百特醫療 (BAX) 2013 Q4 法說會逐字稿

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

Thank you. And good morning, everyone, and welcome to our Q4 2013 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Bob Hombach, Chief Financial Officer.

Before we get started, let me remind you that this presentation, including comments regarding our financial outlook, new product developments and regulatory matters contain forward-looking statements that involve risks and uncertainties and of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more details concerning factors that could cause actual results to differ materially.

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

Now, I'd like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning. Thank you all for calling in.

As you saw in the press release that was issued earlier this morning, Baxter reported solid financial results for the fourth quarter and the full year. In the quarter, adjusted earnings of $1.26 per diluted share were consistent with our guidance.

On a global basis, sales, excluding currency, advanced 17%. And after adjusting for Gambro and currency, Baxter sales advanced 6%, exceeding our expectations for the quarter. For the year, adjusted earnings increased 3% to $4.67 per diluted share, and sales, excluding currency, advanced 8%. After adjusting for both Gambro and currency, sales increased 4%.

I'm pleased that we continue to meet our financial objectives while navigating a challenging and complex macro environment and have consistently generated significant cash flow while maintaining a disciplined capital allocation strategy of returning value to shareholders through both increased dividends and share repurchases.

Before I turn the call over to Bob Hombach for additional commentary regarding the financial results and also the full-year 2014 outlook, I'd like to take a moment to reflect on the progress that our Company has made, particularly in 2013, to improve our operational and commercial execution, advance the pipeline, and position Baxter for future growth and success.

First, Baxter continues to improve operational and commercial effectiveness and derives significant benefits by taking full advantage of existing opportunities to bring products and therapies to various markets more effectively. This includes geographic expansion, particularly in emerging markets where Baxter's 2013 annual sales exceeded $3.2 billion, advancing more than 10% for the year.

We capitalized on the innovative partnership with Hemobras in Brazil with the commencement of shipments to enhance access to Baxter's recombinant factor VIII therapy for the treatment of hemophilia.

Baxter will be the exclusive provider of Brazil's recombinant factor VIII treatment over a 10 year period while we work together on a technology transfer to support development of local manufacturing capabilities. As you may recall, we expect peak annual sales related to this partnership to be material and approach $200 million by 2017. We've already converted more than 2,000 patients to Baxter's therapy, representing about 20% of treated patients.

We also remain committed to meeting patient demands by enhancing our plasma manufacturing footprint. As you know, we're investing in a new state-of-the-art manufacturing facility in Covington, Georgia, and also completed planned modifications at the older Los Angeles plasma fractionation facility. The Los Angeles and Covington investments, augmented by other improvements across the network and the Sanquin collaboration position Baxter well to meet the growing demand for immune globulin, and other plasma-based therapies in both the short and long term in a flexible and also, a very cost effective manner.

During 2013, Baxter continued to transform the new product pipeline into a robust portfolio of products and therapies that improve the quality of care and address key high potential areas of unmet medical need. This is evidenced by our increased spending in research and development to a record level. Achievement of the number of clinical and regulatory milestones, including the progression of several key programs into late-stage clinical trials, completion of regulatory submissions and approval of an array of new indications and treatments.

The announcement of several collaborations that leverage Baxter's proven expertise and extend the pipeline into new therapeutic areas, including: hematology, oncology and immunology and the completion of the Gambro AB acquisition, which enhances Baxter's global leadership in renal therapies and provides a number of longer term opportunities and significant cost synergies.

Momentum accelerated in the fourth quarter, with several pipeline achievements, including: the submission of amended biologics license application, or BLA, to the FDA to reinitiate the review process for approval of HyQvia, a subcutaneous infusion for the treatment of adult patients with primary immunodeficiency. As you know, HyQvia was approved and then launched in a number of European countries in the second half of 2013.

Conclusion of the enrollment in the Phase III clinical trial of BAX 855, an investigational extended half-life, recombinant factor VIII treatment for hemophilia A. The ongoing trial is aimed at assessing the efficacy of the compound in reducing annualized bleed rates in both prophylaxis and on-demand treatment schedules, and will also evaluate its safety and pharmacokinetic profile.

BAX 855 was designed based on the full-length ADVATE molecule and modified with PEGylation technology. To date, no inhibitors or safety issues have been reported in the study.

The BLA submission to the FDA for the approval of OBI-1, a recombinant porcine factor VIII for patients with acquired hemophilia A. OBI-1 has been granted orphan-drug designation by the FDA and the application has been granted a priority review, which is intended to expedite the review process of drug candidates with a potential to fulfill an unmet medical need.

Also, the submission of an application to the FDA for a pediatric indication for RIXUBIS to treat hemophilia B. We've also submitted a marketing authorization application for patients of all ages in Japan and to the European Medicines Agency. RIXUBIS was approved in the United States for adults with hemophilia B in 2013.

Also, the FDA approval for Baxter's FEIBA as the first and only treatment in the US for routine prophylaxis to prevent or reduce the frequency of bleeding episodes in patients with hemophilia A or B who have developed inhibitors. The presence of an inhibitor makes response to treatment more challenging and patients with inhibitors have an increased risk of developing complications.

This approval builds on our leading prophylaxis platform that we've established with ADVATE, and more recently with RIXUBIS. As you may know, in clinical trials, the FEIBA prophylactic regimen showed a 72% reduction in Median annual bleed rate compared to treatment with an on-demand regimen. FEIBA is approved in more than 60 countries worldwide and is indicated for prophylaxis in more than 40 countries, with annual sales that exceed $600 million.

We also received CE marking in Europe for the VIVIA hemodialysis system, designed to deliver more frequent, extended duration, short daily or nocturnal home HD therapy. VIVIA is designed with the potential to deliver enhanced clinical outcomes and greater patient convenience and provides a number of unique safety features, wireless connectivity and integrated water system and extended-use consumables. Baxter will introduce VIVIA in a limited number of European dialysis clinics in 2014 and expand the launch to other European countries in 2015.

And finally, we entered into an exclusive worldwide license agreement with Cell Therapeutics Inc., to develop and commercialize pacritinib, a novel investigational JAK2/FLT3 inhibitor, currently in Phase III development for patients with myelofibrosis, a chronic malignant bone marrow disorder. Under the terms of the agreement, Baxter gains exclusive commercialization rights for all indications outside the United States, and Baxter and Cell Therapeutics will jointly commercialize pacritinib in the United States.

So as you can see, we're beginning to realize value from the significant R&D investment that we've made over the years. We currently are engaged in seven key Phase III clinical trials; we're awaiting the approval for several key new programs and launching five new products in 2014.

Before I turn the call over to Bob, I want to provide you with an update on several additional items. First, we did recently receive an FDA warning letter, primarily directed to our quality systems in Round Lake, Illinois for certain medical devices. We've been working to address the FDA's initial 483 observations, including through a global quality system improvement plan which we've reviewed with the agency and which we're in the progress of implementing. In light of the letter's focus, we do not anticipate an impact on product availability for patients.

Second, while it took longer than we expected to complete the regulatory process, we're pleased with the progress we're making on the integration of Gambro. The Baxter-Gambro renal leadership team under Rob Davis, comprised of experienced leaders from both Baxter and Gambro, are focused on a number of opportunities to enhance growth and profitability in this core franchise.

This includes: enhancing patient outcomes in chronic and acute kidney treatments; driving further penetration of key products in both developed and emerging markets; launching new products such as VIVIA, our new home HD therapy in Europe; expanding capacity to meet growing demand for PD therapy and dialyzers; and optimizing our manufacturing operations and business support functions. We look forward to updating you on the progress with these initiatives and the integration throughout the year.

And finally, we remain committed to enhancing shareholder value over the long term with a disciplined capital allocation strategy. An important aspect of our strategy is to ensure that we position our Company for sustainable and profitable growth, and this includes an ongoing evaluation of our portfolio, including selectively divesting assets that are no longer core to our long-term objectives and executing new business development initiatives, partnerships and collaborations that leverage our core capabilities and global channel.

The recent announcement of plans to explore strategic options related to our vaccine and cell therapy programs, combined with the new partnerships that we've announced, are examples of the discipline that we've exhibited in this regard. So thanks for that.

Now I'll ask Bob to review financial results for the quarter and also guidance for 2014. Bob?

Thanks, Bob. Good morning, everyone.

As Bob mentioned, earnings per diluted share in the fourth quarter, excluding special items, were $1.26 per diluted share, in line with our previously issued guidance. As we mentioned in the press release, GAAP results include after-tax special items of $366 million, primarily associated with costs related to the Gambro acquisition, previously announced collaborations, and business optimization initiatives.

The business optimization initiatives include the elimination of a number of positions as we continue to streamline operations, rationalize our manufacturing footprint, and optimize general and administrative functions. It also includes costs related to the decision to explore strategic options for our vaccines and cell therapies R&D programs.

Annual savings are expected to total approximately $0.17 per share when fully implemented in 2015, which includes savings of approximately $0.13 for 2014, a portion of which is expected to be reinvested in promotional and marketing activities to support ongoing new product launches on a global basis.

Now let me briefly walk you through the P&L by line item before turning to our financial outlook for 2014. Starting with sales, worldwide sales of approximately $4.4 billion advanced 16%. On a constant currency basis, sales rose 17%. Excluding Gambro revenues of $413 million, Baxter sales rose 5% and on a constant currency basis, sales increased 6%, which exceeded our guidance range, primarily due to strong demand for ADVATE and FEIBA, particularly in the US and Europe.

Sales in the base Baxter business improved sequentially, driven by accelerated growth in emerging markets as we benefited from certain government collaborations as well as strong performance across the hemophilia franchise and medical products. For the full year, worldwide sales of $15.3 billion advanced 8% on both a reported and constant currency basis. Excluding Gambro revenues, which contributed $513 million in 2013, Baxter sales increased 4% on both a reported and constant currency basis.

In terms of individual business performance, global BioScience sales of approximately $1.8 billion advanced 5% in the fourth quarter. On a constant currency basis, sales increased 6%. For the full year, global BioScience sales also increased 5% to more than $6.5 billion, and after adjusting for foreign currency, sales rose 6%, exceeding our expectation of sales growth in the 4% to 5% range.

Within the product categories, hemophilia sales of $972 million increased 10%, or 11% on a constant currency basis, representing the strongest quarterly performance in recent years. This is the result of capitalizing on our global leadership position and brand differentiation, broadening our portfolio with new product launches like RIXUBIS for the treatment of hemophilia B, and expanding access to care, particularly in emerging markets.

Specifically, global demand for ADVATE remains strong as we continue to benefit from our label expansion and improved prophylaxis penetration in both the US and Europe. This was augmented by a benefit from shipments to Brazil as part of our ongoing partnership with Hemobras to enhance access to recombinant factor VIII therapy in the world's third largest hemophilia market. We've now converted more than 20% of the total patients and generated incremental sales of approximately $70 million in 2013.

In BioTherapeutics, sales of $564 million declined 1% on a reported basis and were down 2% on a constant currency basis. Growth in the US of 7% was a result of improved product availability and growth of immune globulin therapies, Albumin and Alpha-1 treatments. This performance was more than offset by lower sales in international markets, primarily the result of lower Albumin sales in China and decision to exit certain markets due to previous supply constraints.

Sales in BioSurgery of $194 million increased 8%. On a constant currency basis, sales rose 7%, driven by solid demand across the entire portfolio of surgical sealants, like Tisseel and Floseal.

Finally, vaccine revenues totaled $46 million in the quarter and declined 6%. On a constant currency basis, sales were comparable to last year, as strong demand for our core vaccines was offset by lower milestone payments related to our ongoing collaborations on the development of influenza vaccines.

In Medical Products, global sales in the fourth quarter were approximately $2.6 billion, and increased 25%. On a constant currency basis, sales increased 27%. Excluding Gambro, Medical Products sales grew 5%, or 7% on a constant currency basis with solid growth across all product categories. For the full year, Medical Products sales increased 9% to approximately $8.7 billion, and after adjusting for foreign currency, sales were in line with our expectations and advanced 10%.

Within the product categories, Renal sales totaled approximately $1.1 billion, including Gambro sales of more than $400 million, which were in line with expectations. Excluding Gambro, Renal sales increased 2%, or 5% on a constant currency basis, driven by strong PD growth of 6% to 7%, which continues to be driven by strong patient gains in the US and emerging markets.

Sales in the Fluid Systems category of $819 million, increased 6% on both a reported and constant currency basis. Performance continues to be driven by demand for IV solutions and injectable drugs as well as price improvements for the injectable oncology drug, Cyclophosphamide, which collectively more than offset lower international sales.

Specialty Pharmaceuticals, which includes our inhaled anesthetics and nutritional therapies, posted sales of $407 million, reflecting an increase of 8% on a reported and constant currency basis. Strong global anesthesia growth offset lower sales of nutritional therapies in the US resulting from supplier shortages of distributed vitamins and lipids.

Finally, sales in BioPharma Solutions, which is our pharma partnering business, totaled $267 million which improved -- with improved growth of 11% on a reported basis or 12% on a constant currency basis. This performance can be attributed to the timing of orders and shipments as we've alleviated supply constraints experienced in late 2012 and earlier this year.

Turning to the rest of P&L, gross margin in the quarter was 49.5%, with the full-year gross margin of 51.1%, in line with our expectations and guidance. For the quarter, the gross margin benefited from product mix and price improvements, particularly for Cyclophosphamide. These benefits were more than offset by the integration of the lower margin Gambro business, which negatively impacted the ratio by 150 basis points, as well as other headwinds, including foreign currency, pension, austerity measures and the realization of additional costs associated with modifications and the ramp-up of production at our Los Angeles fractionation facilities.

SG&A totaled $940 million, and increased 16%, with the Gambro acquisition accounting for the vast majority of the growth. Excluding Gambro, SG&A increased 2% given tight management of expenses, which was offset by select investments in promotional and marketing initiatives, new product launches and within international markets to enhance our global presence. For the full year, SG&A increased 9% and excluding Gambro, spending increased 4%.

R&D spending in the quarter of $304 million increased 16% versus the prior year. Excluding Gambro, R&D spending rose 3% and continues to be driven by investments we are making to advance a number of programs in our pipeline, including those in our leading hemophilia franchise and programs to leverage our expertise in the therapeutic areas of hematology, oncology and immunology as well as investments in renal therapies aimed at improving patient outcomes across the continuum of care. R&D for the full year approached $1.1 billion, a record level for the Company.

Operating margin in the quarter of 21% is lower than last year's operating margin of 23.8% as leverage in the base Baxter business was offset by the factors impacting gross margin and the addition of Gambro. Interest expense was $41 million, compared to $22 million last year, due to the new debt issuances within the last year to fund both the Covington Plasma Manufacturing site and the Gambro acquisition.

The tax rate was 23.3% for the quarter, somewhat higher than expected, due to earnings mix and a minor discrete item affecting our tax reserves. The full-year tax rate was 22%, in line with our guidance.

And as previously mentioned, adjusted earnings per diluted share of $1.26 is flat to the prior year. Full-year 2013 adjusted earnings of $4.67 per diluted share increased 3%.

On a year-to-date basis, cash flow from operations of $3.2 billion improved by almost $100 million versus the prior year. This includes after-tax cash costs associated with the Gambro acquisition of more than $60 million. Excluding these costs, cash flow from operations was in line with our full-year objective.

DSO ended the quarter at 55.9 days, and excluding Gambro, Baxter's DSO was 52.5 days, lower than the prior year by almost a full day. Inventory turns of 2.7 are higher than the 2.5 turns in the prior-year period, due to stronger sales and inventory management.

Lastly, for 2013, we repurchased approximately 13 million shares for $913 million, or on a net basis, 4 million shares for $439 million, slightly more than our full-year objective.

Finally, let me conclude my comments this morning by providing our financial outlook for the first quarter and full year 2014. As we previously communicated, going forward, we will report and provide guidance that excludes the impact of intangible amortization and other special items.

Intangible asset amortization books entirely to cost of goods sold and for the full year 2013, totaled approximately $0.19 per diluted share. And as mentioned in our press release, the estimate for 2014 is approximately $0.25 per diluted share. For 2013, we provided a quarterly financial statement, including this adjustment, which was included on page 14 of our press release issued this morning, and additional historical financial statements can be found on the Investor Relations page of our website.

Moving on to the guidance, for the full year 2014, we expect adjusted earnings of $5.05 to $5.25 per diluted share. You may note that we are providing a larger guidance range than our historical practice as we have a number of factors and assumptions impacting this year's financial outlook.

Our 2014 guidance includes: a benefit from pension of approximately $0.14; savings related to our business optimization initiatives over the last two years of approximately $0.18; and accretion from Gambro acquisition of $0.20 to $0.25 per share, in line with our original expectations. These tailwinds are more than offset by foreign currency and austerity measures of approximately $0.25, and Cyclophosphamide composition of $0.20 to $0.30 per share.

Specifically, by line item for the P&L, starting with sales, we expect sales growth, excluding the impact of foreign currency, of approximately 9% to 10%, and this includes annual sales of more than $1.6 billion for Gambro. At current foreign exchange rates, we expect reported sales growth of approximately 8% to 9%. Excluding Gambro, we expect the base Baxter sales to grow approximately 2% on a constant currency basis.

For the full year, we expect gross margin for the Company to decline by approximately 150 basis points from the restated 2013 margin of 52%. By quarter, we expect the gross margin to be fairly stable, due to the timing of certain headwinds and tailwinds and our assumptions related to new competitive entrants.

In terms of expenses, we expect SG&A to increase in mid-single digits and R&D to grow in low single digits. Both line items reflect leverage in the Baxter expense base and the addition of Gambro. We expect interest expense to total approximately $160 million, and other income to total an expense of approximately $15 million for the full year.

We expect the tax rate to improve to approximately 21.5%, which includes a benefit related to the structure of the Gambro transaction, and we expect full-year average share count of approximately 547 million shares, which assumes approximately $300 million in net share repurchases. From a cash flow perspective, we expect to generate cash flow from operations of approximately $3.5 billion.

We expect capital expenditures of approximately $1.8 billion, which includes Gambro and the investments we are making to enhance our plasma manufacturing footprint in Covington, Georgia. I'd note that 2014 is our peak year of capital spending. In 2015 and beyond, we expect capital expenditures to begin to moderate towards approximately $1.5 billion.

Let me move to sales and expand on our assumptions for the two businesses in the major product categories. Beginning with Medical Products, on a constant currency basis, including the contribution of Gambro, we expect sales growth of approximately 13% to 14%. Excluding Gambro, we expect sales for Medical Products to grow 0% to 1%. Specifically, we expect Renal sales to grow approximately 40% including the benefit of continued PD penetration, the incremental revenue contribution from Gambro, as well as commercial synergies.

We expect Fluid System sales to decline 3% to 5%, reflecting the impact of lower Cyclophosphamide sales. As we mentioned last quarter, if we have two competitors by mid-year, the sales and pre-tax impact would equate to $150 million to $200 million. We expect Specialty Pharmaceutical sales which includes our nutritional therapies and inhaled anesthetics to grow in the 3% to 5% range, and we expect our BioPharma Solutions sales growth to be in low single digits for the year.

For BioScience, we project sales growth, on a constant currency basis, of 3% to 4%. Our outlook includes growth of 4% to 5% in our hemophilia franchise, which includes recombinant and plasma-derived factor VIII and factor IX therapies and FEIBA, an inhibitor treatment. While we expect increased competition for recombinant factor VIII therapies in the second half of this year, performance will be fueled by underlying global demand for ADVATE, where we continue to realize benefits associated with the new expanded label, incremental sales related to the Brazil collaboration and new tender awards, as well as the benefit from new product launches, including RIXUBIS, OBI-1 and FEIBA prophylaxis.

For the BioTherapeutics franchise, which includes IG therapies, Albumin and Alpha-1 treatments, we expect growth of approximately 4%. This plan includes a contribution from HyQvia, as well as accelerated volume growth of immune globulin therapies and Alpha-1 treatments. However, given production timing and the license renewal process for Albumin in China, we are expecting flat Albumin sales on a global basis for the year.

In BioSurgery, we expect growth in the 5% to 7% range. And finally, we expect our vaccine sales to decline by 10% to 15%, as a result of lower milestone payments related to our influenza development programs, which we have discontinued.

As mentioned in our press release, for the first quarter, we expect earnings per diluted share of $1.06 to $1.09, which excludes intangible amortization and any special items. We expect sales growth, excluding the impact of foreign currency of 13% to 14%. At current foreign exchange rates, we expect reported sales growth to grow 11% to 12%. Excluding Gambro, we expect the base Baxter sales at constant currency rates to grow 2% to 3%.

In terms of calendarization of our earnings guidance for 2014, as I mentioned earlier, there are a number of headwinds which are more pronounced in the first half of the year, namely foreign currency and incremental interest expense. In fact, we expect approximately 80% of the FX headwind to occur in the first half of the year, with 50% of the full-year impact occurring in the first quarter alone.

In the second half of the year, we expect increased competition in a couple of key product areas, which will be partially offset by synergies related to Gambro and savings related to our business optimization initiatives. In closing, the midpoint of our guidance range for the year assumes low single digit EPS growth in the first half of 2014, and EPS growth in mid- to high single digits in the second half of the year.

And now let me open up the call for Q&A.

Thank you. We will now begin the question-and-answer session.

(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.

David Lewis from Morgan Stanley.

Bob, you talked a little about the BioTherapeutics business, specifically Albumin. Could you update us on the timeline and what's changed? It sounded like it was going to be a fourth-quarter registration issue with China. It sounds like it's delayed -- maybe a couple quarters. So maybe walk us through on when you think the resolution could be.

Related to IVIG, is most of the issue really tied to Albumin, or are there still some lingering capacity issues on IVIG?

So first off, no capacity issues on IVIG. We've exited 2013 running at the levels that we expect, and as we said, we'll be able to support at least 6% to 8% volume growth for 2014 and 2015 out of our existing network.

As it relates to Albumin in China, we expect here in the fourth quarter -- excuse me, in the first quarter to hear on the second license. We've already gotten approval for the first license renewal and so -- but given the timing of when that approval comes and the manufacturing cycle for the product, it's likely that we wouldn't be able to get product into China for the second product until late this year. So, that will impact from a timing perspective. And given the price points in China relative to other markets, we will have some mix impact there, but we will be able to redeploy the Albumin into other markets during the course of the year.

Okay, very helpful. Bob -- and I appreciate all the detail you gave on the headwinds and tailwinds here for 2014. I guess the dynamic we'd love to get more visibility on is: We know all these tailwinds are -- certain headwinds are out there. We obviously don't know the timing of some of those headwinds. Your guidance sort of assumes those headwinds.

But could you help us understand specific knowledge in Cyclo and Suprane -- where do you think the competitive launches sit? And what specifically is incorporated in the guidance, in terms of when you expect to see that pressure?

I also wonder if you could update us on the timelines for Rigosertib, HyQ and 855? Thank you.

Okay. So, in terms of the competitive timing, we don't have a lot more insight than we've had in the past. We know there are a number of folks on the Cyclo side who have applied for approval. But visibility to having gotten approval and ready to launch is not great at this point.

So, again, our assumption is approximately by mid-year, we have two competitors in the market. And if so, that creates $150 million to $200 million bottom-line exposure for the Company. So, that's effectively what's baked into our guidance.

We have widened the range than what we would normally do to account for the fact that competitors may come in a little earlier, it may come in a little bit later, it may be one, it may be two, or maybe more this year. There isn't a lot more visibility to that on the Cyclo side than what we've talked about up to this point.

As it relates to Suprane, the competitor has the ability to enter the US market as of January 1 of this year. We've not seen them do that yet, but again, not sure why that is, and so we really can't comment on that. But we do expect, for the majority of this year, that we do face some competition. I would say on Suprane, we've always viewed that as more of an evolutionary impact, and not that significant in 2014.

David, you were asking about Rigosertib, HyQ, and was there a third?

855, Mary Kay.

855. So, I'll start with 855. As you know, we're completely enrolled in the Phase III clinical trial. And we expect to complete the trial sometime in Q3, and have data then, and file before the end of the year for 855. So, things are going fairly well there.

On HyQ, really, no change. We submitted the amended BLA, and we expect a six-month review, so we should hear sometime around mid-year on the approval of HyQ for the US.

Rigosertib, we are currently awaiting the data on the high-risk MDS trial, and we expect that here sometime in the first quarter.

Great, thank you so much.

Thank you. David Roman from Goldman Sachs.

One financial follow-up question, and then one broader strategic question. First, just on the financial piece -- Bob, maybe you could go into a little bit more detail as you look at the gross margin line in 2014 -- 150-basis-point decline on an adjusted basis. Is there a way to tease out how much of that is isolated to 2014, in terms of competition and changes in business mix or austerity, et cetera, versus what is a structural change in the profitability of your Business when you include Gambro?

Yes, absolutely. So, of that 150-basis-point change in gross margin, I think about it in three buckets that are roughly equal impact. One is Gambro, and that's almost purely from a mix standpoint. But they are, at the moment, a lower-margin business than Baxter.

But structurally over time, we do expect, as we've talked about, to drive the majority of the overall $300 million in cost synergies -- we expect to drive those in the margin line. So, over time, we expect that to improve. But for 2014, the mix impact of bringing Gambro in for a full year into Baxter results is about 50 basis points on the gross margin.

Cyclo also contributes about a 50-basis-point impact to the gross margin, given the high contribution margin of that and the magnitude of the impact. Again, we expect numerous entrants to come in, in 2014 and 2015, so I view this as more of a 2014/2015 issue. We think by the end of 2015, given the normal trajectory of a generic situation, the vast majority of what's in our base today for Cyclo will be out of the Company results by then.

And then the third bucket, which is, again, about 40 to 50 basis points, is foreign exchange. And that's a combination of both emerging-market FX -- as you know, since May of last year, emerging-market currencies have really deteriorated pretty significantly against the US dollar pretty much across the board. As we've talked about before, we have a $900-million to $1-billion profit pool in those emerging markets that's largely unhedged, and so that creates an issue.

The second aspect of FX is the Japanese yen. We do hedge the yen, and we had a very good rate in 2013. We hedged about an JPY80-per-dollar rate. Unfortunately, given how rapidly that's deteriorated, the hedge rate we have for 2014 -- I'm sorry, in 2013, we had the JPY80. In 2014, our hedge rate is about JPY93 per US dollar.

So, again, well hedged versus the current rate of JPY104, but it's 17% deterioration from our hedge rate in 2013. We do see some negative impact related to there. So, then overall I would say those are the three main impacts that account for pretty much all of the impact on gross margin.

One additional comment on the directional guidance on calendarization, since we talked about FX and those two impacts, in terms of emerging markets and the yen. As I mentioned, the emerging markets, in particular, started to deteriorate in the second quarter of last year. So, in the first quarter of this year, the year-over-year impact is pretty significant. It's about $0.08 a share of headwind here. The majority of that is coming through the margin line.

We have another impact in the second quarter somewhat, but the FX impact, as I mentioned in my prepared comments, is pretty front-end loaded. And that's impacting our year-over-year growth for EPS in the first part of the year.

Okay, that's helpful. And then maybe just on -- from a bigger-picture standpoint, you had offered a long-range plan in 2012, which you updated at the time of the Gambro transaction. In December, obviously there have been some changes with respect to austerity and the macroeconomic conditions since that plan was issued, but is it still fair to look at 2014 as a trough year for organic growth and earnings progression as it relates to the long-range plan? Any perspective you could provide on how you're doing relative to your internal expectations, and how we should think about the long-term picture here?

Yes, David. It's Bob Parkinson here. Let me tackle that and then I'll maybe ask Bob Hombach to augment my comments if I miss anything.

First off, kind of starting at a high level, clearly our long-term outlook for Baxter continues to be very positive for a lot of different reasons. When you contrast it with our last investor conference, clearly there are headwinds that have emerged that are more pronounced than what we had anticipated at the time, I think. We continue to talk about global austerity measures and so on, as payers around the world struggle with financing access to healthcare and their own budgets and so on. And so, not only is that going to continue, it's realistic to think that, that very well could intensify as time moves on. So, that's more of a pronounced headwind than I think we anticipated in the Fall of 2012 when we had our last investor conference.

The other thing, and Bob just commented on it earlier specifically as it relates to the yen, but currencies in emerging markets are more pronounced negative, certainly now. We anticipate that continuing for the foreseeable future. So, those are a couple of big changes.

Of course, the other operating dynamic that we deal with in 2014 -- you mentioned a trough, but it's going to continue to be a challenge as we move into 2015 is the Cyclophosphamide generic, which is a bigger product, significantly so, than what it was a couple of years ago. So we're going to have to continue to ride that down.

On the upside, I would say when -- at our last investor conference when we projected long-term top-line growth, we did not reflect any new business development beyond that point in time. And subsequent to our investor conference, we've done a number of things, and clearly are committed to doing that. So, to the degree we continue to close BD transactions, that will be an upside to the long-range plan that we last reviewed.

The other thing I would say is: We're a lot closer to our new product pipeline. We've talked about that this morning. You're familiar with the specifics compared to two years ago, where there -- I would say there was a higher risk element. As we sit here today, we have approval for a number of the products; we're closer to approval on others. Other things continue to advance in the pipeline.

So, I think in terms of the risk adjustment that we dialed in our new product pipeline, as we move closer to these launches, and in some cases have actually launched products, we have a higher confidence level there ourselves. So, net-net, how those balance out over five years -- I think the long-term top-line growth for the Company is very much in line with what we messaged a couple years ago. We do continue to manage through the trough, as you call it, in 2014.

I would caution you, though, that -- not to assume that when January 1, 2015, rolls around, the trough is behind us. You got to work your way through it. Cyclophosphamide is probably the biggest piece of that.

As you know, we get competitive launches in our hemophilia franchise this year. Although our -- as we've commented before, our long-range outlook for the growth of our hemophilia franchise is very much in line with what we messaged to everyone a couple years ago.

So, I realize I touched on a number of different pieces. Bob, I don't know if you have anything you want to add to that?

David, is that helpful?

That gives these a lot more context. Thank you.

Thank you. Matt Miksic from Piper Jaffray.

Bob, I think you mentioned, when you talked up some of the growth in the quarter on hemophilia and how you're looking at 2014 -- in addition to new products, there's a fair amount of international demand and penetration with the new label. You talked a little bit about this last year in the US, prophy and convenience dosing. Can you talk about what maybe regionally, in terms of health systems or clinicians, or researchers that are looking at the data that you've put together for ADVATE in prophy -- what the effect has been outside the US? And then I have one follow-up.

Yes. I would say, Matt, that, particularly in western Europe, I think the benefits of prophy have been well understood, and there are some kind of top-tier benchmarks in like countries like Sweden that have some of the highest utilization rates as well. But there are other markets where it is underpenetrated.

So, the additional approval for ADVATE prophylaxis in Europe allows us to more actively promote that, and so we are seeing benefits both in Europe and certainly in the US. You've seen the performance be very strong in the US for us here. There continues to be opportunity to drive that, create greater awareness, and increase penetration because we think, at the end of the day, it does improve patient outcomes and quality of life over time.

Certainly having the gold standard product has helped us in a number of markets. And again, we're very pleased with the progress we see in Brazil. And one of the stated objectives of the Brazilian government is to improve access to care, and quality of care, which prophylaxis is one of the target aspects of that, that we're working with them very closely on. So again, we think there is much more mileage to be gained here on prophylaxis on a global basis as we go forward.

And then on the SG&A line -- thank you, Bob -- in terms of the addition of Gambro, and then some of the synergies over time around that acquisition, can you give us a sense of when and -- or are we already seeing that line start to show some of the synergies across the acquisition? Maybe what the progression, either percentage or revenues, would look like this year as you get through the integration and synergies?

Yes, I would -- well, first off, I would say, as we talked about, there definitely is leverage in the base Baxter business excluding Gambro and FX. In fact, SG&A year over year is flat, excluding Gambro and FX for Baxter. And that includes absorbing more than $40 million of incremental spend focused on important new product launches, both in 2014 here and in preparation for 2015. So, I think we've done a very responsible job in the face of generic competition to drive down our base spending as much as possible, while continuing to invest for future growth.

Clearly, in the short term, Gambro is adding, but again, at a leveraged rate. We do have a meaningful amount of synergies already baked into our 2014 expectations. As we've talked about, we expect, on a run-rate basis, by the end of 2015, to achieve about 80% of our overall $300 million cost synergies that we expect to have. So, we're well down the path. We've baked into our 2014 assumptions here that we make meaningful progress in the first year of synergies, both in SG&A and in margin.

Thank you. Derrick Sung from Sanford Bernstein.

I wanted to turn back to the IVIG markets, and a couple questions there. Could you give us an update on how the HyQvia launch in Germany is going? Are you able to get the price premium -- what you're seeing in the early days there?

And then, also on HyQ, talk about your ability to supply the market in the US if and when you get the launch there? And then maybe if you could also then comment on IVIG market dynamics as well, in terms of pricing and volumes? Thank you.

Yes. So, a couple things, Derrick. So, first, I think the HyQvia launch in Europe is going very well. As we talked about, we've been very targeted about the markets that we've launched in, and have done a very controlled launch to ensure that we get this off to the right start with both patients and treaters. So, the initial feedback has been very good. And patient experience has been very good, which is very important to us for the long-term positioning of this product.

We are pleased with our ability to, I think, get the innovation we brought to the market recognized, and the price point that we've been able to achieve in some of the markets in Europe. And so, we do have a meaningful price premium in those markets today. And we expect, as we hope to get approval here by mid-year 2014, that we'll be able to do the same in the US.

In terms of our ability to supply the market, as I mentioned earlier, given our assumption around overall demand growth of about 6% to 8% on a global basis, within our existing footprint we will be able to provide volume unit growth in the 6% to 8% range, both for 2014 and 2015.

As you saw, though, we have selectively -- given our product constraints, we've selectively targeted which markets we want to participate in for the long run. While that's depressed our sales a little bit in the short term, in terms of some of the markets we've exited in Europe as an example, it does position us well to continue to participate in the strong growth in the US market. And certainly, we think HyQvia would provide a significant differentiation for us in the US. So, we're excited about that opportunity, and we'll be in good position as our inventory levels have improved in the US to support strong demand going forward for that product.

In terms of overall market dynamics, I don't want to talk about too much here in specifics, but I would say that no real change, strong demand, and again, our ability to supply at market growth rates is much enhanced here. So, we feel good about where we're at for 2014.

Okay. Thank you.

Maybe just a quick follow-up on Gambro. You talked about the rationale at the start of the -- when you announced the acquisition around revenue synergies. And I was wondering if you could maybe give us an update on when you expect to see those revenue synergies -- how they're looking now that you're completing that -- you're in the midst of the acquisition. And then -- or integration, rather.

And then also, if you could talk to the dialyzer constraint issue, and where we are on that with respect to Gambro? Thanks.

As we've talked about, this took a little bit longer for us to close the transaction as we worked through the regulatory processes. So in the meantime, the business, as you've probably seen, underperformed market growth throughout 2013. But we continue to believe in the long-term opportunity that this represents, and the key drivers where we think we will be able to enhance growth going forward. That would be in the dialyzer space, in the acute care CRRT space, where we have very strong hospital presence on a global basis, as well as stabilizing the in-center monitor business, and getting back to more market growth rates in the low-single digits.

So, in 2013 overall, I'd characterize Gambro's sales growth as -- I'd say slightly negative -- negative low-single digits, if you will. We're expecting to accelerate that in 2014 into low- to mid-single digits within Baxter, as well as enhance our overall PD growth as well. Because we do think there are synergies on both the Baxter base business, as well as the Gambro business, as we bring these two together, particularly in emerging and developing markets. And so -- sorry. (multiple speakers)

On dialyzers, Derrick, things are going well there. We did bring up a new line in 2013 to enhance our dialyzer capacity in 2013. Additional capacity will be coming in 2014. We expect about a 50% increase in capacity by the time we get to the end of 2015.

I would say early days on generating commercial synergies, but we definitely see the opportunity, and baked some of that into our assumptions here. And we expect that to ramp up throughout the course of 2014, and accelerate beyond that.

Mike Weinstein from JPMorgan.

I'll try and limit here to just a couple questions. So, first on Gambro, the $300 million in synergies that you've targeted -- it looks like you're actually ahead of our estimates on what you'll achieve in 2014 with your SG&A mid-single-digit guidance and the R&D low-single-digit guidance was both lower than we were expecting. So, maybe try and just tie the two, so the $300 million -- what do you think that is for 2014?

I would characterize it as slightly more than $100 million. And recognize that, as we said, a meaningful portion of that comes through the cost of goods sold line. It will take a little bit longer with some of the actions that we need to take there, but a little bit more than half of that, slightly more than $100 million coming through margin, and the rest coming primarily through SG&A.

But I would also say, as you saw through the business optimization activities that we've done as well, we've taken actions on the Baxter side of the expense base as well, again, to get to flat to drive some leverage given the approximately 2% sales outlook that we've got for the base business.

Okay. And then, on Cyclophosphamide, can you give us what the 2013 revenue contribution was? And can you make an estimate of what you think the EPS contribution was in 2013, so we can think about what that looks like with it out of the model once we get into 2015?

I'd say approximately $400 million, Mike, at very high contribution margins. So, a meaningful contribution on -- (multiple speakers)

So, depending on the timing of events here in 2014, if we just ignore 2014 for a second, view it as a transition for Cyclo, the total contribution somewhere in the [$0.35] range?

Yes, it might be a little bit higher than that. Again, we're thinking about, with multiple entrants coming in over the next two years, and the normal flow of a generic situation like this, by the end of 2015, on a run-rate basis, we expect roughly 85% to 90% of this to be out of our base by then.

Okay, perfect, thank you, guys.

Thank you. Glenn Novarro from RBC Capital Markets.

So I wanted to ask about what you guys are doing behind the scenes in front of the Biogen launch. We've all done street surveys, have talked to docs and patients about uptake, and there's a great deal of awareness and desire to switch to longer-acting agents. In front of the Biogen launch, I'm sure you guys are being very active in talking to your distributors and patients about the benefits of ADVATE, and what you have going on in the pipeline. So I just wanted to give you guys the opportunity to talk about what you're doing in the background ahead of this Biogen launch. Thanks.

Yes. Let me -- Glenn, Bob Parkinson. I'm just going to handle that at a high level. You can rest assured we're doing a lot of things. I'm not sure I want to specify specifically what those are. So, I'm not going to give you any satisfaction in that regard.

I would say that we have more time to do those things than what we had anticipated a few months ago, given Biogen's announcement that their launch was going to be delayed. So, I think the important thing to recognize is we have more time. We're not sparing any expense or focus to appropriately, first and foremost, promote the merits of ADVATE. But beyond that, I don't think it's constructive to get into specific aspects of our marketing program, for a number of reasons.

Two follow-ups. In the past, you've talked about ADVATE and the new label, and percentage of adoption or sales. Is that continuing to increase?

Yes, Glenn, we're seeing both conversions to prophylaxis in general, and then conversions to extending the dosing regimen to every three days versus every two days. And as we've talked about, hemophilia treatment is very much a person patient -- a personal, patient-by-patient approach here. And we've done some surveys of our own that have shown that a majority of our patients are already doing an alternate regimen from kind of the standard of care of every-two-day dosing for prophylaxis. So, a meaningful portion of our patient base is already doing something three days or longer from a dosing interval.

And so, we're going to continue to highlight the strong track record of ADVATE, the very low bleed rates, the very, very low inhibitor rates. And continue to enhance our offering from a convenience standpoint in terms of the administration process, as well as continuing to work with patients and treaters to develop tools that allow them to even further personalize. We've talked about a PK dosing tool that we have in development that we are excited about, and we think will, again, further enhance our leadership position. So, a number of things we're doing here to leverage a very strong label for ADVATE.

And then just lastly, can you share with us your assumption as to potential market share loss in 2014 or 2015, or switching rates that you anticipate? I'll jump back into queue.

I don't think it's appropriate for us to get into that. We've assumed in our guidance basically what's been said publicly, which is roughly a mid-year launch.

As we've said all along, we think this is a market that will take its time to understand any new product offerings, and a very well-educated patient population that's going to understand the treatment trade-offs that they're going to have to consider and so on. We've baked that into our expectation, as Bob mentioned, over the next several years. And over the long run, our long-term view of how this evolves really hasn't changed.

Glenn, I would add, I think in our prepared remarks we did talk about the fact that although we expect the increased competition, we do have a significant amount of sales related to FEIBA prophylaxis treatments, RIXUBIS, OBI-1, all coming a lot in the back half that will offset some of the competitive impact that we expect.

Okay, great, thank you.

Thank you. Rick Wise from Stifel.

Two things, I guess. One, product specific, and one, a bigger picture. Bob, you talked about VIVIA recently receiving the CE Mark. Maybe just give us a little more detail on the launch plans and market penetration expectations. You're launching in one country -- multiple countries? And the broader 2015 launch -- is that throughout Europe? Maybe talk to us a little bit about the slow ramp and just your thinking behind all that, and then I'll ask my other question.

Rick, the thinking behind the slower launch is: This is a new product and it is a new system, and it is a new electromechanical device. It is sophisticated. It is complex. And as a result, we feel that it's prudent to be very controlled and disciplined on the rollout.

Our excitement about the long-term potential of this product is every bit as high as it's ever been. The prospects of allowing patients to do hemodialysis in the home, nocturnally, significantly increasing the number of hours on therapy, and our belief that advancing important clinical outcomes as a result, will be demonstrated over time. So, the long-term potential for this product is, we think, tremendously exciting.

Having said that, there's no percentage in getting ahead of ourselves on this. And so, the comments that I made in my prepared statement about the limited launch in 2014 is really about that. It's about being controlled and disciplined. This is kind of a long-term journey. But the opportunity is every bit as significant as we've ever felt.

Just any granularity on what countries and what kind of institutions that you're going to be launching in the next 6, 12 months?

I don't want to get into the specifics of that. It's more of on a center-by-center basis, so it will be multiple countries. But obviously, centers that exhibit an interest that we believe can be good partners.

There's a big service component to this as well, over and above the product. And so, it's really important to select partners in terms of centers that we feel lay the groundwork for, again, kind of a controlled and successful launch.

Thanks. Just a follow-up on operating margins. I appreciate there are a ton of moving pieces. Can you help us at all with directional target set-ups for the next couple of years following?

You've had a 23%-ish operating margin for much of the recent history. How long does it take to get back to that level, given all the moving pieces? Is it a couple years? Is it going to be more in the three- to five-year kind of time frame?

Any sort of color would be welcome. Thanks so much.

Sure. And I'll speak to kind of the new way we're going to be reporting here because, obviously, we've provided historical information on what Baxter looks like, excluding intangible amortization, which, again, was all booking to gross margin and having about a 120-basis-point impact or so on gross margins historically. When you wash that through and restate the base and look at our operating margin expectations for 2014, they're not that different from where we've been historically. They'll be a bit below 23% at this point.

I would definitely view Q1 -- excuse me, Q4 2013 operating margin as a -- not representative of where we're going. We clearly had some very specific factors impacting Q4 of 2013. Again, just pulling amortization out, in and of itself, moves it 120 basis points or so.

So, I would say, going forward, if you back out FX at this point, our 2014 operating margin expectation is basically flat to 2013, despite the fact that we're absorbing Cyclo and a number of other headwinds -- we'll again have a Cyclo headwind next year. But we're going to continue to drive leverage in the Business, launch new products with higher margins, drive Gambro synergies and so on. And as we projected in our long-range outlook that over the next several years we would expect it to generate 200 to 300 additional basis points of operating margin leverage going forward. That's still our expectation. Again, I think 2015 will be somewhat clouded by Cyclo, but beyond that, all those factors I mentioned are going to come into play here, and drive leverage for us going forward.

Thanks, Bob.

We have time for one more question.

Certainly. Matthew Dodds from Citigroup.

Bob, on the gross margin for the fourth quarter, you definitely had a positive mix from Cyclophosphamide in terms of mix price, and recombinant factor VIII. You highlighted Gambro. But to drop 150 basis points ex-Gambro -- of the things you highlighted: foreign exchange, pension, austerity, LA frac, was any outsized this quarter?

Yes, I would highlight the LA-related costs are really non-recurring. So, this is really the realization of the down time and ramp up back in the second quarter of this year as we were bringing the old LA facility up. As we talked about, that was about a $25-million cost that we thought, and really a lot of that is impacting the fourth quarter here. And so that's in the neighborhood of 50 basis points or so, in and of itself. And there were a couple of small inventory reserves we topped off, and FX certainly was a driver there as well.

Just one additional quick question. For Brazil, with the Hemobras deal, you said $70 million in 2013? (multiple speakers)

That was the incremental, yes.

Did you have any sales in 2012 as a [comp]?

Yes, we do want to recognize the fact that we had some modest plasma-derived sales -- I would say less than $20 million, in that neighborhood. And so, obviously, they're converting the market from plasma to recombinant, so we're losing plasma sales and getting recombinant. So we netted those two out in the $70-million incremental.

Got it. But in 2012, there was no recombinant sales to Brazil?

Correct.

All right, perfect. Thank you, Bob.

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