百特醫療 (BAX) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's First-Quarter 2015 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 of Investor Relations at Baxter International.

Ms. Ladone, you may begin.

Thank you.

Good morning, everyone, and welcome to our Q1 2015 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. As previously announced, Bob Hombach will be transitioning into his new role as Chief Financial and Operations Officer for Baxalta Incorporated, upon completion of the Baxalta spin. And Jay Saccaro, who is also with us today, will be assuming the role of Chief Financial Officer for Baxter International.

On the call this morning, we will be discussing Baxter's first-quarter financial results and outlook for the second quarter before taking your questions. I'd like to take a moment to highlight that we will be hosting separate investor conferences in New York City on the afternoon of May 18, 2015, for Baxter International and the morning of May 19, 2015, for Baxalta Incorporated. At these conferences, we will introduce you to the new senior management teams and provide investors with more information guarding the strategies, growth prospects, capital structure, and financial outlook for each Company, including guidance for the second half of 2015 and longer-term projections.

I encourage you to visit the Investor Relations page of the Baxter website to register for the event. In addition, we will also engage in a comprehensive investor relations effort, including investor road shows for both Companies, with the respective senior management teams, several weeks before the spinoff is completed.

So with that, let me start our prepared remarks this morning by reminding 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. 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 this morning, Baxter reported financial results for the first quarter with adjusted earnings of $1 per diluted share, exceeding guidance of $0.85 to $0.90 per share. Worldwide sales, excluding currency, increased 4%, also exceeding guidance.

We continued to successfully deliver a wide range of strategic and operational objectives, as we are extending our global reach, launching innovative and differentiated products and therapies, advancing our new product pipeline, and investing to drive future growth and position the two Companies for sustained success. Our new product pipeline is focused on a number of programs that improve the quality of care and address key high potential areas of unmet medical needs.

Some recent highlights include: CD marking in Europe for HOMECHOICE CLARIA, an automated peritoneal dialysis system integrated with the SHARESOURCE web-based connectivity platform. This system is designed with user-friendly features and secure two-way connectivity, so healthcare providers can monitor their patients' home PD treatments and adjust prescriptions as necessary.

We expect to initiate the commercial launch of this system in select European and Asian countries beginning in the second quarter of this year. We also received FDA approval and orphan drug designation of PHOXILLUM Renal Replacement Solution, for use in continuous renal replacement therapy, or CRRT, to correct electrolyte and acid-based imbalances. And we plan to introduce these solutions in the United States in the coming weeks.

In BioScience, we submitted a new drug application to Japan's Ministry of Health for the approval of BAX 855, our investigational, extended half-life treatment for human hemophilia a based on -- in addition, we've also completed enrollment in the BAX 855, our investigational extended half life recombinant Factor VIII treatment for hemophilia A based on ADVATE. In addition, we've also completed enrollment in the BAX 855 pediatric study, which will support post-approval label expansion in the US for previously-treated pediatric patients and European regulatory submission in 2016.

We announced positive results from the Phase III study of BAX 817 patients with hemophilia A or B who develop inhibitors. The trial met its endpoint of successful resolution of acute bleeding episodes, with an overall success rate of 92%. No patients developed inhibitors or binding antibodies during the study, and none discontinued treatment due to adverse events. We expect to initiate regulatory submissions in the next several years, aligned with the prioritization of other pipeline assets and manufacturing expansions currently underway.

Our partner, CTI BioPharma, announced positive top line results from PERSIST-1, a randomized controlled Phase III registration clinical trial, examining Pacritinib, a next-generation oral JAK2/FLT3 inhibitor for the treatment of patients with primary or secondary myelofibrosis. The trial met its primary endpoint of reduction of spleen volume, and the safety profile was consistent with previous studies. They will be highlighted in a late-breaking oral presentation at the American Society of Clinical Oncology meeting in Chicago next month.

Under our collaboration with Momenta Pharmaceuticals, we initiated a pharmacokinetic trial in Europe for BAX 923, a biosimilar version of HUMIRA. As you know, HUMIRA is a therapy for patients with autoimmune and inflammatory diseases.

And finally, we presented interim data from the Phase I/II study of BAX 335, an investigational Factor IX gene therapy treatment for hemophilia B. The trial is assessing the safety of ascending doses of BAX 335 in up to 16 adult patients to determine the optimal single dose. At the end of 2014, a total of six patients from three dosing cohorts had been treated, with evidence of a dose-related response.

In the two highest dose cohorts, Factor IX activity levels in 10% or above were observed in two patients with no bleeding episodes. In addition, no patients developed Factor IX inhibitors. We expect to disclose additional data at the upcoming ISTH Congress in Toronto in June.

In addition to internal innovation, strategic acquisitions and partnerships remain essential for both businesses as we continue to enhance and bolster our portfolio. During the first quarter, we acquired SuppreMol, a privately-held biopharmaceutical company based in Germany, developing treatment options for autoimmune and allergic diseases. The acquisition includes SuppreMol's early stage development portfolio of novel biologic immunoregulatory therapeutics for the treatment of autoimmune diseases and IgE-mediated allergic diseases. The technology focuses on the modulation of FC receptor signaling pathways, an immune target that could have broad applications in diseases like lupus, a disorder in which the immune system attacks healthy tissue.

And we signed an exclusive global licensing and distribution agreement with Laboratoire Aguettant SAS for trace elements, which are essential micronutrients used in parenteral nutrition therapy. This collaboration augments Baxter's leading parenteral nutritional portfolio; and the Companies will work together to pursue a broad range of regulatory approvals, including the United States.

In summary, our core portfolio remains strong. We continue to benefit from the focus on life-saving therapies. And we are pursuing new avenues to enhance the value of our products for patients and healthcare providers. Innovation is the lifeblood of Baxter's success. And our increased investment and recent achievements point the way to even greater success in the future.

Before I turn the call over to Bob, I'd highlight, as you know, that we are quickly nearing a transformational milestone in Baxter's history, with the creation of two leading healthcare Companies; one focused on developing and marketing innovative biopharmaceuticals, and the other on life-saving medical products. This will present a remarkable opportunity for growth and success in two new Companies with unique and compelling investment identities, prospects, and strategies, while each continues to extend their legacy of pioneering science and enhancing shareholder value.

Our employees around the world have been fully engaged in separation activities since the announcement last March. And we remain on track toward a mid-2015 completion as a result of their dedication and commitment. And while the separation will usher in a period of transition, our passion for saving and sustaining lives will be enduring.

As always, I'll be happy to take any questions on this or other topics during the Q&A. And with that, let me now turn the call over to Bob Hombach for a discussion of our first-quarter financial results and outlook.

Bob?

Thanks, Bobby.

Good morning everyone. Adjusted earnings in the first quarter of $1 per diluted share exceeded our previously-issued guidance range of $0.85 to $0.90 per share. These results included $74 million of unplanned other income, or $0.11 per diluted share, primarily associated with the impact of foreign currency on [balancing] positions.

As we mentioned in the press release, GAAP earnings of $0.78 per diluted share included net after-tax special items totaling $120 million, or $0.22 per diluted share, primarily for intangible asset amortization and costs associated with the Company's planned separation, and the integration of its Gambro AB acquisition. These charges were partially offset by a benefit related to the reversal of certain business optimization reserves.

Now let me briefly walk you through the P&L by line item before turning to the financial outlook for the second quarter of 2015. Starting with sales, worldwide sales of approximately $3.8 billion declined 2% on a reported basis. On a constant currency basis, sales increased 4%, which favorably compares to our guidance for the quarter of 2% to 3%. Medical products sales were in line with our expectations, while strong growth across the BioScience portfolio contributed to the overachievement.

Sales in the US increased 4%, and international sales on a constant currency basis increased 5%. Emerging markets continue to be a key growth driver across the Medical Products and BioScience portfolios, as evidenced by mid-teens growth in the BRIC markets during the first quarter. In terms of individual business performance, global BioScience sales totaled approximately $1.4 billion in the quarter and increased 2% on a reported basis.

On a constant currency basis, BioScience sales advanced by more than 8%, comparable to the full-year growth generated last year, with continued positive momentum across the portfolio. Our Hematology business, which includes hemophilia and inhibitor therapies, generated global sales of $807 million, which declined 2% on a reported basis. On a constant currency basis, hematology sales grew 5%. Within the hematology product categories, hemophilia sales in the first quarter of $641 million declined 5% on a reported basis; and on a constant currency basis, global sales increased 2%.

Strong global demand for recombinant therapies, including ADVATE and RIXUBIS was offset by the impact related to our reimbursement assistance program, which was recently implemented for patients in the US, and the timing of tender sales in Eastern Europe. Excluding these impacts, hemophilia sales in the quarter increased 6%. In the US, sales in the Hemophilia category were up 5%, after adjusting for the impact of new reimbursement program.

We continue to be pleased with the overall growth recombinant Factor VIII therapies, despite the competitive environment and modest patient losses. We continue to estimate our cumulative recombinant Factor VIII share loss at approximately 2%. Sales in the Inhibitor category, which includes FEIBA and OBIZUR, of $166 million advanced 9% on a reported basis.

On a constant currency basis, Inhibitor sales advanced 18%. This was primarily driven by demand and price improvements for FEIBA as we continue to promote the prophylaxis indication, and a modest contribution from the recent launch of OBIZUR for patients with acquired hemophilia. You may recall, only 15% to 20% of inhibitor patients globally are treated prophylactically, presenting a significant long-term growth opportunity for our Hematology business.

Turning to the Immunology business, which includes immunoglobulin therapies such as HYQVIA and GAMMAGARD liquid, as well as biotherapeutics, sales totaled $554 million and advanced 10% on a reported basis. On a constant currency basis, Immunology sales grew 14% versus the prior year. Immunoglobulin sales of $420 million increased 6% on a reported basis, or 9% on a constant currency basis.

This was the result of robust demand, particularly in chronic primary immunodeficiency markets; strong international growth, driven by our improved supply; and the contribution of HYQVIA. As you may recall, we launched HYQVIA in the US during the fourth quarter last year. This is a transformational therapy with an attractive value proposition for patients, physicians, and payers.

We are very pleased with the uptake and continue to experience a favorable reception in the US marketplace based on its differentiation. Of the 15,000 adult PI SubQ patients, we now have approximately 1,500 patients on HYQVIA. With the majority converting from competitive therapies.

Lastly, in the Biotherapeutics category, which primarily includes albumin and our Alpha-1 therapies, we reported sales of $134 million, which increased 29% on a reported basis. On a constant currency basis, sales increased 36%, driven by an easier comparison to last year; favorable pricing; and increased demand for albumin, particularly in China.

In Medical Products, global sales of approximately $2.4 billion declined 5%, and on a constant currency basis, sales increased 2%. Adjusting both periods for the impact of new generic competition in the US for cyclophosphamide, medical products sales rose 4% on a constant currency basis. Within the product categories, renal sales totaled $913 million, reflecting a decline of 8% on a reported basis. On a constant currency basis, sales increased 1%.

PD growth of mid to high single digits, which was driven primarily by solid PD patient gains in Asia, was offset by the selective loss of certain lower margin HD monitor and dialyzer sales, aligned with our objective of optimizing margins. Within the Fluid Systems category, sales of $493 million declined 2%; and on a constant currency basis, sales grew 3%. Performance was driven by favorable pricing and demand for IV therapies and infusion systems in the US.

Sales in the Integrated Pharmacy Solutions business totaled $564 million and declined 5%. On a constant currency basis, sales increased 1%, as strong growth of nutritional therapies and compounding services revenues were offset by lower cyclophosphamide sales in the US. Excluding this impact, sales in the category advanced 10%.

A new competitor entered the US market for cyclophosphamide during the fourth quarter last year, and we continue to expect additional competitors. As a reference, full-year 2014 US cyclophosphamide sales totaled approximately $450 million. And sales in the first quarter of 2015 totaled approximately $60 million. Revenues in surgical care, which includes our inhaled anesthetics and biosurgery products, were $322 million in the quarter and comparable to last year. Sales rose 5% on a constant currency basis as double digit growth in anesthesia, reflecting increased global penetration, was somewhat offset by lower sales of select biosurgery products.

Finally, sales in the Biopharma Solutions and Other category, which is our pharma partnering business, totaled $111 million, increasing 1% on a reported basis, or 6% on a constant currency basis. Performance can be attributed primarily to increased demand from our contract manufacturing partners.

Turning to the rest of the P&L, gross margin in the quarter was 49%, compared to 50.4% last year. Positive mix, select pricing improvements, and foreign currency hedge gains were more than offset by the expected cyclophosphamide and manufacturing impacts.

SG&A totaled $887 million and declined 1%. On a constant currency basis, SG&A increased 6%. This growth reflects bad debt expense driven by adjustments in several emerging markets, and BioScience investments to support international operations and marketing initiatives related to new product launches.

R&D spending in the quarter of $298 million increased 7%, driven primarily by an increase in BioScience, which was offset by foreign currency. In BioScience, we continue to invest in various programs across the disease areas of hematology, immunology and oncology, while advancing technology platforms, such as gene therapy and biosimilars. Interest expense was $30 million in the first quarter, compared to $43 million last year, as we benefited from recent debt maturities; higher capitalized interest; and income generated from the change in the mix of floating versus fixed interest rates.

Other Income totaled $74 million, and included gains related to the impact of foreign currency, including gains related to the impact of foreign currency on balance sheet positions, driven by the significant decline in the euro during the quarter. The tax rate was 21.8% for the quarter, in line with our expectations. And, as previously mentioned, adjusted earnings of $1 per diluted share exceeded our guidance range.

Finally, let me conclude my comments this morning by providing an update on our full-year sales guidance and outlook for the second quarter. Beginning with the new Baxter franchises, on a constant currency basis, we continue to expect sales for the full year 2015 to be comparable to 2014, primarily due to the impact of generic cyclophosphamide. Excluding cyclophosphamide in both years, underlying growth would be approximately 3%.

We now expect sales in our renal franchise to grow approximately 3%. This is somewhat lower than our original expectations, as we remain committed to servicing our patients while also focusing on enhancing profitability. As such, we have made a proactive decision to forgo lower margin sales opportunities.

For Fluid Systems, we continue to expect sales to grow in the 2% to 3% range. We continue to expect sales of our Surgical Care franchise to grow in the 4% to 5% range. We now expect the Integrated Pharmacy Solutions sales to decline high single digits. This category includes cyclophosphamide, and the impact of generic competition.

For 2015, we estimate US cyclophosphamide sales of approximately $150 million. And growth for the category after adjusting for cyclo is expected to be in mid single digits. And finally, we expect the Other category to decline approximately 15%, which will be impacted by a major customer electing to use self-manufacture products previously manufactured by Baxter.

For Baxalta, we now project sales growth on a constant currency basis of approximately 4%. Our outlook includes growth in the Hemophilia franchise of 0% to 2%, which will be fueled by new product launches and strong international demand. Which will be somewhat offset by anticipated high-single-digit share loss for recombinant Factor VIII therapies in the US due to competition.

We now expect growth in the Inhibitors category to exceed 8%, driven by strong performance in the first quarter; further penetration and growth of FEIBA for the treatment of inhibitors; and the launch of OBIZUR for the treatment of acquired hemophilia patients. For immunoglobulin therapies, we continue to expect growth of 6% to 8%, driven by strong market demand and the contribution from HYQVIA. And finally for Biotherapeutics, which includes plasma-based therapies like albumin and treatments for alpha-1 deficiencies, we continue to expect growth in the 2% to 4% range.

As we previously highlighted, given the complexities of a mid-year spin, we are not in a position today to provide full-year P&L guidance for Baxter and Baxalta. We are, however, providing guidance for the second quarter, as Baxter will be publishing earnings results for the combined business at the end of July. As stated in our press release, for the combined business, we expect adjusted earnings, excluding special items, of $0.92 to $0.96 per diluted share.

This guidance does not reflect any material incremental standup costs for the separation, as expenses will begin to be layered in toward the end of the quarter. Our outlook by P&L line item, we expect second-quarter sales growth, excluding the impact of foreign currency, to increase approximately 1%. At current foreign exchange rates, we expect reported sales to decline 9% to 10%.

By business, on a constant currency basis, we expect Medical Product sales to be comparable to last year, and BioScience sales to grow approximately 4%. We expect the gross margin for the Company to decline by more than 150 basis points versus the second quarter margin last year of 50.3%. We expect SG&A to decline in high single digits and R&D to decline in mid single digits. On a constant currency basis, SG&A growth is expected to be in low single digits; and R&D growth is expected to be in mid to high single digits. And finally, for the second quarter, we expect interest expense to total approximately $35 million, and Other Income of approximately [$50] million. This does not include any impact of foreign currency on balance sheet positions, as our outlook assumes current foreign exchange rates remain constant.

We expect a tax rate of approximately 22%, and an average share count of approximately 547 million shares.

I'd like to conclude my prepared remarks this morning by saying that we recognize investors and analysts need more information to help model both Companies separately, so we look forward to providing you with an overview of the businesses at our upcoming investor conferences on May 18 and May 19, 2015, in New York.

At this point, our estimate of initial incremental stand-up cost to create two independent companies remains approximately 2% of total Baxter sales, or slightly more than $300 million. About half of these costs will be reflected in operating results beginning in the second half of 2015. Going forward, both Companies will take steps to reduce a meaningful portion of these costs over the next several years post spin.

Finally, as we are finalizing the capital allocation strategies of each business, I'd emphasize that both businesses will have strong balance sheets; generate significant cash flow; and have flexibility to follow a disciplined capital allocation approach which balances reinvestment in the business with returning value to shareholders.

This concludes my prepared remarks this morning. We look forward to providing more financial information to you in May.

Now let me open up the call for Q&A.

(Operator Instructions)

Josh Jennings, Cowen and Company.

I guess first just on the renal business, I was hoping to get a little more color on, not only the decrease in projection there for that business but also just specifically on Gambro, the performance in the quarter and outlook going forward, and an update on the cost synergies

Sure, Josh. I may ask Jay Saccaro to add his comments as well. Relative to the renal performance, clearly the growth in first quarter was -- actually, the business was fairly flat as we pointed out in the script, largely due to a conscious decision to walk away from a couple of tenders that frankly weren't generating the kind of returns that we expect. One of the things that we talked about before, and you'll hear more about when we're in New York a few weeks is our increased focus on portfolio, and particularly in areas that the returns on certain businesses in certain countries are not generating acceptable returns.

And so that was really what contributed mostly to the softness in the first quarter, the overall renal business. Going forward, we're looking at mid single digit growth for the remainder of the year, that's really led by faster growth in the acute area, but overall we're projecting about mid single digit growth, as I said, for the last nine months of the year. So in some ways the first quarter was a bit of an anomaly.

Relative to your question more specifically about the Gambro, the decisions we made to walk away from tenders and so on, were in fact in the chronic space, the hemodialysis space, that would be associated with the Gambro business. The PD business continues to -- underlying demand continues to be strong globally. I would say that we continue to work through the integration issues with Gambro as we phase that in, on a global basis.

Again, the numbers right now are tracking a little bit behind the model that we pulled together when we did the acquisition, but we continue to be very positive about the decision to make the acquisition, and the prospects of the business going forward. Jay, do you want to talk about maybe the second part of the question?

In relation to overall cost synergies, and how that's tracking, as we think about that component, we have previously commented $300 million in annual savings achieved by 2017, as we sit here today. We are confident that we were very much on track in terms of achieving milestones necessary to achieve that level of cost savings by 2017.

Just one thing I would add, coming back to my comments, the specific focus on Gambro. Obviously one of the rationales behind the deal was to be able bring forward a broad-based product offering, and in addition to the cost synergies that Jay just commented on is the opportunity for commercial synergies that we are already starting to realize.

So as we move forward, really the way to value this business, or evaluate the business is to look at it in total. While the chronic business was softer the first quarter for the reasons that I mentioned, we're seeing synergies already in terms of increased demand in the PD segment as a result of being able to bring a broad product offering to the marketplace. Particularly participating in certain tenders and so on, where we have, as I say, a complete product offering.

So I think going forward, the way to look at this business is really in aggregate, because you're going to see the various components. Certainly in the chronic space, whether it's traditional in-center or PD in the home begin to meld together somewhat.

Great, thanks for that, and just a quick follow-up. I know you're going to give more details at the investor days, but you have called out that the new Baxter is going to hold a 20% stake in Baxalta. Can you just give us some details around the rationale behind that strategy, and timelines in terms of the ultimate sale of that stake, and deployment of that capital? Thanks a lot

Again, we will be more specific on that in a couple weeks, but Bob you might want to make it couple of comments about that.

Well, certainly, Josh I think first and foremost this is a clear indication of confidence in the future prospects of Baxalta, and I think that it provides a significant amount of flexibility, in terms of capital structure, really for both businesses, as we approach this significant separation, and try to set up the two entities for sustainable success going forward. Again, very confident in the ability to generate significant cash for both, and want to ensure we position both in a very competitive environment, to be ready and able to continue to pursue their strategies, which include reinvesting in the business and potentially bolt-on acquisitions as well. As Bob mentioned, I think we'll get into much more detail on that as we get into the investor conference in May.

David Roman, Goldman Sachs.

Hey Bob, I wanted to just start with hemophilia. I think in your prepared remarks you referenced 2% cumulative share loss. We're now three quarters into the Biogen launch. Are we at a point now where you feel confident in your original assumptions about the pace of share loss, and if that is the case, why not a more optimistic outlook than the 0% to 2% guidance that you're providing for the balance of 2015?

I'll turn this over to the expert. Ludwig?

Thanks for the question, David. So as you said, we continue to see growth in our recombinant Factor VIII demand in the US, and in addition to that, as you saw, we have very strong fiber growth. I can tell you we have a very strong team, and Advate has a very strong brand equity. And the bar is high, and the bar is high on efficacy and tolerability.

So with respect to the guidance that we gave you already last year, high single-digit market share loss between the launch and the launch of Eloctate, and the launch of the 855, we still stick to that guidance for now. The 2% market share, we're doing better, as expected. We're going to see what we will go to in the next couple quarters. You should also note that we will get additional competition within the Factor VIII space in the US, so we were looking to post about how we are doing, and we will adjust hours guidance accordingly.

If I could just clarify something you just said before I go to my second question, you said high single-digit loss between Eloctate and 855, so as you think about the total Baxter franchise, Advate plus 855, the share loss will be lower than that high single digits?

I think the expectation is we would get approval very late in 2015, and then launch 855. So from midyear last year launch of Eloctate until that point of the end of this year, before we launch 855, that's the single-digit share loss that we're referring to.

So we think it's about an 18 month period.

Got it, okay. And then secondly just on margins, Bob in your comments around renal, you made the point that you did walk away from some lower margin business, and I think one of the potential opportunities around the medical products business is the relative profitability compared to peers. Can you just maybe give us some sense on the dissynergies? How easy is it just to cut out those incremental $300 million, and it sounds like you're adding the costs, in terms of pulling it back out, you have a commitment to ratchet that down. But how long does something like that take, and what are the steps needed to get there?

Well first of all, the entire $300 million is a new BAX. That's partly absorbed by Baxalta as well, but nonetheless, it's a meaningful number. I would say our intent would be to offset the negative impact of dissynergies and stranded costs, if you will, probably within a two-year time frame. But frankly, that's just part of a broader initiative to evaluate opportunity to pull out structural cost, which is a significant opportunity going forward.

I mean, this is the story that you're going to hear in a few weeks in New York, is our belief, strong belief that there's an opportunity to meaningfully improve margins over time, whether it's the Gambro synergies that we continue to track well on, as Jay commented earlier, focus on structural cost improvement and manufacturing efficiencies and costs going forward. Because we have absorbed some incremental costs, as you know, in our facilities, particularly in manufacturing IV solutions and PD solutions, as a result of looking for ways to enhance our operational and quality performance in those businesses.

The relaunch of Sigma Spectrum portfolio, as I talked about, in terms of more proactive management of that, and then increased focus on higher-margin, higher-growth products. So in aggregate, this provides a very exciting opportunity to meaningfully increase margins over time. But you're right, back your question, David, as you benchmark versus peers and so on, as you'll see, we are at the lower end.

Now part of that frankly, to some degree, is the nature of the businesses that we are in. Not only IV solutions but PD solutions. We incur significant distribution cost that is associated with being in those businesses that typically are unique to those kinds of businesses, compared to other companies you might want to benchmark against.

So in some ways the real litmus here is in those businesses, are we generating returns that are sufficiently in excess of our cost of capital, and in many ways this gets back to the whole notion of focusing on portfolio. So again, I'll stop there. Jay and I can talk a lot about this but you'll hear more on this in the a few weeks, David.

David Lewis, Morgan Stanley.

Good morning. Just a couple of quick ones here. Just for Bob Hombach, just into the second quarter, Bob, the earnings number was a little lower than we were expecting, but some of the factors you discussed weren't materially different than we were expecting. So does that simply reflect conservatism, or simply incremental cycle pressure with a little bit of currency? So what is specifically driving some of the pressure sequentially?

Well first and foremost, I would say that second quarter very much aligns with our outlook for the full-year. So there is a calendarization impact at work here, as well, just in terms of timing of tenders and so on. But clearly, the cycle impact will accelerate in the second quarter relative to the first quarter, fairly meaningfully, as that first competitor is much more entrenched in the marketplace.

And FX will continue to be a headwind. As we have talked about, the rates at which we've been able to hedge key currencies like the Euro are much higher in the first half of the year than they are in the back half of the year, so that certainly a contributor to the near-term. But again, I would emphasize this is all very much in line with our expectations, as we looked at 2015 initially.

Very clear. And Ludwig, the commentary I think actually that Bob had made, but on inhibitors, the volume growth is actually very impressive. The other comment I thought was interesting, though, I think it was a comment about stronger pricing in the inhibitor segment, and trying to figure out where exactly that stronger pricing is coming from. Is this simply mix, or are you given the strength of the portfolio, using this as an opportunity to take a price in other Obizur, Obizur obviously is new, or Feiba prophy?

Probably the number one driver within that segment, so we just launching Obizur, and the patient response is positive on Obizur, so we're still building that business. On Feiba, we see different dimensions here. The first one, continued growth, demand growth because of very strong rollout of the prophy indication. In addition to that, we've been able to take a little bit of price on Feiba.

Okay, and one quick one and I'll jump back in queue. For Bob Parkinson, hey Bob, you talked about renal cost-cutting and renal growth being a little slower. In terms of capacity, that was a big driver of the Gambro transaction.

You are going to ramp capacity at certain plants. Is there any concern that if growth is lower on renal, that's going to put some pressure on some of the gross margin objectives, or are you still comfortable with those gross margin objectives, or simply feel that there are more SG&A cost opportunity to Gambro, that make you very confident that you still get to those cost targets, even with the little lower growth rate? Thank you.

Well, the synergies that Jay commented on earlier are largely associated with structural cost and global manufacturing footprint and things of that -- very operational in nature. In terms of our gross margins, we are confident that we are on track with what we model in that regard. I think clearly, and we modeled this in, I think the traditional in-center hemo market will always be very, very price competitive and so I think we've been very realistic in how we forecasted pricing and margins going forward in that business. I think the acute segment, and frankly the PD segment in certain markets around the world can be more buoyant in terms of pricing and so on, but net-net for the broad renal business including the Gambro component, I think our outlook in terms of pricing, market dynamics, and how that manifests itself in gross margins is pretty realistic.

And maybe just adding one comment back to the second quarter, in our outlook, I would also emphasize we have given a somewhat wider range for two reasons. One is the volatility in FX, but the second one is, during the course of the second quarter, likely we will execute a financing to establish the capital structure for Baxalta, and have to adjust the existing debt portfolio potentially for Baxter, and as a result, there is some uncertainty around both timing and impact on interest expense, so we have built some conservatism into the outlook to account for that eventuality.

Kristen Stewart, Deutsche Bank.

I guess this will be our last call together as all Baxter. So I had a couple questions, I'll just throw them out there. On the recombinant hemophilia side, you had mentioned new patient reimbursement programs. I was wondering if you could just comment on that. Is that part of the strategy to kind of keep people locked in with Advate?

Just wanted to get an update on the Georgia plant, how things are going, whether or not that is tracking on schedule from a completion perspective and Sanguin? And lastly just gross margins. You had guided to being down 250 to 300 basis points. It came in a little bit better than that. Just curious on what drove the favorability? Thanks.

This is Ludwig, Kristen, thanks for your question. With respect to hemophilia, these new patient reimbursement programs, we do this for access reason. Want to make sure people have access to our products.

With respect to the Georgia plant, it is on schedule. As far as supply is concerned, we will grow faster than the market, including the Sanguin opportunity. You mentioned Sanguin is still on track to have the first product by the end of this year, and we will be focused on European products.

And Kristin as it relates to gross margin, yes, the gross margin did come in from a percentage basis a bit better than we expected in the quarter, but certainly is driven by mix. You saw bioscience grew very strongly. Some modest price contribution as well, a bit better than we expected.

But also on a reported basis, we did have hedge gains, as I mentioned. And so those hedge gains, while they do impact the gross margin, they are simply offsetting the underlying weakness in the currency that's driving down the natural sales and gross margin that would otherwise be reported by the business. So the mechanics here with the lower reported sales but the gross profit dollars being preserved by the hedges results in a higher reported gross margin. And that contributed somewhere between 60 and 70 basis points to the reported gross margin percentage benefit in the quarter.

Just maybe a moment more on those hedges, again, I would emphasize that these hedges preserve value, they do not in and of themselves create incremental value. They are there to hedge underlying exposures. By definition, if the currencies are weakening, those underlying exposures are worsening, and the hedges again preserve value back to our original expectation.

But as it relates to year-over-year comparisons, as we think to the back half of 2015 and then into 2016, the hedge rates we have in place in the first half of 2015 are very attractive, particularly for the Euro, north of $1.30 per Euro, which clearly we put in place a long time ago. But the hedge rates we have in place for the back half of 2015 are less than that, and certainly for 2016, are nowhere near that. So while they do not create incremental value necessarily in 2015, for Baxter, in 2016, if rates stay where they're at, sales will continue to be depressed, but our hedge rate will imply a gross margin percentage and value that will be less than what we are seeing now.

We estimate at current rates, that would be $70 million to $80 million of incremental headwind, if you will, in 2016, for the combined Company, which equates to about $0.10 to $0.12. So at current rates, we would see that in 2016, but again, I just want to emphasize the hedge gains improve reported gross margin percentage, but in and of themselves, are not necessarily additive to the bottom line, because they're there to hedge underlying exposure.

And could you update just for 2015, where we stand now with the total Baxter impacts from a foreign exchange perspective?

It's still very much where we expected, excluding this anomaly in other income here in the quarter. Operationally and margins, and op margin is still very much where we had previously projected, with again, most of the negative impact somewhere on the order of two thirds of the negative impact, or the approximately $0.40 that we projected for the year, we're going to experience in the back half of 2015.

So $0.40 in the back half of 2015 in total?

No. $0.40 is our full-year expectation, so excluding the anomaly of the other income in Q1, we are very much in that range still for 2015, but about two-thirds of that will impact us in the back half of the year for the reasons I mentioned. The hedge rates are at less attractive levels for us, and frankly the Euro has deteriorated from when we eventually gave guidance, as well.

Okay, thank you very much.

Bruce Nudell, Credit Suisse.

Thanks for taking my question. I have a couple for Ludwig, Ludwig most of these [Metex] bins work pretty well, and the stock appears to have been handcuffed, prior it's been largely due to kind of perceived existential threats to hemophilia, specifically Factor VIII and Feiba. There are SubQ approaches that are out there, in the development stage, that are potentially once a month. They work in the presence of inhibitors, potentially BAX 826 may be better than once per week dosing, but it's not humans yet. Just schematically, what's the Company's view, broadly speaking, as to whether or not we should view Factor VIII and Feiba as a midterm grower or decliner? And if it's a decliner, are there enough offsets so that it really shouldn't matter for the new Baxalta?

Well this is a great question, and you are going to see all the details on May 19, so I hope you will be able to join us. But overall, we believe that this business will continue to be a growth driver for us in all the different segments, inhibitors as well as hemophilia. What we're doing is we're building both breadth and depth in our portfolio. The depth, as you mentioned, with 855 hopefully launching by the end of this year. 826, and then moving to gene therapy.

Everything is related to Factor replacement, which is in an advantage because the clinical, the regulatory piece, the manufacturing piece is very well understood. But that's the path that we're on. The breadth is that we're going outside of hemophilia, and you know that we have different opportunities in development. So overall, this will continue to be a growth driver for us, but we are going to give you much more details on May 19.

Thanks so much for that. And just, your commentary on Hyqvia was very interesting. I think you said 1,500 of the 15,000 patient equivalents in the US PID are SubQ PID are now captured. What's the ceiling for that, and what are the plans for extending that to non-PID applications?

We're very pleased, and were pleased in the first place, because the feedback from the patients is very strong. It also gives value to the payer, as well. Overall we believe that a decrease in total cost of therapy, even though we were able to take a price premium because of the bioequivalents, the bioavailability of Hyqvia. So I believe it's a winner. It's in a position over the long term to make this a leading product within PI. The opportunities that we have on the development side is to go outside of PI, PI is about 20% to 25% of the total business. So we are starting Phase III program in the CIBP as well as we continue to look at extending the label within PI. At this moment, we're restricted to adults. So we're very pleased, we see uptick six months in, and we have 1,500 patients out of 15,000.

Thanks so much.

We have time for two more questions.

Mike Weinstein, JPMorgan.

Thanks. I just want to clarify the starting point, the FX impact commentary in the second quarter. So the $0.11, Bob, that you called out for this quarter, that would be offset in the $0.40? So the actual, on a reported basis, the FX impact for the year is more like $0.30 this year, and then another $0.20 to $0.22 next year? Is that how we should think about it?

Yes, I would definitely separate the anomalous situation that occurred here in Q1 in other income from the operational FX we expect to incur, which again, we continue to think is approximately $0.40 at op income line. As it relates to 2016, my comments were specifically about the year-over-year potential for headwind related FX gains. The overall FX picture is clearly going to be defined by how currency rates move between now and the end of 2015, which they have been fairly volatile, and plus they will have different impacts by business, as well.

So I don't want to get too far ahead of myself here as it relates to overall expectations on FX impact in 2016, other than to say these hedge gains here are clearly going to be an issue at the current level of exchange rates, and the current level of hedge rates we've been able to achieve thus far in 2016. And again, I peg that at about $0.10 to $0.12 on a year-over-year basis.

Okay, and then just to think about the $0.92 to $0.96 for the second quarter, so if we are annualizing that, which I realize there's a problem in doing that, but that's all we've got to deal with right now, the incremental impact from there is the $0.40 plus of dissynergies from the split, and then that incremental FX impact as well as whatever remaining erosion there is in cyclophosphamide? Is that fair?

Well just to be clear, when you say $0.40 of dissynergies, that's an annual number. That's not what we will incur in the back half of 2015, but that's our current estimate of the annual impact. Initial dissynergies, from run rate perspective, I would tell we will get into this more in May, but both businesses are going to begin to do what we can to mitigate some of those dissynergies, even starting in 2016. So that will be part of what we get at the investor meeting here in a few weeks. But from a run rate perspective, in the back half of 2015, the $0.40 roughly, as I said, approximately $300 million or so in overall dissynergies, so it's a bit more than $0.40.

Right. Just a quick product clarification. You said in the prepared comments, Bob Parkinson, I think on 817, that even though everything is going well there, you said regulatory submissions over the next several years. So I was hoping you could clarify that, because we're assuming that you would submit that product later this year.

And then 855, Ludwig, if you could comment on the dialogue with the FDA and the confidence and approval later this year, that would be great. That's all, thanks.

817, or recombinant seven, so on the Phase III data, we have to prioritize, since we have a long list of products within hemophilia, we have to prioritize from a manufacturing perspective. 817 is lower in the ranks, and that's the reason why we will not be submitting later this year. With respect to 855, the regulatory review is ongoing. No red flags at this moment, and we believe that we still have the chance to get approval before year-end.

Stephanie, our last question?

Bob Hopkins, Bank of America.

Thanks very much for taking the question. So the first question I have is, previously you have suggested that the fully loaded operating margin for Baxter medical products, by the time of the spin, would be in low double digit range, and I was wondering, in light of all the comments today, about that business. Is that still a good number to think about, in terms of the operating margin from the start? Or is that now lower?

Yes, Bob, we haven't been quite that specific. We simply said it would be at the very low end of the peers, then, for a number of reasons. And frankly as we work through all the details here on the separation, including things like the pensions that we currently have in the US, which generates a specific amount of expense, and how that gets apportioned between the two companies and so on, again, we will lay all this out at the investor meeting, but I just wanted to clarify, we haven't specified a start point, if you will, from an operating income margin perspective

Well maybe another way of asking the question is, in terms of what's happened at the business since the last call on Q4, you have talked a lot about currency. I think we've got that straight. The spin costs sound like they're the same. Renal sounds a little worse. Is there any other major moving parts you're willing to comment on here? Is pension different than it was at the beginning of the year, in terms of some of the big buckets we should be thinking about, that might have changed again since the last conference call?

The only thing I would say about pension is due to the fact that we are going to have to split the pension, that triggers a GAAP requirement for a remeasurement. This is the process that normally happens at the end of the year, where your rebase where your discount rate is, your asset return assumption, et cetera. Your mortality tables, the whole nine yards. So there is a possibility that pension expense could be different. I think, directionally, interest rates are slightly lower now than they were at the end of the year, so there may be some impact. I don't think it's going to be super material. Other than that, and the factors that you have mentioned, I don't think there's anything else in the business we've talked about, that has changed

And then lastly, really quickly, are you going to address dividend policy at the upcoming meetings? Obviously given the decline in earnings, there's been a lot of discussion about the dividend. Is that something you will lay out in detail at this meeting? And just wondering how confident you are that you can maintain the total payout relative to what you're currently paying?

Yes, as we said all along, we are going to lay out the full financial outlook. The sales, the operating margins, the cash flow generation capabilities between businesses, as well as capital structure in terms of debt allocation and capital allocation policies, including dividend policy. That will all be part of our discussion with investors on the 18th and 19th of May in New York

Great, thank you

Thank you ladies and gentlemen. That does conclude today's Q&A session, and today's conference call for Baxter International. Thank you for participating. You may all disconnect, and everyone, have a great day.