百特醫療 (BAX) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's fourth-quarter earnings conference 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.

Thanks, Ann. Good morning, everyone and welcome to our Q4 2014 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; Ludwig Hantson, President BioScience; and Bob Hombach, Chief Financial Officer.

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

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

Thanks, Mary Kay. Good morning and thank you all for calling in. 2014 was a great year for our Company and I'm very pleased with our achievements and progress we've made from the financial, operational, scientific and strategic perspective.

First, we were successful in meeting or exceeding our financial objectives with accelerated growth in sales, solid earnings and a significant cash flow. And we've consistently executed a disciplined capital allocation strategy that balances reinvestment in the business with returning value to shareholders in the form of increased dividends and share repurchases.

Positive momentum continues to build across the commercial franchises as we extend our global reach with the core portfolio, enhance care with the introduction of several new products and position both businesses for sustained success. We are balancing this with investments in commercial and operational excellence, as well as manufacturing capacity to improve our competitive position and support the solid underlying fundamentals and future demand that we foresee for Baxter's products and therapies across the globe.

We are also transforming innovation and advancing the pipeline with the achievement of significant clinical and regulatory milestones, while expanding the portfolio through acquisitions and collaborations. And most notably, 2014 we reached a significant milestone in Baxter's history, as we remain committed to driving long-term value for shareholders with the creation of two independent publicly traded Companies in mid-2015, providing investors with two unique and compelling investment opportunities.

Before turning the call over to Bob Hombach for a discussion of the financial results and future outlook, let me take just a few minutes to reflect on a number of the achievements from the past year. First, strong sales performance reflects our strategic focus on improving access and treatment standards, broadening our global presence while investing to support future growth.

Baxter's worldwide revenues totaled $16.7 billion in 2014, advancing 11%, or 5% excluding Gambro and foreign exchange. International sales, representing nearly 60% of Baxter's total revenues, were augmented by significant growth in emerging markets, with the sales in the BRIC countries advancing by more than 15%.

Continued emerging market penetration represents a significant opportunity for both businesses going forward, as many products and therapies remain underpenetrated, diagnosed or treated. For example in medical products, we continue to drive global penetration for higher-margin specialty products, including those from biosurgery and nutrition franchises with the expanded launches of FloSeal in Japan, HEMOPATCH in Europe, and our proprietary triple-chamber nutritional containers in several new markets like China, Brazil, Australia and France.

To address strong demand across our hospital products and renal portfolio, we announced plans to invest approximately $600 million to expand capacity and enhance production capabilities in several key markets and product areas, representing some of the greatest opportunities for future growth. These include investments in Asia and at our North Carolina facility to support production of peritoneal dialysis and intravenous solutions.

We are also executing on expansion plans at our state-of-the-art manufacturing facility in Opelika, Alabama to meet the growing global demand for dialyzers. In addition, we've successfully executed on the integration of Gambro, achieving the commercial and cost benefits that we anticipated, and further extending our global reach with a comprehensive renal therapies portfolio.

In BioScience we're building upon our global leadership position in hemophilia, as evidenced by our strong double-digit revenue growth for 2014. Highlights for this franchise include supporting rising standards of care for approximately 100,000 patients, more that a quarter of the world's hemophilia A patients, in key markets like the UK, Australia, Brazil, Russia and China, with recent product approvals launches a multi-year tender awards.

Second, driving personalized care with the launch of BAXJECT III reconstitution system and myPKFiT in Europe, Canada and Japan. Thirdly, the European regulatory approval of the new manufacturing facility in Singapore, for the production of recombinant proteins, including ADVATE and eventually, BAX 855.

Within our biotherapeutics franchise we remain committed to meeting patient needs by enhancing our plasma manufacturing footprint in a flexible and cost-efficient manner. We've increased capacity at our Los Angeles and in Vienna, Austria plasma fractionation facilities.

We are investing in a new state-of-the-art facility in Covington, Georgia and we are making progress with the Sanguin collaboration. These efforts have led to improved growth throughout 2014, capping the year off with strong double-digit growth for this franchise during the fourth quarter.

As you know, we've significantly ramped up R&D over the last several years and are now beginning to realize the benefits. In 2014 the Company received regulatory approval for almost a dozen new products and therapies. We also announced an array of significant pipeline achievements and advanced many of our R&D collaborations with partners.

In medical products we are obtained 510(k) clearance for the next generation SIGMA spectrum infusion pump in the United States, and further advanced development of AMIA and HOMECHOICE CLARIA, our latest automated PD systems for the US and European markets. In BioScience we received FDA approval of several key therapies, including HYQVIA, which we launched in the United States in the fourth quarter.

HYQVIA is a transformational subcutaneous treatment for adult patients with primary immunodeficiency. Our launch is progressing well, with more than 400 physicians currently prescribing the therapy.

We were granted FDA approval for OBIZUR, a treatment for patients with acquired hemophilia A, very rare and potentially life-threatening acute bleeding disorder, as well as the pediatric indication for RIXUBIS for the treatment of hemophilia B. In addition, we recently received European approval for RIXUBIS for both pediatric and adult patients.

During 2014 we achieved several regulatory milestones, including positive top-line results from the Phase 3 pivotal clinical trial of BAX 855, an extended half-life recombinant factor VIII treatment for hemophilia A based on ADVATE. We also met the primary efficacy endpoint in the Phase 3 study of BAX111, the first stand-alone recombinant treatment for von Willebrand disease. And late last year we successfully completed the FDA regulatory submissions for both BAX 855 and BAX111 with approvals expected later in 2015.

In addition to our internal R&D accomplishments, we are collaborating with partners to advance R&D programs in new disease areas which capitalize on our core technical capabilities, expertise and global channel. These collaborations include the partnership with Coherus Biosciences in the initiation of two Phase 3 trials for an investigational etanercept biosimilar in rheumatoid arthritis and chronic plaque psoriasis.

And advancement of pivotal trials for Pacritinib with our partner, CTI BioPharma. Pacritinib is a novel oral JAK2/FLT3 inhibitor for patients with myelofibrosis, a chronic malignant bone marrow disorder. And we expect clinical trials results for PERSIST-1 later in the first quarter of 2015.

In 2014 we augmented internal development programs with select acquisitions and new collaborations. Within medical products we entered an exclusive agreement with Rockwell Medical for their leading hemodialysis concentrates in select markets, which enhances Baxter's comprehensive range of therapeutic options across home and center hospital settings for patients with end-stage renal disease.

And earlier this year we acquired ICNet, a global leader in surveillance and case management software used in hospitals, which builds on Baxter's unique expertise at hospital pharmacy operations. In BioScience the organization continues to enhance its focus on specific disease areas centered on its expertise in hematology, oncology and immunology, as well as through technology platforms including gene therapy and biosimilars.

During 2014 we bolstered the portfolio with acquisitions like AesRx and Chatham Therapeutics and extended our collaboration with Xenetic Biosciences. The AesRx acquisition expands our reach in hematology with BAX 555, an investigational oral prophylactic treatment being evaluated in a Phase 2 clinical trial for patients with sickle cell anemia.

With Chatham Therapeutics acquisition we obtained their development gene therapy pre-clinical hemophilia A and ongoing hemophilia B program, which is currently in a Phase 1/2 trial. This approach has the potential to redefine the concept of longer-acting therapy and we plan to share additional data on this program at the European Association for Hemophilia and Allied Disorders in Helsinki in February.

The exclusive agreement with Xenetic Bioscience is a partnership for the development of BAX 826, an extended half-life recombinant factor VIII therapy for hemophilia A. BAX 826 is currently in pre-clinical development as a treatment that may be administered less frequently, potentially at once-weekly intervals, without compromising efficacy.

Also in BioScience we are building on the strategic decision to expand our presence in the area of hematology-oncology, leveraging our heritage of success in developing new therapies that treat unmet medical needs for patients with rare diseases. We now have several oncology assets, including our most advanced asset, MM-398 for pancreatic cancer, which will be submitted for approval in markets outside the US and Taiwan in 2015, as well as Pacritinib mentioned earlier. Each of these new therapies offers the potential for numerous additional indications for patients with a variety of hematologic and solid malignancies.

In summary, our core portfolio remains strong. And we continue to benefit from our focus on life-saving therapies along with strong global channels that provide a platform for ongoing geographic expansion and growth. We are investing for the future to enhance our commercial, operational and scientific effectiveness.

Our pipeline remains robust and we've accelerated the pace of business development with opportunities that are aligned with our core strengths. And we are committed to overcoming the challenges presented by the external economic environment while enhancing value through improved performance and execution.

So with that, let me now turn the call over to Bob Hombach for a discussion on our 2014 financial results and outlook. And when Bob concludes his commentary, I will provide an update on the spinoff of our biopharmaceuticals business, before opening up the call for Q&A. Bob?

Thanks, Bob, and good morning, everyone. Adjusted earnings per diluted share from continuing operations increased 2% in the fourth quarter to $1.34, which exceeded our previously issued guidance range of $1.30 to $1.33 per share. These results reflect strong revenue growth across several key franchises and continued investments in operations and research and development.

As we mentioned in the press release, GAAP earnings of $1.74 per diluted share reflects both earnings and an after-tax gain from the recently-divested vaccines franchise totaling $429 million, or $0.78 per diluted share. In addition, our GAAP results reflect after-tax special items totaling $209 million, or $0.38 per diluted share, for intangible amortization, costs associated with business development and contingent milestone payments, integration of the Company's acquisition of Gambro AB and Baxter's planned separation.

Now let me briefly walk you through the P&L by line item before turning to the financial outlook for 2015. Starting with sales, worldwide sales of approximately $4.5 billion advanced 3% on a reported basis.

On a constant currency basis, sales increased 7%, reflecting a sequential improvement in growth over the last four quarters from an organic perspective. This growth also favorably compares to our guidance for the quarter of approximately 3%.

Each product category contributed to the over-achievement, with particular strength coming from the hemophilia franchise driven by ADVATE and FEIBA, and strong US performance across the medical products portfolio. Sales in the US increased 6% and international sales, excluding foreign currency, increased 7%. As Bob mentioned, sales in emerging markets were strong, advancing by more than 15% in the quarter with robust growth in the BRIC markets, driven by hemophilia sales in Brazil and the timing of tenders as expected.

For the full year worldwide sales of nearly $16.7 billion advanced 11% on a reported basis, or 13% on a constant currency basis. Baxter sales for the full year increased 5% on a constant currency basis when excluding Gambro revenues from both periods. Gambro sales were $1.6 billion in 2014 compared to $513 million in 2013.

In terms of individual business performance, global BioScience sales totaled approximately $1.9 billion in the quarter and advanced 9% on a reported basis. On a constant currency basis, BioScience sales increased 12%, reflecting the highest quarterly growth in the last five years.

For the full-year global BioScience sales advanced 7% to $6.7 billion. After adjusting for foreign currency, sales grew 8%, significantly exceeding our original expectation of sales growth in the 3% to 4% range for 2014.

Within the product categories, hemophilia sales in the fourth quarter of approximately $1.1 billion increased 9% on reported basis and, excluding foreign currency, sales advanced 13%. While sales in the US were strong, up 8%, international sales grew 16% on a constant currency basis.

As mentioned in Bob's opening remarks, international penetration remains a significant opportunity for our Company, as Hemophilia is a disease that remains tremendously under-diagnosed and under-treated around the world. As the established global leader, Baxter today derives approximately 60% of total hemophilia sales from outside the US in and more than 60 countries worldwide.

In addition, in the quarter we achieved a record level of ADVATE sales with the fifth consecutive quarter of double-digit growth. This was the result of strong global demand, prophy conversions, benefits from recent tender wins in the UK and Australia and convergent to recombinant therapy in Brazil.

For the year, sales in Brazil totaled more than $100 million, in line with our expectations. And to date we have converted approximately 40% of the estimated 10,000 hemophilia A patients in the country.

In the US, where we face new competition, our recombinant factor VIII sales outpaced market growth. In fact for 2014, we've enhanced our overall factor VIII unit share position, despite more competitive environment and modest patient losses.

We are also pleased that growth in our hemophilia franchise was further augmented by the launch of several new products and indications, including double-digit growth of FEIBA for the treatment of hemophilia patients with inhibitors, as well as contribution from RIXUBIS, a factor IX treatment for hemophilia B patients, and the recent launch of OBIZUR for acquired hemophilia.

In biotherapeutics, sales of $628 million increased 11% on reported basis. Sales increased 14% on a constant currency basis, driven by robust demand, particularly for immunoglobulin therapies and albumin. Throughout 2014 we enhanced our overall supply of plasma therapies, as we successfully executed to increase capacity across our manufacturing network. We are now in a position to support ongoing growth in demand of at least 8% going forward.

A significant achievement in the fourth quarter was the launch of HYQVIA in the US. This is a transformational therapy with an attractive value proposition for patients, physicians and payors. For 2014 Baxter successfully increased global SubQ penetration, including the US HYQVIA sales in the fourth quarter of $35 million, which primarily reflects the impact of initial stocking orders by customers and the favorable reception of the product in the marketplace.

In biosurgery sales of $197 million grew 2%. On a constant currency basis, sales rose 4% driven by increased penetration of surgical sealants, despite modest growth in surgical procedures and some competitive pricing pressures. As you may recall, the biosurgery business will be reported in the medical products business going forward.

In medical products, global sales of approximately $2.6 billion were comparable to the prior year, and on a constant currency basis, sales increased 3%. For the full-year, medical products sales rose 15% to approximately $10 billion, and on a constant currency basis, sales growth was 16%. After adjusting for Gambro in both periods, medical products sales in 2014 increased 4% on a constant currency basis.

Within the product categories, renal sales in the quarter were approximately $1.1 billion, reflecting a decline of 2% on reported basis. Excluding foreign currency, sales grew 3%, driven by solid PD patient gains in the US and emerging markets and improved performance from the Gambro HD business. For the year, Gambro sales were in line with our expectations and exceeded $1.6 billion, an increase of approximately 2% an organic basis.

While sales in the first half of 2014 were comparable to the prior year, we are encouraged with the acceleration of sales to mid single-digits in the second half of 2014, driven primarily by mid-teens growth of the Acute Care business and improved dialyzer sales.

Within the fluid systems category, sales of $822 million were comparable to the prior-year period and on a constant currency basis sales grew 2%. Performance was driven by favorable demand for IV therapies as well as increased sales of Cyclophosphamide, which collectively more than offset lower sales of infusion pumps.

As you may know and new competitor recently entered the US market for Cyclophosphamide and we continue to expect additional competitors in the in the coming months. For your reference, full-year 2014 US Cyclophosphamide sales totaled approximately $450 million.

Specialty Pharmaceuticals, which includes our inhaled anesthetics and nutritional therapies, posted sales of $417 million in the quarter, reflecting an increase of 2%. Sales rose 6% on a constant currency basis as we continue to penetrate international markets with our higher margin anesthesia portfolio, and achieve strong growth in our US nutrition business with improved sales of vitamins and lipids, which were constrained last year.

Finally, sales in Biopharma Solutions, which is our pharma partnering business, totaled $271 million, increasing 1% on reported basis or 4% on a constant currency basis. Performance can be attributed primarily to increased demand from our contract manufacturing partners and strong hospital pharmacy compounding revenues.

Turning to the rest of the P&L, gross margin in the quarter was 50.3% compared to 50.4% last year. Positive mix in BioScience and select pricing improvements across the portfolio were more than offset by the impact of foreign currency, as well as expedited freight for PD solutions, ongoing manufacturing inefficiencies and investments we are making to enhance operational capabilities and advance our quality systems and processes. For the full-year, the gross margin of 50.4% was in line with our guidance.

SG&A totaled $970 million and increased 4%, driven by planned investments in promotional and marketing initiatives for new product launches in BioScience and incremental customer freight and logistical expenses to support the strong demand for IV solutions. R&D spending in the quarter of $305 million increased 6% versus the prior year, driven by the addition of new R&D programs in BioScience through acquisitions, the acceleration of other programs in the areas of hematology, oncology and immunology and investments in renal therapies aimed at improving patient outcomes across the continuum of care.

Interest expense was $29 million in the fourth quarter compared to $41 million last year, as we benefited from recent debt maturities and income generated from a change in the mix of floating versus fixed interest rates. Other expense totaled $25 million and was driven by the negative impact of foreign exchange on balance sheet positions.

The tax rate was 20.5% for the quarter, bringing the full-year tax rate to 21.7%, in line with our expectations. And as previously mentioned, adjusted earnings per diluted share from continuing operations increased 2% to $1.34. And for the full-year 2014, earnings per diluted share of $4.90 exceeded our guidance range.

Turning to cash flow, for 2014 cash flow from operations was very strong and totaled more than $3.2 billion. Excluding cash costs associated with the spinoff of the biopharmaceutical business, we generated $3.3 billion in cash flow from operations.

Capital expenditures totaled $1.9 billion for the year, reflecting investments in manufacturing capacity to support future demand and growth across the portfolio. DSO ended the quarter at 52 days, and excluding Gambro, Baxter's DSO was 50 days, lower than the prior year by more than 2 days.

Inventory turns of 2.4 are lower than the prior-year period by 0.3 days, driven by the impact of new product launches and enhanced inventories in our plasma business. And lastly, in 2014 the Company repurchased approximately 7.8 million shares for $550 million, or on a net basis, 1.3 million shares for $206 million.

Finally, let me conclude my comments this morning by providing some information on the financial outlook and assumptions affecting our performance in 2015. As I previously mentioned, given the complexities of a mid-year spin, we are not in the position today to provide full-year guidance for Baxter and Baxalta.

As we move into the second quarter of 2015, Baxter will likely begin reporting Baxalta as a discontinued operation. And at our investor conferences in May, each Company will provide additional information on their financial profile and outlook.

Today we will provide investors with some relevant information on several key discrete challenges we expect to face in 2015. First, given significant volatility in foreign currency rates, particularly in emerging markets and more recently the euro, we expect a full-year impact of approximately $0.40 per diluted share related to foreign exchange. Given the timing of currency movements, the impact of our hedging strategy and our geographic mix, the majority of this impact is expected to occur in the second half of 2015.

Second, with interest rates much lower as we exited 2014, pension expense will be a headwind of approximately $0.10 per diluted share for the year. Third, given the assumption that we will experience additional competition for cyclophosphamide throughout 2015, we are assuming a full-year impact of approximately $0.40 per diluted share.

And lastly, as previously mentioned, we are incurring additional costs that reflect manufacturing inefficiencies and investments to enhance operational capabilities, creating an additional headwind in the first quarter of approximately $0.10 per diluted share. As we move into the second half of 2015 we expect these costs to stabilize, as we begin to anniversary these impacts.

Let me take a few moments to provide full-year sales guidance for the two businesses and the major product categories for 2015. Recall that, given the spin, we have taken the opportunity to step back a look at our organizational structure to ensure that we're best positioned to successfully operate two stand-alone Companies.

Therefore we are moving to a new reporting configuration that is aligned with the respective internal organizations and are providing guidance in this new format this morning. For your convenience, we've we posted the historical restated sales, including 2014 by quarter to the investor relations section of our website.

Beginning with the new Baxter franchises, on a constant currency basis, we expect sales to be comparable to 2014. Excluding cyclophosphamide in both years, underlying growth will be approximately 3%. Specifically, we expect sales in our renal franchise, which includes our leading peritoneal and hemodialysis products to grow in the 4% to 5% range.

We expect fluid system sales to grow in the 2% to 3% range. This franchise includes our IV therapies, infusion pumps and associated disposables.

We expect sales of our surgical care franchise to grow in the 4% to 5% range. This franchise includes anesthesia and biosurgery products.

We expect the integrated pharmacy solution sales to decline approximately 10%. This franchise includes injectable drugs like cyclophosphamide, as well as our nutritional therapies and hospital pharmacy compounding business. Excluding the impact of cyclophosphamide of approximately $300 million, growth is expected to be in the low single-digits.

And finally, we expect the other category going to decline approximately 15%. This category primarily includes our third-party manufacturing business, which will be impacted by a major customer electing to self-manufacture products previously manufactured by Baxter.

For Baxalta, we project sales growth, excluding foreign currency, of approximately 3% to 4%. Our outlook includes growth in the hemophilia franchise of 0% to 2%. This includes sales of our recombinant and plasma-derived hemophilia therapies, including ADVATE, RIXUBIS and other treatments for factor VIII and factor IX deficiencies. Growth will be fueled by new product launches and strong international demand, which will be somewhat offset by anticipated high single-digit share loss in the US due to increased competition.

We expect growth in the inhibitors category to be in the 6% to 8% range, driven by further penetration and growth of FEIBA for the treatment of inhibitors and the launch of OBIZUR for the treatment of acquired hemophilia. For immunoglobulin therapies, which includes our antibody replacement treatments, we expect growth of 6% to 8%, driven by strong market demand and the contributions from HYQVIA. And finally for biotherapeutics, which includes plasma drive therapies like albumin and treatments for alpha-1 deficiencies among others, we expect to grow in the 2% to 4% range.

Now turning to the first quarter, we expect adjusted earnings, excluding special items, of $0.85 to $0.90 per diluted share, reflecting the headwinds just mentioned. It is important to note, however, that this guidance does not reflect any incremental costs or disynergies associated with the spinoff of the biopharmaceutical business, as these costs will begin to be layered in throughout the second quarter.

Now in terms of the P&L by line item, we expect first-quarter sales growth, excluding the impact of foreign currency, of 2% to 3%. At current foreign exchange rates, we expect reported sales to decline 3% to 4%. By business on a constant currency basis, we expect Medical Product sales growth of 1% to 2% and BioScience sales to grow 4% to 5%.

In the first quarter we expect gross margin for the Company to decline by approximately 250 to 300 basis points versus the fourth quarter of last year of 50.4%. This reflects the impact of increased manufacturing costs, which are most pronounced in the first quarter, as well as the impact of cyclophosphamide and pension expense.

We expect SG&A to decline by approximately 5% versus the prior year, and R&D to be flat on a reported basis. Excluding foreign currency impacts, both SG&A and R&D are expected to grow in low single-digits.

And finally, for the first quarter we expect interest expense to total approximately $35 million, no impact from other income versus gains we were reported in the prior year. And we expect a tax rate of approximately 22% with an average share count of approximately 547 million shares.

This concludes my prepared remarks this morning. Look forward to providing more financial information to you in the near future. In the meantime, I would now like to turn the call over to Bob for his closing comments.

Thanks, Bob. Let me end our prepared comments this morning with a brief update on the anticipated spinoff of our biopharmaceuticals business. Our organization has been fully engaged in separation activities since the announcement that we made last March. And we are energized by the prospects of separating Baxter into two leading global healthcare Companies.

One focused on developing and marketing innovative biopharmaceuticals and the other on life-saving medical products. This decision supports Baxter's evolution and underscores our commitment to ensuring long-term strategic priorities remain aligned with shareholders' best interest, while creating value for patients, healthcare providers and other key stakeholders.

The two businesses operate in distinct markets with corresponding underlying fundamentals. And each possesses unique and compelling growth prospects, investment requirements and risk profiles. The spinoff will create two well-capitalized independent Companies with strong balance sheets, investment-grade profiles and disciplined approaches to capital allocation.

The spin will also provide greater management focus, the ability to more effectively commercialize new and existing product offerings, to drive innovation and enhance our flexibility to pursue respective growth and investment strategies. This will result in revenue acceleration, improved profitability and enhanced returns for shareholders.

During 2014, we named our senior leadership teams for both Companies, established the international and commercial structures for both organizations, formally unveiled Baxalta Incorporated as the name of the new publicly traded biopharmaceutical Company and filed a preliminary form 10 with the SEC for Baxalta. While we continue to work through the complexities, this process is unfolding in line with our expectations and we continue on track for a mid-2015 completion.

We recently announced that we will be hosting an investor conference in New York City on the afternoon of May 18 for Baxter International, and on the morning of May 19 for Baxalta Incorporated. At these conferences we will introduce you to the new senior management teams and provide investors with more information regarding the strategies, growth prospects, capital structure and financial outlooks for each Company. We will also engage in a comprehensive investor relations effort, including investor road shows for both Companies with there respective senior management teams, several weeks before the spinoff is completed.

In closing, while 2015 will be a challenging year, momentum in the core business is building and we remain excited about our future prospects. And we are poised for improved performance in 2016 and beyond. As we chart distinct unique paths forward as separate global healthcare leaders, we look forward to unlocking value for shareholders, partners, employees and the patients and healthcare providers that we serve.

As always, I will be happy to take any questions on these or other topics during the Q&A. So with that, I would now like to open up the call to your questions.

(Operator Instructions)

I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International's website for 30 days at www.baxter.com.

Kristen Stewart, Deutsche Bank.

Hi, guys, this is Brittany Henderson in for Kristen, thanks for taking the question. I just wanted to get more clarity as we think about 2015. How should we think about the incremental stand-alone costs versus the stranded costs associated with the Baxalta spin?

Okay. As we mentioned, we are still working through the details around that. We've talked about initial dissynergies of approximately $300 million or approximately 2% of Baxter's current sales.

Interestingly enough, almost half of that is going to relate to IT-related costs. We will be working towards separating the IT infrastructure over time, but that is one of the longer lead time items. So that is actually a difficult thing to break out at this point.

Our initial estimate was a little bit heavier towards Baxalta in terms of dissynergies, but a fair amount of stranded costs for new Baxter, given, again, some of this IT overlap for some period of time. But at this point, still working through those details.

That's part of what we look to address in the May investor conferences for each of the two Companies. We will lay out the financial outlooks.

Okay, thank you. And just a quick follow-up. How should we think about SUPRANE in 2015? What are the assumptions for competition there?

This is Bob Parkinson, Brittany. We anticipate SUPRANE is going to continue to grow in 2015. Having said that, we also anticipate that we may get generic competition in various markets around the world, although as we sit here today it is not evident when or if or who that will be.

I will tell you that it continues to be promotionally sensitive in many markets around the world. So longer-term, we do the anesthesia franchise with SUPRANE as a foundation product as a growth vehicle, not only in 2015 but frankly over our LRP.

Okay, thanks for taking the question.

Sure.

David Lewis, Morgan Stanley.

This is actually James in for David, thanks for taking the question.

Okay, James, go ahead.

I wanted to get a quick sense from you. The first quarter earnings guidance of $0.85 to $0.90, how representative do you think that is of where the business stands from a profitability or earnings power basis today?

On the one hand, obviously you've got some idiosyncratic headwinds from quality spending that are going to fade through the year. But on the other hand, it seems as if FX and any potential ADVATE competitive impact would get greater through the years. Is 1Q a reasonable representation of where the business stands today? Or is it wrong?

As we've looked at the situation, there are clearly some things in Q1 that are more pronounced. The $0.10 in manufacturing clearly is something that is very much front-end loaded.

Overall manufacturing, just to give you a sense, is definitely a meaningful headwind in the first half of year, but a slight tailwind in the back half of the year. So that clearly is not representative of what the ongoing situation is with the Company.

FX and cyclo are clearly meaningful headwinds here, both around $0.40. They will be somewhat back-end loaded, particularly FX. We are very well hedged in the first half of year on the euro and a few other key currencies. But again, as we've been highlighting for six months, the emerging market depreciation in currencies that happened in the back half of 2014 is still very much there, and we are much more exposed as well.

So Q1, I would say, is definitely not representative. As a general matter from a seasonality standpoint, it is usually by far our lowest quarter from an earnings perspective in any given year.

Okay, that's helpful. Then second, any help you can give us on Hemophilia guidance? Obviously you've done very well in that business, strong double-digits, or double-digits at a minimum, for the past several quarters, decelerating to 0% to 2% next year. Clearly there's some competitive impact there, but how do you think about balancing the US competitive impact versus the continued strength internationally?

This is Ludwig, James. First of all, the Hemophilia team is doing a great job, as you see from the numbers. We will continue to grow at a rate faster than market internationally. So internationally we will see positive growth.

In the US, as Bob was alluding to, our guidance of high single-digit market share loss, between from the Biogen launch to 855's launch, is still our guidance. This will result in a negative growth in the US.

With respect to our sales guidance, as we said, hemophilia, this is the base business only, is 0% to 2% for the year. We have a separate sales guidance for the inhibitor market. Our business will continue to grow 6% to 8%. So overall, when you take the two together, we are talking about low single-digit growth.

Very helpful, thanks.

David Roman, Goldman Sachs.

Thank you, Bob, Bob and Mary Kay, good morning. I wanted to start on HYQVIA, which Bob, you gave some disclosure in your prepared remarks. I think you said that there were 400 prescribers as of now.

Could you go into a little bit more detail on the launch? Was that a US or global number? And how are things going thus far domestically?

David, I will let Ludwig address that. Go ahead, Ludwig.

Yes, thanks. We are very pleased with the launch in the US. The 400 number that we gave you is a US number only. So the interest is very high.

We have a value proposition for the patient as well as for the payor. The value proposition for the patient clearly is a SubQ once a month with one needle.

From a payor perspective, although we take a price premium of about 30%, overall the cost of the treatment is still a favorable number. Overall cost, we think about 10% less, because of the high viability that we have with HYQVIA versus the SubQ.

Overall, it is a very strong proposition, all of our key stakeholders. Objective is that HYQVIA will become a leadership branch within the PI market long-term. With respect to our 2015 guidance, you saw 6% to 8% for IG. We think that HYQVIA will be about $100 million for 2015.

That's very helpful, thank you for the additional information there. Secondly, broadly on the US businesses, I think this was one of the better quarters you've had domestically in quite some time, particularly in some of the more volume-exposed or medical products businesses.

Can you talk through some of the underlying dynamics in the US? What really got better this quarter? And your guidance does not seem to suggest that that's sustainable, but why would that be the case?

With respect to Hemophilia, and when I think about ADVATE, 2014 as well as the fourth quarter, we've seen an impact of 1 to 2 market share points from the Biogen launch over the last six months. However, when you take all the different pieces of the puzzle together here, the positive contribution of the prophy conversions that we have more than 650 patients that converted to ADVATE prophy.

So that positive contribution, in addition to the weight gain contribution, more than offset the share loss. That's a dynamic that we have and that's the reason why we are growing faster than the market.

Then our projection for 2015, we will continue as we said. We are on track for a high single-digit market share loss for the year. But we will not only have a Biogen competition, our assumption is that we also have new entries in the short-acting factor VIII market segment.

David, I would just add that given the momentum we've seen the last couple of quarters, we are sticking with our original assumption here of the high single-digit market share loss. But that may prove to be conservative.

Understood. I guess I was asking more broadly about your US franchises across the board. I think if I look at the biosurgery business, that did better. You had nice momentum in things like the specialty areas. Why wouldn't that continue in 2015?

I think it may -- Bob Parkinson here, David. Yes, I think in many of those areas it will continue in 2015. I think we are seeing a little more stability in the market in terms of hospital procedures and hospital activity compared to what was earlier, which is encouraging.

We are also managing out of some of the supply constraints that we incurred earlier in the year, and got in a much better position in the fourth quarter on both IV solutions NPD solutions. And we are bringing some more capacity online in 2015.

I think the underlying fundamentals, whether it is the IV fluid systems business, whether it is parenteral nutrition, biosurgery, as you mentioned, anesthesia. And again, we will expand on this when we get together at investor conference and so on.

But I think each of these product segments, these are never going to be double-digit growers, but they are going to be solid single-digit growers. We'll provide more color on that when we get together in May.

Okay, great. Thank you.

David, I think that -- just to add -- it is Mary Kay. I would say the decline in cyclo and in the other category are really predominately what is driving the US performance to where it is in 2015.

And offsetting the strength in the other areas that I commented on. So you get some pretty large netting effects there, as you know.

Okay, that's really helpful. Okay, we will look forward to more details in May.

Sure.

Mike Weinstein, JPMorgan.

Things for taking the question and very nice quarter, guys. I want to circle back to the first quarter guidance, because that's what I'm getting the most questions on. The $0.10 that you are calling out, that's made the manufacturing impact, the quality upgrade, how much of that do you want us to think is ongoing versus one time?

As I mentioned, we will see on a year-over-year basis, a meaningful improvement in the back half of the year. The nature of these are partly due to capacity expansion and the timing of that, which will come on line in the first half of 2015. So that will certainly alleviate the need for some of the expedited freight and any incremental logistical costs that we've been incurring.

Other aspects of the process modifications that we are working through will take a little bit more time to work down as we work down the cost curve on that. These are well-established processes that we have been when manufacturing PD and IV solutions for decades. So we will take a little bit of time. So I would say a meaningful portion in the back half. Some will linger into 2016.

Okay, so if we think about $0.85 to $0.90 as a starting point and recognizing the first quarter's historically low 22% to 23% and the year's earnings, so it is not a best representation. But you still have in front of you the full impact of generic cycle. It sounds like you are assuming the front end part, but not the whole part. So there's still a little bit of tail there.

And then obviously you've got the, call it, $0.45 of dissynergies from the split of the two Companies. Is that the right way to think about it, in terms of what's still in front of you in terms of the EPS headwinds that we won't see in the first quarter but we will still see qt some later date?

Well, as it relates to cyclophosphamide, we do anticipate a pretty meaningful impact here in the first quarter. It won't be one-fourth of year, but it will be meaningful. And certainly even the first quarter we expect a meaningful impact. And in the first half almost half of the full-year impact we expect to see.

As you know, when generics come in, the pricing-volume dynamics start to play out pretty quickly. So that is fairly representative of what the full year is going to look like.

As it relates to be the dissynergies estimate, again we won't really see those in the P&L in any meaningful way until the back half of 2015. The initial estimate is around $300 million, but both of the two Companies are going to get busy as quickly as possible post-spin to working those down. So how that plays into what a full-year 2016 is going to look like, I don't anticipate that's going to be $300 million, I think it is going to be lower. And that will be part of what we lay out in the May timeframe.

Perfect. Thank you, guys.

Larry Keusch, Raymond James.

Hi, good morning. Bob, I'm wondering if you could talk a little bit about the outlook for Brazil in 2015? You obviously did as you anticipated for this year and achieved over $100 million in sales. But talk a little bit about what has to continue to happen on the conversions and where you think you are as you go towards that, I think, $200 million-ish target?

We gave you a target of $200 million. Clearly we are on track to achieve that over time. As far as the market is concerned, there about 10,000 hemophilia A patients in Brazil. We have now converted more than 4,000 patients.

As we convert from plasma to recombinant, we also convert those patients from on-demand to prophy. And our penetration of prophy in those patients is about close to 70%.

So we still have a long way to go. That's where the additional $100 million opportunity is coming from. 2015 will be the next step in the journey, but it is going to take longer than two years to get to the 100% conversion.

Okay, that's helpful. And then for Bob Parkinson, one thing that you've talked about is potential opportunities to establish other public-private relationships such as the Brazil hemophilia agreement. Could you provide any thoughts on do you think that's still viable? And other either geographies or product categories and when we may see something transpiring?

Yes, Larry, I think it is going to be an increasing opportunity, actually for both Companies and both businesses. Because I think governments are going to be thrust into position to embrace new paradigms in terms of how they manage healthcare costs. I think inevitably is going to involve collaborations with suppliers, certainly leading suppliers, in ways of doing business going forward that are different.

So obviously the Hemobras collaboration in Brazil on Hemophilia has been well discussed, and everybody understands that. But we are building a new solutions plant in Thailand to manufacture PD solutions, which was a direct result of us working with the Thai government to establish, from a policy point of view, peritoneal dialysis as the therapy of choice. Not hemodialysis, largely because it is lower-cost, it saves the government money. And in the process, we are making investments, we are creating jobs in Thailand.

China is another good example where we've got a program that we refer to, or describe internally, as the flying angels project. Which has really been another example of a great collaboration that's driving adoption of PD therapy. I know Ludwig and his team continue to have discussions on various fronts, as does new Bax.

So I just think this is going to be a new way of doing business going forward. And I would anticipate in the coming years both Companies will do more of these kinds of collaborations.

Okay, great. Thank you very much.

Derrick Sung, Sanford Bernstein.

Great, thank you for taking my question. I wanted to ask a little bit about if you could help us think about the capital structure of the two split businesses moving forward? Can you give us a sense for how we should think about, will debt be split evenly amongst the Companies? And in terms of the dividend, how should we think about high-level dividend profile of the two businesses?

Derrick, this is Bob Hombach. As we've been saying, we're going to give the whole financial picture for both organizations, the financial outlook for sales, for earnings, CapEx spend and capital structure, including capital allocation assumptions, in the May timeframe. A lot to work through as we work through the separation here, and that is obviously a very key aspect of this.

We do believe both Companies are going to generate significant cash flow going forward. And we'll have a significant amount of flexibility to be disciplined about capital allocation and to think about returning significant value to shareholders as we've been doing in the past. But also continue to reinvest in the businesses to support future growth. So we will lay all that out in the May timeframe.

Okay, thanks. Maybe then focusing a bit on Baxter, the medical products business, for either of the Bobs. You've talked a bit about the potential for a margin expansion opportunity coming out of the gate with a relatively lower margin relative to your peers.

Could you help us think a little bit more about does that margin expansion come primarily from mix shift? We understand the Gambro piece to it, but beyond Gambro, where does that primarily come from? And how do we get there?

Yes, Derrick, Bob Parkinson here. Let me spend a couple minutes responding to that. First of all, the comment about our returns being lower than peers, I think everybody understands one of the reasons for that is we are in very logistics-intensive businesses.

Shipping IV solutions and PD solutions is expensive. So we have a freight disposition line on our P&L, which is inherent in those businesses, as opposed to, let's say, traditional medical device or hospital supply businesses.

Now having said that, what we will show you at the investor conference in May is a steady improvement over the LRP and operating margins that are very achievable, and I think will be significant as well. They really emanate from a series of things. I will just touch on a few in the interest of time.

We clearly are going to increase our focus and investment in what I'll call higher-margin, higher-growth product categories. Things like anesthesia, biosurgery, parenteral nutrition, the acute CRRT business in the hospital setting.

These are all businesses today that range between $0.5 billion and $1 billion, that are promotionally sensitive, have prospects for higher growth and are higher margin so would represent a mix upgrade. Also we're very excited about re-engagement, if you will, in the infusion pump business with the approval of the SIGMA Spectrum version 8. We will be rolling that out in 2015 in the US.

We effectively have been out of the infusion pump business for a number of years. There's been a lot of margin that's been lost attendant with share loss, starting with the colleague things, and so on. So we are on the cusp of being able to get that back.

Also are new product flow in new Bax, and again, we will get into this in detail in May. But VIVIA, home hemodialysis; AMIA, the next generation home PD solution, [Prismatch] was our next generation CRRT. We have a program called project [carrer] internally, which is in array of premixed drugs that we'll be developing and bringing to the market, and our proprietary GALAXY technology.

These are all very exciting growth opportunities and new product opportunities, but all of which represent margins. In some cases that are meaningfully higher than the overall margin percentage of the business.

Clearly we still have a lot of synergy to capture from Gambro going forward. It is tracking very well. We've achieved a lot of that, but there's still meaningful opportunity consistent with our original projections on Gambro synergies, both cost and commercial synergies.

I think you will see us managing portfolio very aggressively, both from a product and geography point of view. And to be very frank, I think the split-off of the Company provides a better line of sight to really focus on overhead infrastructure cost and so on. And you can anticipate that we are going to do some things in that regard to be proactive.

I will stop there and we will expand on each of these in detail in May. But each of the things I mentioned are meaningful, and that's why we are pretty confident about our ability to drive meaningful improvement over the long-range plan and beyond spin.

Okay, great. Thanks a lot, Bob.

Sam, we have time for two more.

Bruce Nudell, Credit Suisse.

Thank you so much for taking the question. Ludwig, could you just parse any US hemophilia guidance for next year. How much of the high single-digits, ELOCTATE versus more standard competitive recombinant factor VIII? Just comment more generally on -- basically all the surveys everybody did on the sell side indicated that ELOCTATE would be much more impactful than it is proving to be.

And given the changes in Hemophilia that are likely to occur over the next five years or so, does it speak at all to Baxter's competitive advantage in that space because of the intimacy you have with patients and caregivers? Any general comments in that regard.

It is a good question, thank you. With respect to the surveys, I think my answer would be we will post the surveys. We have now six months of data. At this point the surveys are very qualitative, but the quantitative piece comes from the actual data. So that will be my answer to the survey question.

With respect to the market itself, it is a very sticky market. We've see this in factor VIII. Now when you look at that market dynamics in IX, it is not much different with the new entrants, including RIXUBIS.

The market, I believe, will continue to look for the standard treatment because we raised the bar. And the bar is very high. The bar is zero bleeds. When you look at the clinical data, zero to one is where the ADVATE data comes out, and that's a very high bar.

So irrespective of the new technology, we are talking about an efficacy target which is very high. We do believe that we have a very strong strategy in place, starting from the gold standard ADVATE, moving to 855, which is ADVATE in a tabulated form, to known technologies, moving to 826, which is ADVATE in a PSA technology.

Then leap-frogging maybe to a technology with, potentially, gene therapy. In gene therapy, as you know, we will post proof of clinical concept in hemophilia B. We're going to show that data in a couple of weeks in Helsinki. But overall we believe that we are in a position of strength to continue to grow this franchise moving forward.

Thanks. Bob, just talking, could you give us some general comments about your assessment of the progress of Gambro. I know that PD is growing high single-digits, low double-digits thereabouts, and your guidance for renal 4% to 5% in 2015. How does Gambro figure into that? Is it tracking as you hoped in terms of revenue growth?

Yes, first of all, relative to synergies we are tracking very much on target, okay? So the numbers that we laid out at the outset will be achieved, both in total and the timeframe attendant with that. We are pleased with that.

In terms of commercial performance, frankly, we got off to a little bit of a slow start, but we've really picked up steam. I think if you look at the first half, second half comps, 2014 versus 2013, you saw the momentum build in the second half. And I think that's a by-product of the natural challenges of integrating organizationally, and getting the alignment and leadership established and so on.

But I think we are very much on a pace to generate revenue growth commensurate with what we messaged at the time of the acquisition. And of course, we look forward to being able to expand dialyzer capacity in 2016 and beyond, which is going to be very helpful to being more demand.

The other thing I would say, the commercial synergy component of this now having the full product line, gives us a lot of flexibility. I mentioned in response to one of the earlier questions about public-private partnerships and so on. Managing the cost of providing access to treatment of end-stage renal disease, dialysis is a very -- it's a big ticket item on every healthcare budget for every country around world.

And this is an area where naturally they are going to look for collaborations and how to partner to manage that. Given our full product offering, I think we are in the best position to partner with governments to do that, as evidenced by the example I gave with the PD First program in Thailand.

So I'm very pleased with the acquisition. There's always fits and starts when you do something of this size and complexity. But I'm really glad we did the deal, and it is going to be big part of our growth going forward. Bob?

Maybe just a clarification, Bruce. We have talked about double-digit patient growth in the US as a result of changing reimbursement. Recall, US is less than 20% of global PD sales.

So if we look at our guidance for 2015, mid single-digits for the overall renal business. In fact PD and the legacy Gambro business are both expected to grow in that mid single-digit range. So it is comparable.

Perfect, thanks so much.

You bet.

Our last question, Sam.

Chris Hamblett, Cowen.

That's for taking the question, guys. Strong quarter. Just one follow-up on hemophilia. As you position gene therapy as the next major potential breakthrough for the longer competitive dynamics in that market, what do you think you will need to show in terms of long-term durability and safety to address potential regulatory concerns there with the gene therapy?

Then second, what exactly are you going to show terms of new clinical data for BAX 335 in February? And when might the factor VIII gene therapy be ready for the clinic? I believe you said later this year, but I wanted to make sure that was correct.

Okay, with respect to the gene therapy, as I mentioned with post proof of concept in Hemophilia B, so the data we're going to present in two weeks from now will be individual patient data. What we will be showing, and I've shared that before, we see sustain levels of factor expression elevated versus current treatments.

With respect to what is a target level, there is some data with respect to target level depending on activity of the patient. When you are talking about patients that are active, it might be 20% plus. And yes, we are able to achieve those levels with hemophilia B.

With respect to your question on regulatory pathway, that is still a work in progress. My assumption at this moment is that for every new technology that comes into hemophilia, that it might be a little bit different than the way that we've developed ADVATE or 855. Because there's always going to be more questions with respect to efficacy sustainability and long-term probability. We will keep you posted as soon as we get the regulatory input.

And with respect to the timing of gene therapy for hemophilia A, we are planning to start our clinical program in the next year. So hemophilia B with first proof of concept, Hemophilia A we are going to take this same technology into the clinic in about a year from now.

Okay, thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's conference call with Baxter International. Thank you for participating. Everyone have a wonderful day.