百特醫療 (BAX) 2012 Q2 法說會逐字稿

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

(Operator Instructions).

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

Thanks, Kevin, and good morning, everyone, and welcome to our Q2 2012 earnings conference call. 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 help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today, to the comparable GAAP financial measures is included in our earnings release issued this morning, and available on our website. Now, I would like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning. Thank you for calling in. We are pleased today to announce financial results for the second quarter, and also provide you with an update on Baxter's full-year 2012 outlook. As you saw in the press release, which was issued earlier this morning, second-quarter sales after adjusting for FX increased 4%, and EPS of $1.12 per diluted share was in line with the guidance that we previously provided, and reflected an increase of 5%, versus the prior year on an adjusted basis. Despite ongoing macroeconomic challenges, we continue to have flexibility to make investments in our core product portfolio of critical therapies, expand further in developing in emerging markets, advance the pipeline, and pursue opportunities that will position us well for the future, and create long-term value for our shareholders.

Baxter continues to broaden it's portfolio through investments in research and development, and with business development initiatives aimed at enhancing longer-term growth. Some recent achievements include the following. First, we gained FDA approval to market GAMMAGARD LIQUID as a treatment for Multifocal Motor Neuropathy, or MMN. This is the first and only immunoglobulin treatment approved for MMN in the United States, where Baxter has been granted Orphan Drug status, and complements the approval received for this indication in Europe last year. MMN represents Baxter's first neurological indication, and further differentiates the GAMMAGARD LIQUID brand in the chronic care segment of the global immunoglobulin market. MMN is associated with the progressive limb weakness, mostly affecting the upper limbs, which can lead to significant difficulty performing simple manual tasks. We estimate that there are approximately 6,000 to 7,000 people worldwide with MMN. And today, immunoglobulin therapy is the first line treatment for this debilitating disease.

As you know, Baxter is also evaluating GAMMAGARD LIQUID for the treatment of mild to moderate Alzheimer's disease. Earlier this week, as I'm sure you know, data from abstracts related to the ongoing clinical programs were presented at the Alzheimer's Association International conference, the AAIC meeting held in Vancouver Canada. Dr. Norman Relkin, of New York-Presbyterian/Weill Hospital Cornell Medical Center, and the principal investigator in the Alzheimer's trials presented three-year follow-up data on the Phase II 24 patient study for the first time. As you may recall, the 18 month Phase II clinical results announced in April of 2010, represented the first study in Alzheimers disease where all three measures, cognitive, functional, and neuroimaging reported positive data that were statistically significant.

The Phase II study continued to treat 16 patients, open-label with GAMMAGARD LIQUID for a 36 month period. Specifically, four subjects, who were treated with the optimal dose throughout the study period showed no change from their pre-treatment baseline after 36 months on measures of cognition, clinician's global impression of change, and activities of daily living, behavior, and quality of life skills. While these trial results are encouraging, the open label extension study included a very small number of participants. The larger Phase III studies, which are currently in progress will further assess the safety and efficacy of GAMMAGARD LIQUID in the treatment of the disease, and we expect results from the first Phase III study in the first half of 2013.

Within our leading hemophilia franchise, Baxter continues to demonstrate an ongoing commitment to scientific innovation, and advancing treatment options for patients living with this hereditary condition. According to the World Federation of Hemophilia, more than 400,000 people in the world have hemophilia, and two-thirds are currently undiagnosed or untreated. As the global leader, we remain focused on increasing access and advancing standards of care, and improving treatment regimens. Baxter's leading product, ADVATE, continues to be the gold standard treatment in the marketplace, given it's strong safety, efficacy and convenience profile which remains a key competitive advantage.

We are encouraged by the acceptance of our new prophylaxis label, as evidenced by the strong first-half sales performance in the United States. The new label includes an impressive reduction in annual bleed rates, from 44 bleeds when treated on demand, to 1 when treated prophylactically. And also offers a new dosing schedule, that provides patient the choice of fewer infusions versus standard prophylaxis. In addition, the approval earlier this week of the 4000 IU dosage strength of ADVATE provides added convenience of single vial dosing for many adult patients, particularly those on a dosing schedule of every three days. Also during the quarter, we received approval for ADVATE in China. And we continue to work closely with the Chinese hemophilia community, including both patients and treaters to provide access to care for this life-saving, life-sustaining therapy. It's estimated that there are 50,000 to 100,000 people in China living with hemophilia A, with only a fraction of patients being actively treated.

Also in the area of hemophilia, we recently announced an exclusive global agreement with Chatham Therapeutics LLC for the development and commercialization of the potential treatments for hemophilia B, utilizing Chatham's advanced recombinant gene therapy technology, which has shown potential therapeutic benefit in early clinical studies. A small independent study involving six patients [vector] components of the Chatham technology, was the topic of the 2011 article in the New England Journal of Medicine. This collaboration will involve the next generation of this gene therapy technology, which Baxter and Chatham will investigate through US-based clinical trials. This partnership complements Baxter's internal development of a recombinant Factor IX therapy, where we remain on track to file for US regulatory approval before the end of this year. As you may know, hemophilia B is the second most common type of hemophilia, and is the result of insufficient amounts of Factor IX, a naturally occurring protein in blood that controls bleeding. Hemophilia B occurs in about one in 25,000 males, with approximately 4,000 people in the United States currently diagnosed with the disease.

Within the medical products business, we successfully completed the COLLEAGUE replacement program, and continue to focus on building upon Baxter's long-standing leadership and IV medication and fluid delivery. Toward this end, we finalize the purchase of the remaining interest in SIGMA International during the second quarter. Sigma's Spectrum large volume pump provides advanced safety and clinician friendly features, and is a system that addresses both the clinical and economic needs of customers. The pump is small, and easy to use, features technology intended to help reduce infusion-related adverse drug events, offers wireless connectivity to simplify the transfer of data for updating drug libraries, and uses Baxter's standard intravenous administration sets. You may have also seen that the Spectrum Smart infusion pump received top recognition in the large volume pump category of the 2012 Best in KLAS awards, Medical Equipment and Infrastructure report, which represents the opinions of more than 4,500 hospitals and 2,500 healthcare clinicians, and reflects a high level of customer satisfaction. KLAS is a company that measures vendor performance, and helps healthcare providers make informed technology decisions.

Lastly, earlier this morning, we announced a collaboration with the Sanguine Blood Supply Foundation in the Netherlands who will provide fractionation capacity for plasma-based therapies used to treat immune disorders, hemophilia, trauma and other critical conditions. Under the terms of this initial 10-year contract manufacturing agreement, Sanguine will provide Baxter with plasma fractionation capacity beginning in 2014, and ramping up to approximately 1.6 million liters annually by the end of 2016. This agreement, along with our plans to build a new state-of-the-art manufacturing facility in Georgia, positions us well to support future growth of plasma-based treatments. In summary, these highlights depict just a handful of recent achievements that present great opportunities for Baxter in the years to come. And we look forward to updating you on further milestones, as the year unfolds.

Now before turning the call over to Bob, I would like to provide a brief update on HyQ. As you may recall, in April, Baxter and Halozyme announced that the FDA requested additional information to complete it's regulatory review of HyQ. Baxter and Halozyme had been working to address Agency's concerns related to HyQ, and the long-term chronic use of hyaluronidase. As anticipated, and as part of the ongoing regulatory review process, we do expect to receive a Complete Response Letter from the FDA within the next few weeks, and we will provide an update at that time. As always, I would be happy to address any questions on this or other topics during the Q&A. But with that, I would like to ask Bob to review the second-quarter financial results and guidance for 2012. And then when Bob concludes his commentary, I will have a few additional comments, before then opening the call to Q&A. Bob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the second quarter excluding special items increased 5% to $1.12 per diluted share, which was at the high end of the EPS guidance range we had previously provided of $1.10 to $1.12 per diluted share. As mentioned in the press release, our GAAP results included a net after-tax benefit from special items totaling $42 million of income or $0.07 per diluted share, for costs and adjustments related to recent business development transactions and certain financial reserves. Specifically, we recorded a special after-tax charge totaling $23 million or $0.04 per diluted share related to a global collaboration with Chatham Therapeutics for the development and commercialization of potential treatments for hemophilia B. This charge was more than offset by a net after-tax benefit of $65 million or $0.11 per diluted share, resulting primarily from adjustments to both the Company's COLLEAGUE infusion pump reserves, and estimated milestone payments associated with the 2010 acquisition of ApaTech Limited.

Now let me briefly walk you through the P&L, by line item for the quarter, before turning to our financial outlook for 2012. Starting with sales, worldwide sales totaled $3.6 billion in the second quarter, and increased 1%. On a constant currency basis, sales increased 4%, which was in line with our sales growth guidance. As a reminder, the benefit from recent acquisitions which includes Synovis and Baxa was partially offset by the divestiture of the US multi-source generic injectables business. The net sales benefit of acquisitions and divestitures in the quarter was approximately $50 million, and benefited sales growth by approximately 130 basis points.

In terms of the individual businesses, starting with BioScience, global BioScience sales of $1.6 billion increased 1% in the second quarter. And on a constant currency basis, sales increased 4% despite a tough comparison to the prior year when sales increased 10%. Within the product categories, recombinant sales declined 1%, and totaled $565 million. On a constant currency basis, sales increased 3%, 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 6%. As Bob mentioned earlier, we are very pleased with the strength of our US business, where we continue to realize benefits associated with the new expanded label of ADVATE. While there may be some stocking in the US channel during the first half of the year, we are pleased to see strong underlying demand for ADVATE which is growing in high single digits.

Moving on to plasma proteins, sales in the quarter were $364 million, and were flat to the prior-year period. On a constant currency basis, sales increased 4%, driven primarily by growth of Aralast for the treatment of hereditary emphysema and FEIBA, a therapy used in treatment of inhibitors. In antibody therapy, sales of $376 million declined 1%. On a constant currency basis, sales were up 1%, slightly ahead of our expectations. Sales in the US advanced 3%, as we continue to be supply-constrained, and experience strong demand for GAMMAGARD LIQUID, particularly given the successful launch of our SubQ therapy. This growth is partially offset by lower sales outside the US, as we continue to optimize our global supply, in light of the LA facility shutdown planned for the third quarter.

I would also mention that the contribution from Octapharma last year of more than $30 million in sales presented a difficult growth comparison. Excluding the benefit in the prior year, growth in antibody therapies was in double digits. In the second quarter, sales in regenerative medicine advanced 18% to $174 million. On a constant currency basis, sales rose 21% as a result of double-digit growth of FloSeal, and the incremental benefit from Synovis of just over $20 million. Finally, revenues in the other category totaled $87 million in the quarter and declined 5%.

On a constant currency basis, sales increased 3% driven by sales of our FSME vaccine, and ongoing revenues related to our influenza collaboration in Japan with Takeda. In medical products, global sales in the second quarter exceeded $2 billion, reflecting an increase of 1%. On a constant currency basis, sales increased 4% and the net benefit from acquisitions and divestitures of $25 million favorably impacted sales growth by 120 basis points. Within the product categories, renal sales totaled $635 million, and were comparable to the prior-year period. On a constant currency basis, sales increased 4% as global PD growth accelerated to 6%, supported by solid patient gains around the globe. This momentum was offset by lower HD revenues.

Sales in the global injectables category of $539 million increased 7%, and on a constant currency basis, sales increased 9%. Excluding the net impact of $10 million related to acquisitions and divestitures, organic growth was 11% on a constant currency basis. Performance was driven primarily by our pharma partnering and compounding businesses, and significant growth of certain injectable therapeutics like cyclofosfamide, a generic oncology drug. IV therapy sales advanced 6% to $479 million. On a constant currency basis sales increased 10%, driven by higher demand for IV therapies in the US, and strong performance globally of our nutrition franchise, which includes a $35 million benefit related to the Baxa acquisition. Infusion systems sales totaled $209 million, similar to the first quarter and declined 10%. On a constant currency basis, sales declined 9% as a result of lower access set sales. Finally, our anesthesia franchise posted sales of $132 million, reflecting an 8% decline versus the prior-year. On a constant currency basis sales declined 6%, as a result of a difficult comparison to the prior year, and lower US sales due to wholesaler inventory adjustments.

Turning to the rest of the P&L, gross margin for the Company accelerated to 51.8%, in-line with our expectations, and reflecting an improvement from the first quarter of 100 basis points. However, this gross margin rate was modestly lower than last year, as mix benefits were more than offset by a number of headwinds we have previously discussed, and the impact of foreign currency which had a negative impact of 50 basis points. SG&A totaled $789 million and increased 3% as a result of recent acquisitions, incremental pension expense, and promotional and marketing initiatives within BioScience, and in international markets to enhance our global presence. These investments were partially offset by a benefit from foreign currency, business optimization savings, and aggressive management of discretionary spending.

R&D spending advanced 15% to $276 million, as we continue to fund a number of projects, including investments in our leading hemophilia franchise, Alzheimer's programs, and our Phase III adult stem cell trial. And it also reflects continued focus on a variety of early stage initiatives that augment our late stage pipeline. In addition, I would highlight that R&D investments this quarter included approximately $20 million of accelerated and discrete items, including various milestone payments, and expedited supplies of products for use in a number of ongoing clinical trials. I would also point out that the second quarter represents the highest level R&D spending on a quarterly basis that we expect for 2012.

The operating margin in the quarter was 21.9%,160 basis points below prior year, driven primarily by the negative impact of foreign currency and the significant ramp up in R&D. Interest expense was $22 million, compared to $15 million last year. This increase is due to incremental expense associated with the $500 million debt issuance in December of last year, and lower interest income. Other income totaled $24 million in the quarter, and compared to expense of $13 million last year. This benefit is a result of favorable foreign exchange impact on balance sheet positions, which totalled approximately $10 million, and a benefit of $15 million related to minority interests. The tax rate was 21.2% for the quarter. And on a year-to-date basis, is in line with our guidance. And finally, as previously mentioned, adjusted EPS was $1.12 per diluted share, an increase of 5%.

Turning to cash flow, cash flow from operations in the quarter totaled $943 million, and increased nearly 50% versus last year. On a year-to-date basis, cash flow from operations exceeded $1.3 billion, which is $350 million higher than prior year, as a result of lower pension contributions and the collection of aged receivables in Spain during the quarter which totaled approximately $200 million. Capital expenditures of $264 million, compares to spending of $210 million in the second quarter 2011. DSO ended the quarter at 52 days, a reduction of more than 5 days versus the prior year, driven primarily by the recent collection in Spain. Inventory turns of 2.4 are somewhat lower than last year, and comparable to the first quarter. Lastly, on year-to-date basis, we have repurchased 17 million shares for $960 million, or on a net basis,13 million shares for $788 million, on track to achieve our full year objective of net share repurchases totaling $1 billion.

Finally, let me conclude my comments this morning, by providing our financial outlook for the third quarter and full-year 2012. First, for the full-year, we now expect earnings of $4.50 to $4.56 per diluted share. By line item of the P&L, starting with sales, we continue to project full-year sales growth on a constant currency basis of 4% to 5%. Given our outlook for foreign-exchange rates, we expect currency to have a negative impact on the top line of approximately 3 percentage points. Therefore, we expect reported sales growth which excludes the impact of foreign currency, to be approximately 2%. We now expect the full-year gross margin rate for the Company to expand modestly, versus last year's rate of 51.4%.

We expect SG&A to grow in low to mid single digits, and we now expect R&D to grow in mid to high single digits, reflecting the strong first half growth, and modest growth in the second half. We continue to expect interest expense to total approximately $80 million. And we now expect other, including non-controlling interests, to be an income item approximately $10 million. We continue to expect a tax rate of approximately 21.5%, flat with 2011, and expect a full-year average share count of approximately 555 million shares, which assumes $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 approximately $250 million related to the finalization of the COLLEAGUE consent order.

Now, to expand on the full-year sales assumptions for each of the businesses, which remain unchanged from previous quarters. 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%, including an incremental benefit of approximately $120 million related to the Baxa acquisition. Anesthesia sales growth in high single digits. Global injectable sales growth in mid single digits, which includes the net benefit of $20 million related to acquisitions and divestitures. Infusion systems is expected to decline approximately 5%. And lastly, renal sales are expected to grow in low single digits.

For BioScience, we project sales growth on a constant currency basis in mid single digits. 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, regenerative medicine sales growth of approximately 20% which includes incremental sales from Synovis of approximately $75 million. And finally, we expect the other category to grow approximately 5%, which includes anticipated milestone payments in the second half of the year related to our US influenza vaccine program.

As mentioned in our press release, for the third quarter, we expect earnings per diluted share of $1.12 to $1.14, and sales growth on a constant currency basis of 5% to 6%. Based on our outlook for foreign exchange rates, we expect currency to impact sales by approximately by 5 percentage points. Therefore, we expect reported sales growth of approximately 1%. Thanks. And now I will turn the call back over to Bob for his closing remarks.

Thanks, Bob. Before we open up the call to Q&A, just a few closing comments. First of all, I would tell you I am very pleased with our results during the first half of the year, which included sales and earnings were in line with the guidance that we have provided on a quarterly basis. We also in the first half, continued to build momentum with our internal R&D and new product pipeline, as well as external business development activities. While the global macro environment is going to continue to pose obstacles and healthcare companies are facing unprecedented complexities, given the medically necessary nature of our products, our diversified health care model and strong market positions, we are confident in our ability to drive improved performance over the long-term.

As you all know, we have an investor conference that is scheduled for October 9 here in Chicago. And at that time, we will provide more insight over into a number of R&D programs across our businesses. And we will also provide a longer-term outlook in the financial performance of the Company, with particular focus on our major franchises, the growth drivers, and strategic business opportunities that are critical to our future success. I'm also looking forward to the opportunity to share with all of you, why I am so positive about the future of our Company. So with that, thank you, and let's open up the call to Q&A.

Thank you.

(Operator Instructions).

I would like to remind participants that this call is being recorded, and a digital replay will be available on Baxter International's website for 30 days at www.baxter.com. Our first question comes from David Roman with Goldman Sachs. Please go ahead.

Good morning, everyone. Thank you for taking the question. Bob Hombach, I was hoping you could go into a little more detail about the guidance for the balance of the are. If I look at the $1.12 to $1.14 earnings that you are providing for the third quarter, but essentially keeping the full-year guidance unchanged at the midpoint. But the sales guidance for the third quarter likely represents a highest growth that we will see for the year. Just talk about the negative leverage that -- and how that flows to the P&L and if there are any discrete items in the third quarter that are negatively impacting the earnings numbers?

Well, yes, David, I would say first off, I wouldn't say that the third quarter is the highest sales growth. I think you will see comparable sales growth in the third and fourth quarters, in order to get to the full-year organic growth guidance that we have projected. I think the single biggest difference between third and fourth quarter, in terms of acceleration at the bottom line is really just timing of some key tenders in emerging markets, primarily Eastern Europe and Latin America, that just from a shipment timing perspective are going to land in the fourth quarter versus the third quarter. Also from an FX standpoint, there has been a lot of volatility here lately. And so I think as we look at our third-quarter in particular, since that is more near-term here, and I would say there may be a touch of conservativism in the third quarter numbers as well.

And David, it's Mary Kay. I would also add, just on gross margin, we do expect margin in the third quarter to be lower than Q2. But still show expansion over the prior-year, call it roughly 50 basis points. And Q4 will be our highest gross margin quarter. Again, projecting something in the 50 basis point improvement year-over-year.

Okay, that is helpful. And then Bob Parkinson, on HyQ, I think you can probably expect a lot of questions on this. But you sort of opened yourself up on the Complete Response Letter which you expect to get a couple weeks. Can you maybe provide a little more detail on what we should look for in that letter? How the dialogue with the Agency has gone since the April announcement? Whether you're still think you need a panel, et cetera, where from here?

Let me maybe respond to that, David. And then, I might ask Dr. Reidel to comment as well. We have had a lot of back-and-forth with the agency, since our last call last quarter on this. As I commented in my prepared comments, we do expect to receive a Complete Response Letter from the FDA within the next few weeks, and I think at that time, some of the specific expect Haitians will be clarified. And of course, when we get that letter, we will communicate externally. And in a more specific way than I think what we have been able to date. Beyond that, I think I would prefer to wait until we get the letter, and then can share with everyone as I said, in a more specific way than what we have been able to do thus far in that regard.

I don't think we want to -- at this point, there's really not a lot we can add to that. (Multiple Speakers).

Okay. And then maybe just lastly, any update on outstanding tenders, such as Canada for recombinants or anything else, that might have come up during the quarter?

No, not at this point. Nothing official has been finalized at this way David.

Okay. Thank you very much.

Mike Weinstein from JPMorgan is on line with a question. Please state your question.

Good morning. Thank you for taking the question.

Good morning, Mike.

First, on HyQ. Bob, can you give us any more insights into your view on what you think the CRL means for timing?

Yes, again, as I said I don't really want to speculate. We will get a Complete Response Letter shortly. It will be within the next few weeks, it might even be somewhat sooner than that. So let's wait till we get that. And as I said, we will be very forthcoming, in terms of what the content of that letter is. As I said in response to David, David's earlier question, we've had a lot of dialogue back-and-forth with the agency. But I think the letter will really, for the first time specifically clarify with the expectations are with the agency. So at this stage, I would prefer to just leave it at that.

Okay. Do you have an update on Europe, and where your filing is in Europe, and the response there?

It's moving along. Norbert or Bob, I don't know if you want to comment on that?

So as you know Mike, we submitted our file in Europe, and the regulatory review process there is ongoing. And I do not expect to hear much from Europe until the end of the year or the first quarter of the year. It is still ongoing, the review process.

Mike, it is Mary Kay. I think it's fair to say, that we are not clear if there is any applications of the FDA concerns on the European approval.

Okay. Can we spend just a minute on the Sanguine collaboration? Because I think that's an important event, in terms of incremental opportunity in your plasma protein business. Can you talk a little bit about logistics, in terms of how that would work, for you shipping product to their fractionating? And how should we think about the economics of that incremental supply?

Yes, I would say we're very excited about this. And I am going to ask Bob just to kind of walk through the specific elements of this, because I think it's important that everybody understands the various components. Bob, so why don't you?

Great. So I would characterize this very much as a toll manufacturing type arrangement here. We are providing the raw plasma. We are collecting it ourselves, and providing it Sanguine. They will do fractionation, and then send the paste to us for IGs and albumin. They will do purification, fill-finish for PD Factor VIII. And so really, we will have control over the vast majority of the overall supply chain here, with the exception of the fractionation for the paste, particularly for IGs. We do have a fixed fee arrangement here. So from an economic standpoint, and as you know, if you look at the overall cost picture, the marginal costs associated with the fractionation these versus collections, and other aspects of the overall cost picture is a modest slice of the overall picture. And the rate at which we're being charged here, is very consistent with our own costs to do similar activities within Baxter. So really, this is an outstanding deal from an economic standpoint. It really doesn't change our cost position net-net, and allows us to access to significant opportunity here for increased capacity over time.

And then just one follow-up on that, could you talk about your ability to increase raw material supply, access to plasma?

Well, certainly. We have a large footprint in the US today. We have some capacity within our existing footprint to increase collections. Over time, as we continue to do -- as we have done in the past, as we grow this business, we need to continue to add incremental collection capacity in order to support that. Certainly, for the Georgia facility. We had it within our plans to continue to add additional collection capacity. And with this opportunity here we will be, in addition to executing this agreement with Sanguine, we will be growing collection capacity, roughly commensurate with this, in terms of how much incremental this adds to our overall picture. But we don't view that as being a rate limiter here at all. Collections will not be a bottleneck, as far as we are concerned.

Great. Thanks for taking the questions.

David Lewis of Morgan Stanley is on line for a question. Please state your question.

Good morning.

Good morning.

Bob, I wonder if we can come back to Sanguine for a second, just sort of strategically. I guess, the announcement is a positive, obviously solves for maybe a near-term capacity problem. But if you think about your access to capacity between LA frac, and then obviously transitioning to the Georgia facility, this implies you are tried to fill sort of intermediate production capacity. So I guess, with the benefit of hindsight, what do you think is sort of the strategic driver? Do you feel like the market demand has just picked up greater than you would have thought several years ago? Is it that, where you that the greenfield facility would come on faster, is it kind of where you see LA frac, in terms of it's maturity? Just sort of help us understand the timing, and what you think brought about this decision, as you think about the last couple of years?

Yes. This is Bob Parkinson, David. Let me take that, and then Mary Kay or Bob can add to my comments. I think you characterized the Sanguine deal the right way. This is an intermediate gap filler. And I think there are three dimensions of our capacity expansion. Clearly, long-term is the announcement that we made last quarter with the greenfield site in Georgia. This announcement this morning with Sanguine, which can add very meaningful incremental frac capacity, starting in 2014 as we mentioned.

And then, of course, short-term our decision to put old LA back in production, recognizing that we are going to continue to manage through for while, the constraints that that creates until we can get old LA back into production. We also have other short-term levers we can pull, in terms of scaling up more volume at new LA, some expansion opportunities as you know at [Reite] facility, and to some degree our Vienna facility. So truly short-term levers that we can pull that I just described. Sanguine is an intermediate gap filler and so on. So back then to your question, what is driving this. We have consistently maintained that the plasma protein business is a very attractive business, that should present robust growth for the foreseeable future. Okay?

We're actually seeing now market growth, candidly globally, that is in excess of the 6% to 8% that we have projected over the last few years. Now whether the recent strength we're seeing in the global market will be sustained out in the future, multiple years is to be determined. But there is no doubt the global market right now is growing faster than that. Our decision, both greenfield as well as the Sanguine deal we announced this morning, is not only to support what is going to continue to be I think robust market growth, but our competitive position has been enhanced as well.

Our 10% SubQ has been very well received in the US. As you know, we got the approval recently, as I commented this morning on the MMN indication, which allows us to promote in the neurology channel. We continue to manage through, obviously the HyQ situation. We see increasing demand in emerging developing markets. We project consistent robust demand out of China for albumin. This is all before you get to, again, the quote-unquote wildcard associated with Alzheimer's. So I think all of you can interpret this announcement this morning, as an expression of our confidence in the continued growth of the plasma protein business. And this is a -- it's a very good business to be in. And we think our competitive position, due to the recent approvals we have received and so on, has been enhanced from what it has been previously. So that is the sum and substance of it.

That is very helpful, very clear. Bob. And then maybe just, Bob Hombach, one quick one. On ADVATE, second straight quarter in a row, we have seen significant US strength. Obviously, we would assume based on the new indication. You sort of suggested that perhaps the second quarter strength was based on some finished good inventory building. Do you sort of have information to believe that really is maybe some distributor stocking? Or is that a message of conservatism, because we only have two quarters of performance?

No, we think there is a bit of stocking here. But we have seen an uptick in underlying demand over the last two quarters for ADVATE in the US, above what we would consider to be the normal market growth rate of mid single digits. There's no question about it. So the vast majority of the growth we are reporting we believe is growth, both in terms of utilization within our own patient base. Because you know the adult prophylaxis label allows us to reiterate for our adult patients the benefits of staying on a consistent regimen of prophylaxis, which most pediatric patients do a very good job of, but that tends to wane a bit. But also conversions to ADVATE, related to again, both the prophylaxis label, as well as the potential for less frequent dosing, with our PK dosing approach of every third day administration. S we have definitely have seen an uptick in underlying demand for ADVATE in the US.

Great.

And David, I would just add, I think we estimate that impact on stocking, and call it the 2 or 3 points of growth in both first and second quarters, which is probably in the realm of about $15 million of sales. And I would mention that our forecast for the back half of the year, we believe that those inventory levels may come down. So we are not projecting 10% growth in the back half of the year in the US. It's going to be probably more like low to mid single digits.

Okay, very helpful. Thank you very much.

Rajeev Jashnani of UBS is on line with a question. Please state your question.

Hi, good morning.

Good morning, Rajeev.

I had a question on the plasma deal as well, first. I was wondering if you could talk about, on just very back of the envelope math, it seems like a lot of the capacity from this deal, or I should say the capacity, the product that is coming from Sanguine would drive a lot of the incremental IV IG revenues between '13 and '16? And I was just wondering if you could comment on that first? Thanks.

No, well, I definitely want to be clear about this point, and we want to make sure we included it in the press release. This Sanguine opportunity, once the capacity is in place and qualified to run our product through and so on, we won't see sellable product out of Sanguine until 2014. And as happens in all plasma facility expansions that we have been involved in, there will be a ramp up phase. And so, we won't see the full 1.6 million-liter runway until the end of 2016. So this well contribute to the picture, but will not be the primary driver in that time frame. Again, we have opportunity to ramp-up new LA. Bob mentioned the expansion in Riete as well, that will be coming online. And the fact, that we are extending useful life of the old LA facility, all of those are contributory to the picture here. And this is just another piece of the puzzle, it's not the primary driver.

Okay, that is helpful. Thank you. And maybe one follow-up on HyQ. I guess -- maybe -- is it reasonable to expect another human trial, prior to approval for HyQ? Or maybe you could, just help explain what other mechanisms there would be to satisfy the FDA requirements? Thanks.

Yes, Rajeev, Bob Parkinson here, again. I know this isn't going to be terribly satisfying to you. But again, I don't want to speculate on the need for another trial. Let's wait till we get the Complete Response Letter. Then we will have, really for the first time despite a number of ongoing conversations and dialogues, we have had with the FDA, as I mentioned, this will really be the first time that their expectations will be clearly delineated. So it's not that far off. I would suggest everybody just be patient. When we get that, again, we will communicate on a very timely basis the content of that Complete Response Letter. Again, I don't want to avoid your question, but it involves some speculation. And at this stage, I really don't want to do that.

That's understandable. If I could squeeze in one more, just on --

Sure. Go ahead.

On recombinant Factor VIII. Maybe you can think about your marketing efforts regarding the prophylaxis label, how intense are those? Do you anticipate becoming more aggressive in that regard in the future? Thanks.

Well, they are -- I would say they are intensifying. The approval, actually this week of the 4000 IU dosage strength, while that on the surface may not appear to be a big deal to you, is actually very helpful. Because for adults given that dosage strength, it really does help facilitate the prophylaxis administration. And also the PK dosing, that could lead to reduced number of administrations to once every three days, which really advances the therapy in terms of dosing frequency and so on. So I think with that approval, Rajeev, you will see our marketing efforts now intensify fairly significantly. As we commented, we are pleased with the traction we have received to date. We would expect that, that momentum is going to continue.

Thank you.

Bob, do you want to add?

I would just add that our market research indicate the number one concern for hemophilia A patients is controlling bleeds. And so, we have been very focused our response would the approval in December of last year, on the significant reduction bleeds from 44 to 1 offered by our base prophylaxis for adults. And so that program started in earnest immediately. And as Bob mentioned, with the 4000 IU approval here, we will launch even with more bigger, the PK dosing approach here, which will add additional convenience to patients. But that the reduction in bleeds has been a key focus. And I think you are seeing that playing out, in some of the demand improvement here, over the first two quarters.

Thanks so much.

Bob Hopkins of Bank of America is on line with a question. Please state your question.

Thanks. Can you hear me okay?

We can, Bob go, ahead.

Great. So just another one on Sanguine, in the announcement there. Obviously, you of late have been talking about a lot of puts and takes in terms of capacity. And I'm just wondering what this announcement if you would be willing to spell out a little more specifically, what is your capacity in liters, as you look at 2013, '14, '15, '16? Is there any way you can give us specific numbers, in terms of liter capacity?

Not this morning. But I would suggest that this is something we can get into in more detail in the October investor conference. We actually plan on including that, as part of the presentation. We realize why you are curious about that. But let's defer that until we get together in October.

Okay, well, maybe I just --

And Bob, I would just say, there are a lot of moving pieces. But I think the announcement today just increases our confidence, that we are going to be able to meet market demand on a unit basis, at least in the 6% to 8% range beyond 2013, as we bring old LA back online and have this come on line in 2014.

Okay. So that was going to be my next question. Is that the way we should think about? That this deal allows you to stay in that 6% to 8% range, or does it get you above that?

At this point, it's at least in that range, and we will give you an update in October.

Okay. And then just one quick follow-up. On the R&D line, this particular quarter, can you give us a just little better sense of the milestone payments there? What was that related to? (Multiple Speakers).

R&D milestones. (Multiple Speakers).

Yes. No, it's a combination of clinical materials. The way the process works with some of our key programs, is as clinical batches are completed for certain clinical trials, and they are released into the trial, we have to expense the costs associated with those products. And so from a timing perspective, we have been looking to accelerate a few of our key programs. And so a few of those releases occurred in the quarter, a bit sooner than we expected which drove the expense up. The milestone payments were fairly small, discrete items in a couple of different areas. So I would say the biggest single chunk there, was really this release of clinical material in a couple of key trial for us, that happened a bit sooner than we expected, which is why the R&D growth rate will moderate in the back half of the year, because of that timing.

And then just one longer-term, bigger picture question on ADVATE. That's another area where there's a bunch of puts and takes in the future, in terms of competitive launches versus your longer acting formulation coming in a couple of years. I just want to get a sense generally, is that a line item on your revenue statement that you think can continue to grow, even if the competition is able to continue to put a good data and launch their product on time, which I realize are assumptions? But there's a lot going on with ADVATE. And I'm just curious, how confident you are that as we work our way forward over the next couple of years, that you think that can continue to grow, despite oncoming competition?

Bob, Bob Parkinson here. The answer is yes, that line will continue to grow. Again, in October when we get together we will be more specific in that regard. I think, short-term, the World Federation of Hemophilia meeting was last week, and I think one of the takeaways from that is, that clinicians and patients are reluctant to switch away from currently effective stable Factor VIII therapy, given sensitivities, the higher risk of inhibitor formation in the B domain deleted products. And particularly, given our enhanced twice a week or once every three day convenience, that is offered by the ADVATE PK dosing approach.

We think that we can mitigate in the short-term, any competitive threats, in terms of longer-acting. As I commented in my prepared comments, longer-term, this is a global market that is only modestly penetrated. It is a franchise in which we are the leader. We are committed to remain the leader, as evidenced by our expanding new product flow. Whether that is Factor IX, recombinant von Willebrand Factor VII, our own longer acting initiative. So we are excited about the long-term prospects of, as you call it, this line on our revenue. And so, it definitely will continue to grow. And we will share that with you, when we are together in October. Norbert, do you?

I would just like to follow up for a moment, and reiterate what Bob Hombach just mentioned. Namely, that the number one priority for patients is reducing or stopping bleeds. And ADVATE particular, with the new label, have shown that very effectively. The second key concern the patients is safety, and primarily safety around the formation of inhibitors. And when you look at ADVATE, we have in the field, in the use of ADVATE, and inhibitor rate of 0.3%, meaning about 3 inhibitors in about 1000 previously treated patients, which is a remarkably strong safety record. And then, on the third item of priority for patients is convenience. And which the three-day prophylactic PK dosing and 855 coming in, the longer-acting Factor VIII going into Phase III by the end of this year, I think we have a best-in-class molecule in all three categories, where patients actually look for ideal features of the therapy. And I believe that ADVATE is extremely, extremely well-positioned to address those needs, including for example, not just the 4000 unit dosage. But the fact that we have 11 different dosage strengths for ADVATE to accommodate very small patients, larger patients. You have to have a portfolio of offerings in the hemophilia A space to really be able to address the variable needs of patients that are active, less active, very young, older. And so I do believe you need to have the kind of portfolio we have, to address that adequately. And therefore we feel very confident that we are extremely well-positioned for the years to come.

Thanks for taking the questions.

Larry Keusch of Raymond James is on line with a question. Please state your question.

Good morning, everyone.

Good morning, Larry.

Bob, I want to just come back to the demand for the plasma proteins that you are talking about with the Sanguine deal. I mean, if you go back and look at the comments you had from the past several quarterly conference calls, you indicated that you felt like you had enough capacity to supply a market that was growing 6% to 8%. And clearly now, you're making some comments that you believe demand is now increasing. I would be curious just to get some thoughts on why is that demand beginning to increase? Is it off label usage, is it obviously, the emerging markets are going to start to become an opportunity? But any thoughts of why demand is increasing would be really helpful.

Well, I think first of all as we have commented a number of times Larry, we and I think others in the industry are more actively promoting, let's say in the primary immune deficiency area, I say promoting really, educating the treaters, in terms of it --being under, significantly underdiagnosed, even in developed markets. So you have got a demand creation that exist today, that historically in this business, didn't exist. So I think that is one factor. The other factor which you mentioned is clearly true, which is emerging and developing markets are adopting these therapies. These are, again, what I've described as medically necessary therapies. So they are high priority, as emerging developing markets dedicate more spending to health care, these are the kinds of areas that they're going to spend in. In terms of off label use, I can't really comment on that. I'm not sure how much of that, if anything is driving the demand. But it is -- the market right now is remarkably robust.

And I -- just to comment on the Sanguine thing. Let's look at the Sanguine thing as, affording the opportunity what I will call, surge capacity over and above our existing network. All right? As opposed to capacity that is necessary to stay get to a 6% market growth. I think that's an important perspective that everyone needs to understand. Bob, I don't know if you want to add to that?

Yes. And one other subtlety, that I think that also contributes to some of the growth we may be seeing even currently in the market, that is beyond the 6% to 8%. The fastest-growing segment of the SubQ market is -- excuse me, of PID is the SubQ market. And as you know, given that the more frequent dosing in that therapy, and how it is absorbed into the body as it's currently offered in the marketplace, patients need to use more grams in order to get the same level of efficacy going SubQ versus IV. And so that can be anywhere, in our case, for our 10% SubQ, about 37% of a normal dose, and in some competitors, 50% of a normal dose. So as more of that market goes that direction, more grams are going to be consumed per patient. And that can also be contributing to some of the stronger growth we are seeing, in the here and now. And we think that trend will continue, as convenient of dosing at home for PID patients is certainly a key driver in the marketplace.

Got it. And just a couple other quick ones. Are there any minimums by the way, associated with that Sanguine contract or is it truly surge capacity as you (inaudible)?

No, there are no minimums here, in terms of a take or pay situation.

Okay. And then, just two last ones for you. Obviously, you do have a capacity limitation on IV IG right now, as you modulate the global distribution. And I'm just wondering if you now have a bit more ability to focus more on the chronic care markets, and away from some of the more price sensitive customers? Because again, you do have some limited availability there, so perhaps that creates a little more stability in the business as a whole. And the second quick one was on just on home hemo? Is there any update there? And is it still CE Mark for 2013 is how we should be looking for at?

So in terms of the dynamics in the marketplace, yes, we have and following that path you just described, of focusing scarce resources on those parts of the market where we see the best opportunity. And so that has manifested itself in several ways, including product prioritization, in terms of the US market. And again focusing our marketing efforts around the primary immune deficiency on label indication we have. And that being one of the fastest-growing market particularly with our 10% SubQ. So that is absolutely the strategy we are following, until maybe on home [hemo].

Mary Kay, why don't you comment on home hemo if you would?

I would just say, Larry, that there's no change. Everything remains on track. We continue with our trial here in the US. Remember that was a small trial, with 20 or 24 patients over about a 10 week period. So we are on track to complete that trial here, in the second half of the year. We are also on track to start our Canadian trial before the end of the year. And as you know, both of those trials will support the CE marking of the home hemo device in Europe in 2013. We are still working through whether we need one or two trials in the US, for the filing that we expect to do 2014 here in the US.

Okay, great. Thanks very much.

Thanks, Larry.

And Kevin, we have time for two more questions.

Okay. Matt Miksic with Piper Jaffray is on line with a question. Please state your question.

Good morning. So I wanted to follow-up on ADVATE, just one more time here. And cover a lot of launches, we are familiar with the shape of small molecule launches. And as we have seen, as you have talked about chronic treatment of hemophilia is quite different historically. You spoke to -- Bob you pointed out they are reluctant to switch off of stable therapy and regular habits of treatment. Can you talk a little bit about -- and the other thing I guess that is different about this one, Norbert as you point out, is these, dosing sizes, these vials that facilitate the administration of ADVATE at these different dosing levels in adults, or young adults prophylaxis. If you could talk maybe about, what other important moving parts are there? Just sort of complete your program, for promoting and marketing around PK dosing? And if you could give us a sense of maybe, where you think you are now, maybe baseline metrics on where you think prophylaxis is now? And then how much of this, how much of your business, how much of your patients, do you think could move to this, could move to this twice week or once every third day dosing over time? That would be very helpful. And then I have one follow-up.

Maybe I will start with some of the science around Factor VIII. There is no small molecule therapy that treats hemophilia A. All hemophilia A treatments are recombinant Factor VIII or plasma-derived Factor VIII The really important distinction is that our ADVATE molecule is a full-length Factor VIII, which is if you will, the authentic molecule that would also be the naturally occurring molecule in someone who does not need a Factor VIII administered. The competitive landscape is one where all other proteins, Factor VIII proteins are either B-domain deleted, or otherwise manipulated in a way that they are not full-length, or have other protein components attached to them. And we have very deliberately stayed away from any one of those approaches, because our conviction is based on the experience we have made with our full-length ADVATE molecule that, that is indeed the very best therapy from a point of efficacy, safety, as well as convenience.

And when I mentioned the various dosages we have, the 11 by now in our portfolio, I keep reminding our audiences that when you have hemophilia A, you are diagnosed with that condition shortly after birth. And you will depend on Factor VIII therapy throughout your entire life all the way to the end of your life. And there is a huge, huge range of needs that someone has, who is a very small pediatric patient, who is an adolescent, who is very physically active, who is an adult, either more or less active. And I have a really, really hard time seeing how a one trick pony if you will, can actually do the trick, and provide adequate therapy for that kind of wide spectrum of needs that patients with hemophilia A have.

That's why we have focused so strongly, on continuously expanding and improving the repertoire of our Factor VIII offerings, including reconstitution devices, including prophylactic surgical pediatric labels, the way we offer actually now prophylaxis with a (inaudible) driven approach. And so I really do believe that, that sets a gold standard that is very difficult to match. And that's why we feel confident that we have the right approach to hemophilia therapy, and we have had it for 20 years now. Factor VIII, recombinant Factor VIII has been a vector product since 1992. We have a 20 year track record, and I think a terrific track record. So I think that's basically describes it.

The protein question, Bob or Mary Kay maybe?

I don't know that there is any scientific reason, if someone is on every other day prophylaxis, why they could not move to every third day? So really -- (Multiple Speakers).

But Matt's question about on penetration on prophy in the market, and the opportunity. Because he asked, what other things do we have? But the reality is, the big thing is, the prophy, the PK dosing, we are at the very early stages of rolling this out. As I commented earlier, we are accelerating now the promotion, we think that's a significant opportunity, but maybe more specifically to put that in context, in answer to your question. So Mary Kay would you --?

Matt, as you know, prophylactic treatment in the adult population has been very low. I think a combination of both the annual bleed data that's included in our new label that Norbert commented on earlier, in combination with fewer infusions offered by a three-day dosing regimen will help to accelerate that prophylactic adoption of adults. So we are looking for to participating in that. And that is part of our marketing strategy, here in the near-term.

Okay. And one follow-up on the plasma market generally. I know that, already the hairs on the back of your neck are going up. The market commentary hasn't been one of your favorite things to talk about but, particularly strategy or pricing or consolidation. But I am interested, this deal with Sanguine, and some comments from one of your competitors about, potentially the opportunity to sort of have more interchangeability, more flexibility, and the way that your collected plasma is sort of utilized across multiple fractionation facilities, multiple sites under FDA approval. I am wondering if you see some flexibility in the future? Do you see more deals like this, more flexible use of capacity, across a branded manufacturer like yourself? And some regional players that might have capacity to put to work? Is this a one-off, or is this something that might happen more often in the future?

Go ahead, Bob.

I think we have built in a Fairmont of flexibility into our existing network. The vast majority of plasma we collect is in the US, and US plasma is really sellable around the world. Our facilities are FDA-approved, so that we can sell in the US or other markets. So I think within our network, we certainly have that flexibility today. I think given the growth opportunities we see, and the potential for new indications and other expansions of the -- strictly for IGs, we are going to continue to explore ways to enhance our flexibility on the supply side, going forward here. So I think we are going to -- the Sanguine deal with it is a very good deal, but we will continue to look for other ways to enhance our flexibility.

Great, thanks.

Thanks and Kevin our last question?

Kristen Stewart of Deutsche Bank is on line with a question. Please state your question.

Hi, thanks for taking the questions. I have two questions. I guess the first, just kind of still following on the plasma theme. Can you maybe give us an update, just kind of on the old LA frac, just in terms of timelines? And to the extent that maybe some of that takes longer, can we also look at the Sanguine as offering flexibility for that as well?

Go ahead, Bob.

Yes, Kristen, as we have talked about, we are looking to take the old LA facility down late in the third quarter. It will be down about five months. We will bring it back up online, get it requalified. I would characterize the refurbishment things we're doing as very modest, and that the risk is low. But nothing is risk-free in this world, but we think it's fairly low. It will take several months to get the qualification, the production runs done, and have product available to the marketplace. That is why we have talked about mid-2013 of coming out of this constrained environment, and being in a much better position. So that is still the time frame we are operating under.

So just to reiterate, yes, to Bob's point, our time frame and plans with old LA have not changed at all. The Sanguine deal is independent of that. So just to be clear, it is to provide surge capacity going forward. But because our view or our plans for renovation of old LA have changed, the plan is the same as it has been for the last six to nine months there, Kristen.

Okay. And just to follow-up, I think there is a question that Bob had asked earlier, where he had asked if ADVATE is a line that you can continue to grow. I just wanted to make sure, that I was understanding your response correctly. Is your, I guess, view that ADVATE itself, can continue to grow, despite longer acting products? Or is it your view that the recombinant line in total can continue to grow. Because I know you have a number of products -- ?

It's our view, Kristen, so the answer is yes. It is our view that ADVATE specifically will continue to grow over the long-range plan. Our hemophilia franchise will grow, and grow at a faster rate as we expand the new product offering. That's as clear as I can be.

Perfect. And then you had mentioned I think, Factor IX, I think you were filing before the end of the year. Can you give an update on recombinant von Willebrand brand, and then Factor VIIa as well?

Mary Kay, the latest on the?

Yes, Factor VIIa, as you know, we completed the Phase II. Our expectation remains unchanged, as to the start of Phase III before the end of the year. On von Willebrand, we are enrolling patients, and we expect to complete the Phase III trial and file, probably in the mid to second half of next year of 2013.

Okay. And still starting the long-acting Phase II before the end of the year as well?

Correct.

Okay.

And you know we are currently in Phase I, and we will complete that before the end of the year, and move into Phase III.

Will we see it on that, before you start Phase III? Or should we just assume if you are starting the Phase III, the date from Phase I looked good?

We have not determined when we will present the data from Phase I, Kristen.

Thank you.

Thank you.

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