPS was $1.01 per diluted share an increase of 3%.

Turning to cash flow, cash flow from operations in the fourth quarter totaled $413 million, and increased 11% versus last year. Capital expenditures totaled $239 million which compares to $198 million in the first quarter 2011. DSO ended the quarter at 58 days, an increase of two days versus the prior year, entirely due to an increase in international days outstanding. And inventory turns of 2.3 were essentially unchanged from the first quarter last year. And lastly, during the first quarter, we repurchased approximately 10 million shares of common stock for $575 million or on a net basis approximately 7 million shares for $421 million, on track to achieve our full year objective of net share repurchases totaling approximately $1 billion.

Finally, let me conclude my comments this morning by providing our financial outlook for the second quarter and full year 2012. First, for the full year, we have narrowed our guidance range and now expect earnings of $4.49 to $4.57 per diluted share. By line item of the P&L, starting with sales, we continue to project full-year sales growth excluding foreign currency of 4% to 5%. Given our current outlook for foreign exchange rates, we expect currency to negatively impact the top line by 2 percentage points. Therefore, we respect reported sales growth which excludes the impact of foreign currency to be in the 2% to 3% range. We continue to expect full-year gross margin rate for the Company to be flat to modestly below the 2011 gross margin of 51.4%.

We expect SG&A and R&D to grow in low to mid-single digits. Interest expense is expected to total approximately $80 million and other expense excluding noncontrolling interest will be in the $20 million to $30 million range. We assume a tax rate of approximately 21.5%, flat with 2011, and now expect a full-year average share count of approximately $555 million which assumes approximately $1 billion in net share repurchases. From a cash flow perspective we plan to generate cash flow from operations of more than $3 billion, which includes an outflow of approximately $250 million related to the finalization of the COLLEAGUE consent order.

Now to expand on full-year sales assumptions for each of the businesses. First, on a constant currency basis, we continue to expect medical product sales to grow in the mid-single digits. This includes IV therapy sales growth of approximately 10%, which includes the benefit of approximately $120 million in sales related to the Baxa acquisition. Anesthesia sales growth in high single digits reflecting the strong performance in the first quarter. Global injectable sales growth in mid-single digits, which includes the net benefit of Baxa sales totaling approximately $40 million and the divestiture impact of approximately $60 million. Infusion systems sales which are expected to decline approximately 5% and reflect a tough comparison for SIGMA as we complete the consent order later this year. And lastly, renal sales growth is expected to be in low single digits.

For bioscience, we project sales growth excluding foreign currency in the mid-single digits, and there's no change to our original guidance by product category. Our outlook includes recombinant sales growth in low single digits reflecting the impact of recent tenders, plasma protein sales growth in mid-single digits, antibody therapy sales growth in low single digits which includes robust underlying demand in the impact from Octapharma. I'd like to take just a moment to point out that in the second quarter we face our most difficult year-on-year comparison, for antibody therapy and as sales increased 21% on a constant currency basis. And as you know, we expect to continue and improve our inventory position in advance of our third-quarter shutdown of the old LA fractionation facility. Therefore, our expectations it include an assumption that global antibody therapy sales will be lower in Q2 this year versus the prior-year period.

Moving onto regenerative medicine, we expect sales growth of approximately 20% which includes incremental sales from Synovis of approximately $75 million. And finally the other category is expected to decline approximately 5%. As mentioned in our press release, for the second quarter, we expect earnings per diluted share of $1.10 to $1.12 and sales growth excluding the impact of foreign currency of approximately 3% to 4%. Based on our outlook for foreign exchange rates, we expect currency to impact sales by approximately 3 percentage points. Therefore we expect reported sales to grow in the 0% to 1% range. Thanks and now I'd like to open up the call for Q&A.

(Operator Instructions)

I would like to remind participants that this call is being recorded and a replay will be available on the Baxter International website for 30 days at www.baxter.com. David Lewis, Morgan Stanley.

This is actually James in for David. My first question is on the new capacity plant in Georgia. Couple points there. One, I think given the 3 million liter capacity total spend in CapEx of a $1 billion dollars is a little bit more than we are expecting. Could you give any details on whether that also includes additional purification capacity and is that -- would that be able to -- could you expand that capacity beyond 3 million liters with the infrastructure you're putting in place? Second, 3 million liters actually seems a little bit less than we were expecting to meet your capacity needs over the long term. Can you talk a little bit about your ability to bridge to that new facility with the existing capacity at the old and new LA facilities?

Yes, James, this is Bob Parkinson. Let me maybe kind of address your question at a higher level and then I'm going to turn it over to Bob Hombach to take you through some of the elements of the CapEx spending that we projected. First of all, just to back up a bit, if you look at our current plans, with old LA putting it back in commission, as well as some expansion opportunities at new LA, Vienna and Rieti, we certainly feel that our installed footprint of capacity to support 6% to 8% kind of growth over the next few years setting the stage then longer-term for the capacity expansion that we announced this morning.

I would say the announcement this morning first of all is an expression I think represents our confidence in the long-term global growth of the plasma protein business. A little bit of context -- over half of the world's population remains undiagnosed and certainly undertreated for many of the conditions that are treated today with therapeutic proteins, and being the world leader in this area, the announcement this morning is really an investment for the long-term and speaks to our confidence in the business. As Bob will explain to you in a minute, the magnitude of the investment represents more than the initial phase of 3 million liters but sets the stage for the kind of expansion over time that supports the kind of vision that I just described. So with that as context, Bob, I'll let you maybe get a little bit more detail in terms of break out. Okay?

Sure. In terms of capacity and investments in capacity, historically, you've seen us bolt on additional capacity expansions onto existing footprint and I think others in the industry. This announcement today represents a true Greenfield site where we are going to be putting infrastructure in place in addition to and we were very careful to point this out in the press release, it is fractionation capacity, it is purification capacity, it is fill-finish capacity, and an additional testing lab which is another requirement in the overall plasma fractionation process that we need to have in place. So we are adding all elements in one location here, whereas historically you may have heard additional capacity investments talked about in a piecemeal fashion. As we look at this investment, approximately 30% of this investment place to infrastructure and as Bob just mentioned, that infrastructure will support both this initial 3 million in capacity but also significantly more capacity in the future. And by making the investment now, it will position us to add that additional capacity in the future at a lower marginal cost and in a much more timely fashion than this Greenfield site is going to take for us to bring up.

Does that answer your question?

No. That absolutely addresses my question. Very helpful. Thanks. The second question is just on recombinant. Obviously very strong growth in the US this quarter. I was wondering do you think that represents true -- presumably, that's growing faster than market, that 10% figure. I think that represents more patient share gains and that patients are switching to ADVATE. Or does it represent higher dosing and maybe a little bit more use of prophylaxis among your existing patients?

I'm not sure at this stage we know. I think that it probably represents some of each of those elements that you just described, James. So I think it's too early to be able to quantify which of those variables is the most pronounced. But we know specifically that on a patient-by-patient basis that we are gaining conversions. One from competition and then two, expansion and use of ADVATE given the broader label. So as we stated in our prepared comments, early start but it's quite encouraging.

Thanks. And maybe I can just get one more in on Sub-Q. Even if HyQ is a little bit delayed, I think one of the things that's interesting is that your non- HyQ Sub-Q product has been doing a little bit better than we expected. Would you be able to quantify either from a share or dollar perspective what the run rate there is now?

Well, probably I think too early to quantify. Again, as we commented previously and I would reiterate today, James, we're very encouraged by the market response of our 10% Sub-Q as you know, our Sub-Q has the lowest reported local site reaction of any of the Sub-Q products by far. And that's being really validated through the use in the marketplace. Beyond that quantitatively, Mary Kay, I don't know if there's anything you want to share that might be helpful.

Yes. I think we're off to a great start with Sub-Q. We continue to see patient gains both competitively as well as conversions from IV to Sub-Q, James, and our assumption currently include sales approaching on a global basis, because we do also have a product in Europe that we sell of about $100 million in 2012.

And I appreciate your question. Obviously, we'll talk more about this I'm sure with follow-on questions about the HyQ program, the delay and so forth. But your point's a good one, because the reality is with the 10% Sub-Q, we've got a great product, we've got something to promote, we're getting traction in the marketplace. And so growth in this segment is not exclusively dependent on the short-term of the timing approval for HyQ. So that's an important point for everyone to understand.

Great. Thanks, guys.

Kristen Stewart, Deutsche Bank.

I guess I will follow-up on just kind of any more specifics that you might have on HyQ maybe just helping us frame what your initial expectations are with the FDA's request and maybe some broad timelines, if you can?

I don't know if we can define the timelines, Kristen. And there is still -- we're still engaged with the discussion with the FDA, so I don't think we want to be premature. I'll ask Dr. Riedel -- Norbert, why don't you comment on this situation, see if you can provide some help to Kristen.

Maybe just as a follow-up to what we have announced at the beginning of the week and to just ground everyone, the study we have done in the administration of immunoglobulin therapies for Hylenex or HyQ is a study where patients were treated with immunoglobulins for more than a year in the extension that we have ongoing actually some patients are approaching three years and we have not seen any serious or nonserious adverse events that would have actually given us any concerns in the clinical study. We have actually talked about the result as recently as last month, where we presented the longer-term studies. And the concerns of the agency are really around the long-term chronic use of the hyaluronidase that is part of this therapy in the administration of immunoglobulin. Immunoglobulin therapy, as you know, from our indication in PID, is indicated for long-term chronic use. So the concerns that the agency has raised our around hyaluronidase in long-term use. I can't really give you a lot of specifics or more specifics than what we have shared, only because we are in dialogue with Halozyme and the FDA as to how to address the concern and what kinds of studies we would propose to address those concerns, but I will of course keep you posted on that as soon as I have a clearer picture and better definition. That's really all I can share with you at this point.

Okay. And then I guess your expectation is to go before a panel. Should I read into it that that seems at least to be positive in that I would imagine you would be able to get some of this data from the extended study? So I guess how should we think about the panel just in terms of possibly helping maybe to support an approval?

So the Blood Products Advisory Committee is the panel that you're referring to. It will actually be involved in looking at the proposed studies that we will put forward as to how to address the concerns of the agency. So I think you're right; I think that's a positive. And actually is also really a pretty normal course of action in regular panel, so there's nothing particularly unusual about it. And that's the current plan, that we will actually have a panel, and discuss the study design with the panel.

Okay. Thank you. Can I ask one other question on the gross margin? Given the recombinant strength in the quarter, I was a little surprised that we didn't see a little bit more upside there. Can you just walk through in any granular detail the moving parts there?

Yes. What I would say is first and foremost, Q1 is always the lowest quarter from a margin standpoint for us. And most cases. So again, this was in line with our expectation. There were some positive mix benefits as we mentioned. There are some headwinds built into 2012 that we've talked about quite a bit. As we mentioned, we remain very confident in the full-year guidance of flat to very modestly down, which implies that the gross margin will increase in subsequent quarters. I'd also highlight -- the one aspect of seasonality that's pretty consistent in our results is Q2 tends to be a higher margin quarter for us, primarily due to the fact that we have sales in Europe of our FSME vaccine for tick-borne encephalitis and so that's a high-margin products that tends to augment the Q2 margin. So we're certainly expecting margin to improve as we move throughout the year with Q2 again likely to be the highest of the quarters. And again, very comfortable with the full-year guidance.

Okay. Thank you.

Thanks Kristen.

David Roman, Goldman Sachs.

I was hoping you could comment just on HyQ and the extent to which the FDA review, how that influences the international approval timelines and what the latest thinking was there?

So as you know, we have actually submitted our dossier in Europe and in Canada as well. It's under review there. And we are in dialogue with those agencies but there's really nothing in particular specific that I need to comment or can comment on because it's an ongoing review process, and it's taking, likewise, it's normal course of action at this point.

Okay. And maybe a follow up on the CapEx questions. For Bob, the $1 billion, how should we think about that getting layered into cash flow statement? Is that something that you're swapping out existing CapEx for that or is that a true net addition of $1 billion spread evenly over the next several years?

No. That is incremental. In the sense that we always invest in our plasma footprint, and as we've mentioned, we've got additional capacity coming online in Italy as an example. So there's an existing base of expense was a spending that's going on even today. Given the nature of bringing a new plant up though, the spending tends to be a bit more front loaded because you need to get the facility in place, the equipment place, build a conformance lot, submit stability studies, and all of those things.

So I would say 2013 and 2014 are going to be the peak years and from an incremental standpoint of where we're sitting today, I think about it in kind of $400 million of incremental spend in each of those years with some flex between '13 and '14 to accommodate this additional spending. But, what I would add is given our strong cash position, our strong cash flow that we expect to have going forward, our very strong balance sheet and flexibility within our current credit ratings, this additional investment is not going to constrain our ability to continue to do the things we've been doing, which is reinvesting in other parts of our business, returning significant value to shareholders in dividends and buyback and doing select bolt-on acquisitions that augment our portfolio.

Okay. That's helpful. And then lastly, maybe, Bob Parkinson you could provide some context for the acceleration in R&D spend. This has been a pretty consistent theme at Baxter certainly since you've been there. I think R&D spending is up over 50% since you joined the Company. Maybe the HyQ disappointment on Monday, I think, does raise some questions about the return profile of some of that R&D. Can you talk just how we should think about the return on that investment and when we start to see a little bit more top and bottom line contribution from those investments that you've made?

Well, first of all, I don't think anyone should associate the disappointment and the delay in HyQ with the broader pipeline. In my prepared comments this morning I cited just a few examples of many in terms of how we're progressing in all of our businesses on multiple fronts. The ramp up in R&D since I've been here as we've discussed many times is a reflection of, at the end of the day what's our most important strategic priority, which is the ability to innovate, because that's really the only sustainable business model in this industry in my view. Again as I've commented, a number of times, I tried to be as objective about this as I can.

I really believe our pipeline today is the strongest that it's been in the history of the Company. The profile of what's in our pipeline, are largely products that are higher margin than the overall Company. Clearly that represents a better growth trajectory with primary focus on core franchises, hemophilia, being one, renal and dialysis being another, and so forth. So in terms of the impact, obviously we all know HyQ was the near-term opportunity to have some material effect on our sales growth. But I mean, things that we've already got approved and launched from the 10% Sub-Q we talked about the expanded label on ADVATE.

Sometimes we don't typically associate with these with R&D spend but these are all programs that required R&D investment and the highest payback and the most significant return are on those things that further enhance the position of franchises or businesses that are already established. As just a couple of examples, we hope to get the approval on the MMN indication. So I'll stop short of playing back the entire pipeline, but let's not associate the shorter-term disappointment on HyQ as a reflection of the broader pipeline, because the strategic priority is as I described.

Okay. That's very helpful context. Thank you.

Mike Weinstein, JPMorgan Chase & Co.

Bob, maybe I can ask a question on HyQ because I do want to focus on it. And I think there are probably two questions. I think the first question is, what does Halozyme have available in terms of its data set, both clinical and nonclinical, that you think could be of value of the FDA that the FDA has not already seen? And second, this response by the FDA certainly surprised the Company. This is an issue we discussed over the last couple of years, the FDA's comfort with the chronic usage of hyaluronidase. So why do you think this surprised the Company and what was missing in the back-and-forth of the FDA that had this come out last-minute?

Well, look, the one thing we all know is it's difficult to speculate on the motivation or rationale of the FDA. I think it is fair to say that we were surprised, certainly disappointed. Norbert, I'm going to have you address the first part of the terms of Halozyme data, what do we have and so on, recognizing that we're limited in talking about it until we get further down the path in our dialog with the agency.

Mike, we have talked about this before, you and I have talked about this before, I was very much focused on the actual clinical trial results that we saw in our Phase III trial with Hylenex in PID. And as I mentioned in my earlier comments, we have seen a very clean efficacy and safety profile in that study, not only within the Phase III that was submitted to the agency but also with respect to the extension that we have ongoing where patients have been on therapy for almost three years now. So clearly I have and continue to have a high level of confidence that the clinical trial data is very strong data and we published that and you referred to that in your write-up.

With respect to the agencies concerned, it's really about introducing the recombinant human PH20, or hyaluronidase, as a long-term chronic administration of a molecule and questions or concerns around that. We are truly working with Halozyme on a daily basis to identify what data exists and what data the agency's looking for and how to best design studies around those data. At this point, that's really all I can tell you. And as soon as we have that better defined, we will of course communicate that. But that's the current status.

Bob, does the potential push out of Halozyme, I'm not talking about six months but of HyQ, the push out maybe beyond six months making this a longer push out, does that potential change your thinking at all on M&A in terms of appetite not only for the -- you've talked about wanting to do a series of smaller deals but potentially doing anything larger?

No. It doesn't. Our priorities in terms of M&A are consistent with what we see -- I don't see any correlation between the two at all is the straight-out answer to it.

Understood. I think the question from the Street would be, if the targets you have internally for reaccelerating revenue growth, and a lot of that is going to be driven by the pipeline, if those targets get pushed out, would that lead you to pursue M&A more aggressively, or sooner than you would have otherwise? That's the thinking behind it.

I don't think so. I think our outlook and obviously we look forward to getting together with everybody at the Investor Conference in October to talk about this. I mean, let's just back up and put this in perspective. We're disappointed in the delay of HyQ. Only a handful of analysts, I think yourself included, Mike, had even quantified what the long-term impact was or longer-term impact. I think the average incremental revenue associated with this in 2014, so in other words two years post-launch was somewhere between $100 million and $200 million. I don't want to minimize that. That's not insignificant but in the context of a company of our size, particularly, just to be very candid with you in view of the reaction of the market this week, is a total disconnect, okay?

And the other point I would make is, assuming this represents just a delay, as you all know, because we talk about fractionation capacity all the time, the incremental value of HyQ was more price-related than it was volume-related, because to be very candid, with the 10% Sub-Q which I commented robust market growth, opportunities globally, we can sell as much IVIG as we can make, independent of whether we have HyQ approved or not. So again I don't want to minimize the incremental value primarily associated with the price but if the composite or consensus average of incremental sales two years out was somewhere between $100 million and $200 million, that puts you in a quantitative perspective, vis-a-vis the reaction to the markets this week. So you know what? I'll just leave it at that.

No. I think that was perfect. Let me ask you a couple other pipeline follow-ups.

Sure.

One, can you just talk about ADVATE approval in China? Is that coming as well as from other emerging markets I know you're waiting on? And second, where are you on timeline for filing your recombinant Factor IX product?

Okay. Well, the ADVATE approval -- Mary Kay help me here. Russia and China are still on track for this year.

On track, Mike. Second half of this year. No change at this point to our expectation for both China and Russia. And in regards to the recombinant Factor IX, we are looking -- that's also on track to be completed here and filed in the second half as well.

Perfect. Thank you, guys.

Matt Miksic, Piper Jaffray & Co.

Not to beat a dead horse here on your points you just made, Bob, on HyQ, but I do want to be clear about one thing, and I think you talked about this in the past. Let's say hypothetically it was going to be $100 million or $200 million product in two years. Is it also fair to say that you're thinking was you get into the Sub-Q market with Sub-Q and then you add to that, drive mix, drive some incremental share possibly? But to some degree, penetrate your Sub-Q business over time with HyQ?

Yes. Clearly that was the original strategy. And it still is based on the timing of the approval of HyQ. I think the difference is originally when we launched the 10% Sub-Q, we saw it as a catch-up to be then competitive, with other Sub-Qs on the market. In other words a catch-up wants to set the stage for HyQ. What we've learned as I've commented, we have the superior Sub-Q product right now which has a lot more traction and opportunity than what we had earlier anticipated. So the strategy remains the same, to overtime upgrade to HyQ when and if we get approval for HyQ, but in the meantime we have more upside and opportunity on 10% than what we had estimated at the start. If that makes sense to you.

It does. So there, I'd look at that $100 million to $200 million number and I'd say, well part of that was an overlay on existing business at that time. So I would agree with your earlier comments and those were very helpful. One point if I could on what the FDA has said or focused on in terms of the chronic use. You mentioned I think clearly that there is no safety concerns for IVIG, which is used chronically and widely. Was there any observations or any blip in the data that the FDA has seen or focused on for hyaluronidase? Or is this a matter of routine that they've just decided to be more careful?

I'll ask Norbert to comment on that.

Maybe I'll expand on it in the following way. There was nothing in particular. I think it has to do with, in a reasonable way, has to do with the recombinant hyaluronidase being positioned for chronic long-term use for which it is currently not indicated. And I think the questions and concerns are all around that aspect of this therapy. And keep in mind maybe as a follow-up to the earlier questions, while our Sub-Q is positioning us extremely well in the space of [this cloud of] administration, we have always looked at the HyQ as truly a transformational, game-changing, incremental improvement, much beyond what Sub-Q does.

So it's one of those pioneering programs in our pipeline that we think are highly promising but also in a way go down a new path with the regulators. And therefore, there's a little bit more uncertainty than there would be in a Factor IX or Factor VII or a [vonvillipon] Factor which is a more straightforward, maybe a lifecycle management product development approach versus pioneering new ground. And that also speaks to the pipeline being really balanced between lifecycle management opportunities that are truly enhancing existing core businesses and new opportunities like HyQ, like stem cells, for which I think we need to make resources available because that is our legacy of truly bringing first-to-market innovations to our patients and customers. But to draw conclusions from HyQ in general onto the pipe and the productivity of the pipeline I think will be really misplaced.

That's very helpful. And then one if I could just on, Bob, your comments on I think holding share obtained from Octa last year was sort of the math that you were doing with the $30 million benefit that you saw in the first quarter of '11, when does that -- you sort of have given if I recall correctly, your guidance assumes that you'd surrender something like $100 million of gained share last year back to Octapharma as they got into the market. It doesn't seem like that's happening yet from the numbers the your reporting, because when does that turn into potentially edging up some of the expectations for the year?

Well, a couple things. As we pointed out in our prepared comments, we are going to have a tough comp in the second quarter. But we will see stronger growth in the third or fourth quarter. But as we also mentioned, because of shutting down the old facility extending its useful life and providing important flexibility going forward, we are going to be constrained this year. We have shifted product to meet market needs, and so I didn't want to imply here that specific customer by customer retention of share from Octa because different price points, different geographies where they're stronger and so on. But in aggregate, stepping back and looking at the level of demand we're seeing for our product, again augmented here with the strong uptake for 10% Sub-Q in the Sub-Q market, we feel very good about how our share position overall has evolved and we have not competed to try to retain some of those more price sensitive customers that we've talked about before that are likely targets for Octa's reentry.

Okay. That's helpful. Thanks so much for taking the questions.

Thanks, Matt.

Rajeev Jashani, UBS.

Just on the recombinants business, there's obviously pretty robust result there in the US. And I was just wondering if you could help us understand what we can expect there, maybe in the US and ex-US across the remainder of the year. One quarter obviously was very strong, but can we expect the same kind of growth across the balance of the year and maybe ex-US declines widening? Or if you could throw out any other color there. Thanks.

Recall that we're in the process of the Australian tender playing out, so we're going to have tough comps throughout the course of this year on the international front, related to the Australian tender, which is going to murk up the picture here as we go forward. Again, we're very encouraged by first-quarter results in the US, and the reaction from both treaters and patients to the very strong data from the ADVATE label expansion, and prophy indication for adults, and so on. But again, it's early days, so I would say we expect to be in good position to grow at least with the market here in the US throughout the course of this year but again, we're going to have tough comps internationally and that's reflected in our global guidance for the full year.

Great. And I had one follow-up on the IVIG market. I think there was a pretty healthy increase reported in the CMS database for pricing for the fourth quarter. And I was just wondering if you could comment whether you saw that sustained over the first quarter? Thanks.

No. We've got to be careful here, because as you know, there's a number of dynamics that come into play with CMS reporting. We've talked about the fact in terms of the contracting process here for 2012 with our customers in the US, we had a very modest price increase, certainly well below 6%. And so that has to do with timing and how we report certain adjustments and rebates and following their rules and so on, so I would not attribute much value to that 6%, because that is not what we're seeing.

Thanks so much.

Mary Kay, would you follow-on to the first part of the question?

I was just going to add, Rajeev, that in recombinants, as Bob mentioned, we didn't change our full-year guidance at this point. The Australian impact is about $60 million for the full year, and as that will play out over the course of the year. We'll have a little bit easier comp outside the US as we get into the back half of the year. But just an example of the impact Australia has had, international sales were flat in the quarter, including the impact of Australia and ex that, they were up 6% in line generally with the market growth that we're seeing and estimating.

Thank you very much.

Bob Hopkins, Bank of America Merrill Lynch.

Sorry to add another Bob to the call here. (laughter) So first on HyQ, I assume the FDA has seen the data approaching three years that you mentioned in your comments earlier?

No. The answer is no, we have not yet submitted the data on the extension study to the FDA.

And how many patients are out beyond 1 year at this point? How many patients do you have that are out to that three-year mark?

It's just a few more than 50 patient that continue in the extension study, and recall the Phase III study itself was just trial of 90 patients. I think it was 87. So 56 I believe are continuing in the extension study.

So the data obviously they've seen the one-year data on all patients so you're going to at some point present to them the incremental data here. I'm just trying to frame the timing. I know there's not much you can say on this, but listening to the conversation you're talking about designing new studies and questions about chronic use. It would seem to me that we should really be thinking about this in terms of an 18-month delay, at least. From your perspective, is there a better scenario here that's possible from a timing perspective? Or is the 18 months that I'm using as a placeholder probably not a bad way of thinking about it at this point?

Truly, I don't know what's actually leads you to the 18 months that you are using. I can only tell you that at this stage, I really can't put a clear timeframe around it, because that all depends on, not only the design of the studies, but also the discussion with the FDA and with the advisory committee, so it's truly too early. But I do believe that we will be pushed out beyond 2012. As I get closer to understanding what exactly needs to be done, than I can help you with the timeline. But at this point it would be speculating and I'd rather not do that.

Okay. And then a question on plasma capacity. Your guidance for this year is for basically low to mid-single digit growth in those businesses. At what point do your capacity constrains ease? And one way to ask a question is if we look out beyond 2012, if the demand were there, could you grow those plasma businesses more in that 6% to 8% type of area as we think about 2013, again, if the demand were there? I'm just trying to get a sense as when you think these capacity constraints will ease and is thinking about high single-digits possible beyond 2012 if the demand warrants it?

This is what I tried to comment on at the outset is with keeping old LA in the commission and some of the other expansion initiatives we have, we believe our install capacity can support growth over the next few years, let's say in the 6% to 8% range, Bob.

That's volume growth.

That's volume growth.

Okay. So when specifically do the capacity constraints start to ease? Is that really not until kind of the beginning of 2013?

Yes. I would say kind of towards the middle of 2013, because that's what we've talked about. We're taking old LA down for five months towards the end of this year but with the plasma production cycles that you're familiar with of up to six months it's going to take into the second quarter before we've got it back up, running and go through the process and have sellable product. So I would put it as kind of middle of next year before that's online. But as we also have mentioned we're bringing additional capacity onto the back half of this year in our Rieti, Italy facility. We are ramping up production this year and continue to ramp up the utilization level in new LA. We'll take another step up in early 2013 as well. So that will alleviate some of the pressure here, but I think really to be in the most robust situation, it's middle of 2013.

But the 6% to 8% over the next few years is reasonable and that's IGs, really.

Yes. That's IGs, really.

Albumin would have --

Others, we would be in better shape.

We'd be in better shape on albumin.

That's perfect. Thanks very much.

You bet.

Rick Wise, Leerink Swann.

Just a couple things and I apologize I jumped on a little bit late. Did you review any update on the home hemo product timing and when you're expecting to get that product launched and going?

Actually, we did not, Rick. It's a timely question. Norbert or Mary Kay, you want to give the specifics?

So the study is actually ongoing, the clinical study and I would characterize it as patients on therapy really liking the therapy. So since we restarted, we have had no issues to deal with and therefore, our projected timeline remains for a CE marking in Europe in 2013 and for US launch in 2014. As US filing in 2014, I'm sorry.

So filing, US filing in 2014?

Correct.

And that would take another -- assume the things went normally, that might take another year so it's 2015 if all goes well for a launch, theoretically?

It shouldn't take that long, because -- I'd rather not speculate on it, so let's stay with filing and then see what happens thereafter.

Okay.

Rick, as we've mentioned in the past, we're as excited about the opportunities for home HD outside the US as we are inside. While we would love to have an approval in the US as soon as possible, we certainly can make a lot of headway on this program by getting a CE mark and moving forward in those markets where today we have a well-established PD business. There is a well accepted approach to home treatment for dialysis in Europe and reimbursement rates are attractive.

We still have 80% of our renal businesses, PD business outside of the US. So sometimes people lose sight of that, so that's really the big opportunity in the short-term.

Right. Thanks. Just two more questions and I'll let you pick and choose if you've discussed it before. Just an update on the integration of med delivery in renal. It sounds like we're pretty much done and Bob Hombach, I'd be curious to hear is to if there's further cost cutting beyond that. And last, Norbert, any update on the Alzheimer's program and Phase III data and next reported milestones? Anything would be appreciated. Thank you.

Okay. So on the medical products integration front, the way we characterize it up to this point, this is a $75 million to $100 million cost opportunity for us over time. We're probably 2/3 or more down the track of realizing that, but there still are additional leverage opportunities in front of us over the next couple of years. But the lion's share that we have already baked into our expectations.

And, Rick, on Alzheimer's, the first Phase III trial, as you know, will complete with the last patient out at the end of this year. And we still expect to have the data analyzed and available in the first half of 2013. The second trial which we initiated after the futility analysis turned out to be positive, has begun to enroll patients, sites have been initiated, so we are off to a good start on the second Phase III trial.

And data presentations interim? Anything coming up the next 6 to 12 months, Norbert?

No. I don't think so.

Okay. Thank you.

Thanks Rick.

Matthew Dodds, Citigroup.

Couple questions. On the new facility for plasma, is it going to be similar to LA? Because I'm just wondering why you might not want to try to tweak it a bit and see if you can get a little bit more yield out of IG.

Actually, the layout, Matt, we're going to take a little different approach, more of a modular approach than we took at LA. I think that that does several things for us. One is I think relative to the yield question you asked, perhaps do a better job in terms of yield. It also allows us to scale up beyond the 3 million liter incremental capacity that we cited this morning in a quicker fashion if we choose to do that. So the approach is actually quite different than what we took at LA.

And then one final question on renal. Internationally, it grew I think about 1% and it looked like it was off a pretty easy comp. Was there anything unique that happened that quarter, what is it PD, HD, anything you can give color on that?

Yes, Matt, it's Mary Kay. We did talk about this when we gave our guidance back in January that we did expect that, given the [yaka] reimbursement that's a biannual every 2-year basically price reduction in Japan, as well as we are seeing some of the EU austerity measures that we discussed, which had for the full year a $30 million to $40 million impact over the total portfolio. But there is a significant portion that's in renal as well. So that will be an ongoing difficult comparison that we'll have going forward.

Great. Thanks, Bob; thanks, Mary Kay.

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