百特醫療 (BAX) 2016 Q1 法說會逐字稿

Welcome to Baxter International's first-quarter 2016 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. Clare Trachtman, Vice President, Investor Relations, at Baxter International. Ms. Trachtman, you may begin.

Thanks, Candace.

Good morning and welcome to our first-quarter 2016 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer.

On the call this morning, we will be discussing Baxter's first-quarter financial results and updated outlook for 2016, before taking your questions. I would just like to remind you that during the Q&A session, if you could please limit yourself to one question and one follow-up, so we can accommodate others in the queue.

With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product development, and regulatory matters contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially.

In addition, on 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.

Before I turn the call over to Joe, I would like to remind everyone that we will be hosting an Investor Conference on May 9 in New York City. At the conference, we will be providing an update on our strategic and financial aspirations, along with showcasing our innovative new product pipeline at an innovation fair. More details, along with the link to register for the event, can be found on the Investor Relations section of our website.

Now I'd like to turn the call over to Joe. Joe?

Good morning, everyone, and thanks, Clare.

As you saw in our press release this morning, we reported a strong first quarter, with both the top-line and bottom-line results exceeding our expectations. I will provide some brief comments on performance before turning it over to Jay for additional details and an update on our full-year outlook. After that, we will open the call for Q&A. So let's get started.

Worldwide sales grew 4% on constant-currency basis and decreased 1% on a reported basis. Operational growth was at the high end of our guidance, and we're pleased with the sequential quarterly improvement in sales growth for total Baxter, within both the Renal and Hospital Products segments.

Sales growth was primarily driven by strength in the US fluid systems and PD businesses, along with strong performance in acute renal therapies. They delivered adjusted earnings of $0.36 per diluted share, exceeding our guidance range of $0.28 to $0.30 per diluted share. These results reflect a positive sales mix, continued spending discipline, and some favorability from foreign exchange versus previous guidance.

Let me summarize performance by franchise. Please note that I will be speaking to sales growth on a constant-currency basis, excluding any foreign exchange impact for each of the businesses and franchise, to provide a clearer picture of Baxter's underlying operational performance.

Starting with Hospital Products, global sales totaled $1.5 billion, and increased 4%. As planned, first-quarter sales of US cyclophosphamide totaled $60 million and were similar to the prior period. As a result, sales of cyclophosphamide did not impact the growth rate for the quarter.

Within the fluid systems franchise, sales totaled $524 million, up 11%; growth in the franchise was driven by strength in the US, supported by the continued successful launch of the SIGMA Spectrum infusion pump, as well as favorable price and demand for IV solutions in the US. We have successfully renegotiated all of our large GPO contracts, including the recent agreement with HealthTrust. This contract is built upon our partnership with US customers that will ultimately allow us to serve more patients, and position Baxter for continued growth.

Sales in the integrative pharmacy solutions franchise totaled $556 million, an increase of 3%. After adjusting revenues for a government preparedness for last year, sales in the category increased 6%.

Growth was driven by strength across the franchise, including nutritional products, pharmacy injectables, and hospital pharmacy compounding services. This category also includes cyclophosphamide, which, as planned, did not impact growth in the quarter.

Key to growth in our IPS business is broadening our product offering. Last week we launched VANCOMYCIN saline in the Company's proprietary GALAXY flexible container, which enables unstable molecules to be pre-mixed, and ensures [sterility] and operational efficiency at the point of care. VANCOMYCIN saline is the second of nine molecules that we will be introducing -- rather, we will be introducing over the next few years, and we recently submitted our third molecule for review with the FDA.

We also continue to expand our nutrition portfolio globally, and recently announced the approval of our NUMETA G13 in the UK and Denmark. This markets represent the first of 20 countries where we look to launch this year. NUMETA G13 is a triple-chamber parenteral nutrition product focused on meeting the specialized needs of pre-term infants. Expanding the formulations of NUMETA will help address an underserved market segment.

Within surgical care, which includes our anesthesia and biosurgery products, first-quarter revenues totaled $305 million, declining 2%. Sales in the quarter were impacted by lower sales of selected non-core biosurgery products and weaker-than-expected international biosurgery sales. Partially offsetting this impact was mid-single-digit growth of both US surgical sealant and hemostasis products, as well as international anesthesia products, where we continue to expand the market and capture share. Baxter is now the market leader globally for inhaled aesthetics.

surgical care remains an attractive area, and we are prepared to accelerate the performance through innovation. In the first quarter, we received approvals for expanded indications for HEMOPATCH in the EU and FLOSEAL in Japan. Both offer great utility among surgeons using these hemostatic agents.

Finally, sales in the other category, which is primarily our pharma partnering business, totaled $92 million. As expected, sales declined 14% resulting from a large customer electing to self-manufacture products that were previously contracted and manufactured by Baxter.

Turning to renal, global Renal sales totaled $898 million, up 5%, and we're pleased to see growth accelerate within this business. Performance in the quarter benefited from low double-digit growth in our US Peritoneal Dialysis business, as we built on the momentum from the recent launch of our new AMIA PD Cycler. The launch is trending better than our expectations, with more than 500 AMIA cyclers sold and more than 100 patients in treatment.

The feedback we've received from clinicians and patients has been overwhelmingly positive, particularly with respect to the benefits associated with our Sharesource, two-way remote connectivity platform. We look forward to continuing to expand this launch and increasing the adoption of home therapies in the US.

A standout from the quarter was global growth of nearly 20% of our acute business, driven by increased adoption of extracorporeal therapies, including Baxter's Continuous Renal Replacement Therapy for acute kidney injuries. In addition to underlying market growth, Baxter's CRRT business continues to gain market share globally. And in Chronic Hemodialysis, we experienced low single-digit growth, a positive reversal from the trend we experienced last year.

With good momentum from our first-quarter performance, the Baxter team is looking forward to our upcoming Investor Conference on May 9 in New York. We've recently completed deep-dive portfolio analysis across all businesses, which has informed us how we must channel our investments moving forward. We're well positioned to leverage our greatest opportunities, and prepare to re-tool where necessary.

I would also point out that we will be hosting an innovation fair prior to the start of the formal presentation, showcasing our exciting new product pipeline. I look forward to seeing you -- many of you on the 9th.

With that, I will pass it to Jay for more details on the financials and updated outlook for 2016, then we'll have some time at the end for questions. Jay?

Thanks, Joe, and good morning, everyone.

As Joe mentioned, we're pleased with our first-quarter results. Operational sales growth of 4% came in at the high end of our guidance range; and including foreign exchange, sales declined 1%. Walking through the rest of the P&L, adjusted gross margin of 42.3% compared favorably to our expectations, and was driven by a positive sales mix, improved pricing, and a lower negative impact from foreign exchange.

Adjusted SG&A totaled $620 million and decreased 17% on a reported basis. On a constant-currency basis, adjusted SG&A declined 13%, reflecting our ongoing focus on controlling spending and rebasing our cost structure. SG&A also benefited from lower pension expenses and TSA income from Baxalta of approximately $25 million in the quarter.

Adjusted R&D spending in the quarter of $136 million declined 5% versus the prior year. On a constant-currency basis, adjusted R&D spend declined 2%, as we continued to balance investments in key programs to support future growth, while reducing infrastructure-related expenses. Adjusted operating margin in the quarter was 10.5%, and compared favorably to our expectations, driven by the positive gross margin and the operating savings I just referenced.

Interest expense was $28 million in the first quarter. During the quarter, Baxter retired approximately $3.7 billion of gross debt through the utilization of a portion of our retained Baxalta equity and two debt-for-equity exchanges. Following these exchanges, the Company's gross debt now totals approximately $3.4 billion, and our net debt totals approximately $1.15 billion.

At the end of the quarter, Baxter held 30.5 million Baxalta shares, and we intend to utilize this remaining equity through a contribution to our US qualified pension plan and an equity-for-equity exchange, which was launched last week. We expect to complete utilization of all remaining Baxalta shares during the second quarter.

Other income totaled $27 million, and included a foreign exchange gain on balance sheet positions of approximately $10 million and dividend income of approximately $10 million associated with our Baxalta equity stake. The adjusted tax rate was 19.8% for the quarter.

And as previously mentioned, adjusted earnings of $0.36 per diluted share exceeded our guidance of $0.28 to $0.30 per share. To decompose this favorability, it was driven by $0.04 of operational strength, $0.02 of benefit from other income, and a lower foreign exchange headwind, which contributed approximately $0.01 relative to original expectations.

Let me conclude my comments this morning by providing an update on our outlook for 2016. Starting with sales on a constant-currency basis, we now expect 2016 full-year sales for Baxter to increase approximately 3%. And after adjusting for the US cyclophosphamide impact, we expect underlying growth of approximately 4%.

On a reported basis, including the impact of foreign exchange, we expect sales to increase approximately 1%. We expect growth in the Hospital Products business of approximately 3%, or approximately 5% excluding US cyclophosphamide. Within the Hospital Products franchises, we now expect sales growth of high-single digits for fluid systems, driven by the continued strength in the US business.

For the integrated pharmacy solutions franchise, we now expect sales to decline low-single digits, including the impact of US cyclophosphamide. Our full-year sales forecast for cyclophosphamide of $180 million remains unchanged, and is based on the assumption that two additional competitors enter the market in 2016, the first by mid-year, and the second during the latter part of 2016. After adjusting for cyclo, sales are expected to increase low-single digits.

Within the surgical care franchise, we now anticipate sales to grow 1% to 2%, reflecting the softness we experienced in the first quarter. The growth trajectory for this category is expected to improve as we build upon new indications and geographic expansions. And finally for the Hospital Products business, we expect the other category to increase 6% to 7%.

For the Renal business, we continue to expect full-year sales to increase approximately 3%, driven by continued growth in our PD and acute businesses, and a stabilization in our in-center HD business.

Moving down the P&L, we now expect an operating margin of approximately 11.5%, a 50-basis-point improvement versus our original guidance, reflecting favorable sales mix, disciplined management of expenses, and a lower headwind from foreign exchange. We expect interest expense to total approximately $80 million. For 2016, we expect other income of approximately $35 million.

For the year, we now expect an average adjusted tax rate of approximately 20.5%; this represents an increase from our original guidance, and is driven by incremental strength we're observing within our US business. For 2016, we anticipate an average share count of approximately 545 million shares. Based on these factors, we now expect 2016 adjusted earnings, excluding special items, of $1.59 to $1.67 per diluted share, as compared to our original guidance of $1.46 to $1.54 per diluted share.

Finally, for the year, we expect operating cash flow to now exceed $1.4 billion. We expect CapEx of approximately $900 million, which results in more than $500 million in free cash flow.

Specific to the second quarter of 2016, we expect sales growth, excluding the impact of foreign currency, to increase approximately 4%. At current foreign exchange rates, we expect reported sales to improve approximately 2%, and we expect adjusted earnings, excluding special items, of $0.38 to $0.40 per diluted share.

With that, we can now open up the call for Q&A.

We will now being the question-and-answer session.

(Operator Instructions)

I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter international website for 60 days at www.baxter.com.

Mike Weinstein, JPMorgan.

So first question, the strength in the Fluid Systems business in the US, could you maybe try and break that out between the pump business and the medication delivery piece?

Sure. The -- we did report a very solid first-quarter in Fluid Systems, with approximately 28% growth, and really, there were a number of drivers of that. We are seeing continued strength in Infusion Systems, which is growing north of 30%. A lot of that has to do with pump placements, or pump sales, I should say, along with the attendant sets. But having said all of that, we also had a very solid quarter in IV therapies benefiting from both volume and pricing. So in short, I think it's a combination of factors that led to the solid performance.

And maybe can you do the same for the US Dialysis business? Could you just talk a little bit about the difference between the underlying PD business and the other businesses?

Yes. Overall Renal in the United States in the quarter grew approximately 8%, and we did see even faster growth in the PD business. As Joe mentioned in his prepared remarks, we're off to a great start with AMIA. It's a fabulous innovative, new product for us. It's been very well received, so that's one of the factors. But I think beyond that, the -- we are seeing volume and price growth in this important area and we're pleased with PD performance, which really drives the lion's share of the growth in the quarter.

The other piece, Mike, was the acute business which we had very strong growth as well in the quarter.

Okay, and then one last follow-up. I'll let some others jump in. The cash flow improvement is obviously important and impressive. Can you just talk a little about the plans to reign in CapEx spending, where you stand with that? Are you still at $900 million for this year? Without getting ahead of us with the analyst meeting upcoming can you just talk about where you are in trying to bring the overall CapEx? Thanks.

Sure. Look, the -- I think both Joe and I would very quickly acknowledge that 9% of sales for a Company of our nature is too high. There are elements that we have to consider as we think about the Baxter business, but there is a clear opportunity for us over our long-range plan horizon to improve CapEx spending and to reduce it to a number that is below the 9%.

One thing I would point out, Mike, that we didn't really discuss in detail on the fourth quarter call, is when we were meeting with you all in May, we highlighted $900 million on average for CapEx over the long-range plan. But we did say that the early years would be above the $900 million, implying a number closer to $950 million in the first year of the plan.

But we were very pleased with some of the zero-based activity that we did on the CapEx budget to reduce CapEx spending to start the year, and then as we move forward, this is going to be a continued area of focus for us and our full intent is to drive this down over the plan.

Just to complement Jay's answer, Mike, it's not only the zero budget that we did, but also using innovation to replace large capital spending programs that we have. We're looking forward to talk to guys -- folks next week about point of care and this is one of the ways to reduce large capital spending, primarily for the PD business.

Perfect. Thank you Joe.

Thanks Mike.

David Roman, Goldman Sachs.

I wanted to start on the Surgical Care business. In your guidance, you've contemplated an acceleration throughout the year from the negative 2% up to the 1% to 2%. Could you maybe just help us understand how much of the drag in the business is coming from discontinuation of non-core product lines versus any other factors that may be negatively influencing that business and then what specifically drives that turnaround expected throughout the year?

David, good morning. The Surgical Care when you get towards the second half of the year, the comps will help that business because we're anniversarying some of the negative trends in that business.

I would like to take the opportunity to make the point that this business has two very distinctive areas. One is our hemostatic sealant, which are doing well. We need to do a better job in the international market and plans are in place for us to accelerate that, with more indications and more focused by a couple organizational changes we are going to be undertaking. But more so is to highlight, there a couple categories in that biosurgery business -- of businesses that were purchased a few years ago that are really laggards and businesses that probably don't fit in our portfolio, very small product lines but they are the ones which are dragging the comp on this business.

So I want to just reassure our investors that we have a significant amount of focus in this technology. Our base business, FLOSEAL, TISSEEL, COSEAL, those are great products and doing very well. And we're looking at a couple of those laggards and see what we're going to do with them.

Okay and then maybe just a follow-up. In your prepared remarks Joe, you brought up that you had renegotiated all of your GPO contracts, I think in reference to the two parts of the Fluid Systems business. Can you maybe just put that into perspective for us? What does that mean in terms of the growth rates of these franchises that the renegotiated contracts provide greater visibility and sustainability of growth. Are there price escalators in there? How should we think about those, just in -- with some context around the overall business performance?

David, I cannot comment on the particulars of the contract. I just have to underscore the fact that we're very happy with the signing of our latest contract with HealthTrust. It's a great opportunity for the Company. We are market leaders in IV Fluid Systems and we're going to continue to be the leader in this market, by providing enough capacity for the marketplace.

We're being very smart about how to optimize capacity for all -- from all of our North American plants to make sure that we have enough capacity for the US market and we'll not disappoint our customers. This is part of signing the contract; there's a cycle between three and five years that we always have.

And our team here in the US, Brik Eyre and Scott Luce have done a superb job, really working with the GPOs and having them see how much of a value Baxter, as a partner, is. So this is -- but I cannot get into the pricing and arrangements and volume that we have in these contracts.

Understood. Thank you very much.

David Lewis, Morgan Stanley.

Maybe one for Jay and then Joe, maybe a two-part strategic question for you. So Jay, I mean for us, to stand out in the quarter obviously was SG&A and I guess if we update for the quarter, your target of 11.5% for the year looks very achievable. Is there a reason why the cost controls unit, down 13% constant currency in the first quarter, won't hold throughout the variety of the year because it seems like if you build on this SG&A momentum, 11.5% looks conservative to us.

Yes. David, maybe I decompose the SG&A performance in the first quarter, and then talk about the annualization of that. There are really four main elements that contribute to the $100 million decline, constant currency, year over year, in SG&A. One is TSAs of approximately $25 million; one is pension of approximately $20 million; and then there are two other elements which I refer to as some of the operational controls that we put in place; restructuring of $25 million; and spend controls of approximately $25 million.

It's clear we're very proud of the progress that we've made on spending and I think the first quarter is clear evidence of that, but as we move to the latter part of the year, there's a couple things to be mindful of. First, the TSA income, we started recording this in the second half of last year so that benefit on a year-over-year basis goes away in the second half of the year.

And then the second comment is, with respect to restructuring and spending, we did have some benefit in the latter part of last year, as we started to implement controls very quickly after the spin-off. And so some of those benefits, it's not appropriate to annualize that performances as we move forward.

But it's safe to say, cost is a clear focus for us. I think the organization has taken this mandate and really, we are going after this aggressively. We're pleased with the progress and the first quarter is evidence of that.

Okay. Very helpful. And then Joe, you're obviously having some early operational success here, specifically on margins. So I wonder, kind of two-part question. The first is, have your thoughts surround pursuing sort of larger M&A this year changed in light of slightly better revenue and operating margin trends?

And the second kind of question, somewhat related, is your prior management seemed to be de-emphasizing generic injectables but my sense is this management seems to be re-emphasizing generic injectables. So, one, larger M&A this year, and number two, in that broader medical management businesses, is generic injectables more of a focus for this team than it was the prior team? Thank you.

David, this is a clear area of focus for us. And we talk about M&A and I always say M&A is opportunistic. But transformative M&A is not in the cards, as we speak right now. So we're looking at strengthening our current core businesses and by doing it, we're going to go into adjacencies, so why is injectable generics a good area of focus?

We have a tremendous technology, GALAXY, in-house. We have a good program. We have several molecules for the next three to four years to come; they are in the pipeline and we are going to accelerate them as much as we can, as those need to be approved by the FDA in terms of technology. We do a great job on that. So logical extension of that would be to go in an area that strengthens those core competencies.

Now, I cannot speak from prior -- no, about the prior management's strategic decisions. But when I look at this, I see there's a natural migration of our business. Now, the competencies to manage a business like this are slightly different and we're going to make sure that we have that in-house, or we're going to acquire [debt] to be able to be even more successful.

But this is an area of tremendous attractiveness to -- for us and I want to make sure that we are focused on that. But with all that said, the opportunistic nature of acquisitions will drive how we're going to approach this market.

Okay. Very clear. Thank you so much.

Bob Hopkins, Bank of America.

Can you hear me okay?

Yes, we can. Good morning, Bob.

Good morning, Joe. Thank you very much for taking the question. And congrats on the good early start. So two questions. One, first for Jay or for Joe, on the Renal side, you had a really good growth quarter here this quarter. And so I guess I'm a little surprised that you're not taking the guidance up for Renal or at least I don't think I heard that. So can you just talk about the Renal growth in the quarter and why you don't think you'll see better than 3% growth over the course of the rest of this year?

Yes, I mean, look, overall, we were definitely pleased with the overall performance in Renal in the quarter. And I think of particular note, the acute business, as Joe mentioned in his prepared remarks, a standout quarter where we continue to be very excited about adoption there. We also had a very solid PD quarter as well. But one quarter doesn't a year make and so for us, we're mindful. We have a reasonable forecast in place for the remaining part of the year.

And we do have some tougher comps, particularly in the fourth quarter where in the fourth quarter of 2015, we had a very strong performance in the Renal business, so that's one where I think there's some tougher comps, and we'll continue to watch this. But as we look at the long-range plan that we've shared, the acceleration in the Renal business is a very important component of our long-term success. So I can tell you that the first quarter was one that was definitely pleasing to us.

Okay and then -- all right, because I just want to make sure that it wasn't something that falls off in the back half or some unanticipated hurdles that you're -- that you want us to be aware of. And so for the second question, for Joe, just to follow-up on the previous question about generic injectables, just curious, as you look around the world, are there a wide range of assets available in that area? I just want to -- I'm just trying to have a better understanding of how much opportunity you think is out there in the world of generic injectables? Are there a lot of assets for you to look at?

Bob, for me, it's not about a number of assets, but the quality of the assets. And also what kind of APIs you're looking to participate. So we are refining the strategy to make sure that we don't have -- we're not out there generic -- easy to make APIs and things that are small. We're looking for high-quality opportunities, partnerships, different-to-manufacture APIs, create a little bit of differentiation for us.

We don't mind to go into the more common APIs but you have to have a construct where your business has some barriers for entry in areas of technology and know-how of manufacturing, so we're looking at the whole spectrum of business. So again, it's not about the quantity of targets but the quality of targets.

Great. Thanks very much.

You're welcome.

Larry Keusch, Raymond James.

Joe, unless I missed it, I didn't really hear much of an update on the emerging markets performance for the quarter. So if you could sort of spend a couple moments just walking us through sort of how things are progressing in those emerging markets?

Sure. Emerging markets are doing well. We are very happy with the performance in Latin America. Like many companies you know, we have in China, seen an overall decline of growth rates. If you equalize for a Renal adjustment that we had in China, our growth rates you should be seeing towards the end of the year are close to 9% to 10%, okay?

So our emerging markets is a healthy business. We, right now, are focusing in what we call the singles and doubles opportunities and we just established our -- we repurposed our R&D center, which is a global center in China, now to be China for China. Also very interested in the RTS, our renal clinics in South America, where we have some expansion opportunities there.

So our emerging markets is doing well, but we want more from it. We're not -- we're satisfied but we're not happy. We're happy but not satisfied, the other way around. We're happy but not satisfied with the performance, and we have some good opportunities ahead of us and we're going to be investing, specifically in areas such as China, some parts of Southeast Asia. There's also selective markets in Latin America. As currency weakens in some countries in Latin America offers an opportunity for potential acquisitions there at a reasonable price with a good return on investment.

Okay, and did you mention what the emerging markets growth was for the quarter?

It was about 3% in the quarter.

Okay, perfect. And then Joe, just one other I guess sort of strategic tactical question. There's this thought out there that connectivity between devices and software between the pharmacy, the nursing station, the patient room is becoming more important, certainly up at the C-suite level. I'm just curious if, A, you do think that's a trend that will continue to increase? And maybe just spend a moment on how you guys think you are positioned there? And are you looking at both organic and inorganic opportunities there?

It is a trend we'll continue [in our ability] to integrate the EMRs with general floor and ICU, connectivity and connect to patient data with libraries and [trial] libraries; and these are very important. The importance is not proportional to the adoption. There is a need for the adoption is not as clear path and immediate as one may make you believe.

So from our perspective, we have a significant effort in connectivity, wired and wireless and we have new -- two new versions of our pumps coming up in the next three years but we also are working diligently on a global platform that we're going to probably have more news in about six months down the road. But we have a significant effort. It's a great opportunity for us and as we continue to gain market share in our infusion systems, we will see us coming up with new pump versions that will enable that feature.

Enabling of the feature doesn't mean that the adoption is going to be there. It's just to make sure that the hospital, or the hospital system, has the ability to connect with the EMR. Not everyone is ready, and -- but we will be ready, as our customers become more diligent about using this feature.

I just want to underscore the fact that our AMIA and CLARIA PD cyclers, both of them operate with a very sophisticated, cloud-based system for communication between clinician and patients. So we're already there. We have the technology and we see the future of Baxter connectivity is enabling our Sharesource technology for also infusion pumps and other devices that may be needed, including our Home Hemodialysis System, our VIVIA program.

Okay, great. Very helpful. Thank you.

Matt Miksic, UBS.

Thanks for taking the questions. I have a follow-up, if I could, on the Renal business to -- in particular, we -- I think, we all on the call, and investors following the Company understand the profitability opportunity, margin opportunity for pump. As you place the pumps and win more business and win more share back and drive more consumables, there's a -- I think it -- we perceive, anyway, an opportunity to take up margins in that business over time. We'd love to understand how maybe some of the same dynamics could play out for Renal, what you see there in terms of improving margins over time. There's new product cycles or consumables or some geographic, just trends would be very, very helpful and then I have one follow-up.

From my perspective, we think that there's upside potential in the margins for Renal and they are different areas. First of all, you saw the performance of the in-center HD business this quarter and that's the result of the stabilization of our dialyzer business, primarily in Europe. And as we have new technology coming about Terranova, we will, hopefully, we'll be able to see that trend being steady. The -- so you have the natural momentum of that.

The second part is access to the patient. In selective markets in the world, Baxter will make an attempt to connect direct with the patients. I have a great example, in Canada, where the government is really into the PD business. They think PD First is a good policy, not only for the patient but also for the system in terms of reimbursement and cost for the system; 60% penetration in Canada.

So there are other opportunities in North America. We're not happy not accessing the patient in North America. So we will have creative ways of connecting to the patient through payers, through providers to be able to increase the penetration of PD; therefore, increasing the future margins of this business.

I have to say that when we look at the chronic renal -- the acute renal business, that is a phenomenal business for the Company, where we're going to probably launch a platform in critical care based on [extra core portfolio] therapies to accelerate even further the growth of that business (multiple speakers) and improved margins.

And just to add to that, as you look at the Renal margins over the last year, there's a couple other considerations, less strategic but impacting the numbers. One is, we have been investing in a number of R&D programs over the last year so VIVIA, AMIA, along with Prismax, which are three major platform developments. That are -- those run through the Renal segment's margins so that's a factor that will go away over time. Related to that, we'll have the benefit of new product launches at a premium price which will allow us to take margin up in that sense.

And then the final point I would make, just tactically speaking, is you'll recall at our investor conference last year, we did comment that there was 150 basis points of incremental manufacturing costs that we had experienced in short term as we looked to address regulatory opportunities for us. That impacted our numbers in the second half of last year and all of 2015 and a large component of that related to the Renal business. We do expect some of these costs to sunset over time. So in addition to the strategic component that Joe walked you through, I think there are a number of tactical elements that will also support margin in this business.

Thanks for that. That's helpful color. On a separate topic, R&D, you said some expectations were sort of right, sitting at the right level for R&D in 2016. And I'd love to understand how you feel about that now and maybe how some of the -- your thinking strategically, whether it's hard to manufacture injectables, plays into sort of how you see that moderating or playing out over time, as part of your P&L?

R&D is a key component for Baxter in terms of innovation and growth. And that's why we're going to be able to show you guys on May 9 our efforts. We're not going to show you everything but we're going to show you a portion of what we think the future holds for Baxter and a significant amount of R&D innovation that is coming through the pipe. So our commitment to R&D is very strong.

We have done and continue to do efficiency programs in R&D in terms of consolidation of sites and infrastructure. Infrastructure does not provide innovation. What provides innovation are people in the right places, developing products for unmet needs, and also applications for a specific market. And so what you see in terms of reduction in R&D is more of a realignment of resources across the globe and the right focus and the right products.

We're starting to do capital allocations so we're going to see some movement in R&D. We're going to see some projects that will be slowed down and some that will be doubled down to be able to accelerate. In terms of hard-to-manufacture APIs, we have some capabilities in-house but we always have, at our disposal, the ability to partner with companies along -- across the globe and acquire companies across the globe. As you know, our balance sheet has good capacity and we'll be putting that to work for the shareholders, for the shareholders' interest and one of them is the ability to capitalize on our injectable core competencies.

Thanks so much.

Joanne Wuensch, BMO Capital Markets.

Good morning and thank you for taking the question. A big picture one and then a specific one. The big picture one, can you give us an idea of what you're seeing in the United States and outside the United States as it relates to sort of hospital volumes and in your relationship with those hospitals? Thank you.

Joanne, hospital volumes in the US are healthy. We also need to do a -- decompose the growth that we have because we have been gaining market share in some of our categories, primarily Infusion Systems. So when you pull that aside, the market share aside, hospital business in the US is still healthy.

Price pressures are always there but we have much less of physician-preferred products so we don't speak from products that have high pressure on pricing coming from IDNs and GPOs. We have products that are used on every day, saving lives and sustaining lives of patients, and those products are very stable in terms of pricing, but also the volume is healthy, despite the fact that, [on top of world], we're gaining market share in many, many categories.

And then outside the United States?

Outside the United States, you see price pressures in some categories in Europe. Europe is still a low-growth business, not only for Baxter but across a large spectrum of healthcare. And we see some opportunity in Latin America and we see some opportunity in China for volume pick-up.

All right and then my specific question with VIVIA starting its US IDE, can you give us an update on how that product is doing outside the United States and the timing of when you expect it in the US? Thank you.

VIVIA is doing well. We have several patients in Europe. It's a technology that continues to evolve. This is a very unique technology. When you compare to competitors that say that they have home therapies, they have hemodialysis therapies that are done in the home, no different than they are done in the center. Our therapy is done overnight in the home, allowing the patient full functionality during the day for working, productive life.

If you think about this technology, it's complex and we keep improving its reliability and its ability to continue to perform in people's homes without a great deal of interference or intervening from clinicians. So the work in Europe is doing well; in the US, we are enrolling patients. We have one patient enrolled and we continue to enroll; we have a clinical trial. I'm -- I think we're little early to predict the end of the trial and approval in the US. We're in constant contact with the FDA. We have a good trial program in place. We will keep you guys updated as we see needed and we make some progress in terms of enrollment.

Terrific. Thank you so much.

Thank you.

Danielle Antalffy, Leerink Partners.

Thank you so much for taking the question. Joe or Jay, I was wondering if you could talk about full-year guidance and the drivers of improvement there? I mean, obviously, some of the 2Q outperformance flowed through, but you are raising the midpoint of the range even higher than the beat. So I wonder if you could walk us through some of the variables that are driving better guidance?

Great. Thanks for the question, Danielle. As we pointed out, at the beginning of the year our guidance range was $1.46 to $1.54, implying the midpoint of $1.50 per share. And we updated it to $1.59 to $1.67, with the midpoint being $1.64, so it's essentially a $0.14 improvement in terms of EPS. Contributing -- there are a number of factors that contribute to that. One is foreign exchange. There's approximately $0.06 of benefit from foreign exchange that we expect to see in the late -- in the remaining part or over the course of the year.

The second piece though, and frankly, this is the one that I think we're happiest about, relates to operational performance. Our expectation now is that operationally, we will be $0.06 better than our original expectations. And then there's a number of other puts and takes. Interest and other income related to equity gains and balance sheet gains is approximately $0.04 and that offsets tax rate and share count, which is a negative, roughly negative $0.03 or $0.04.

So those are the primary drivers of the performance but I would highlight that, from our standpoint, as we think about the work that we're doing, both on the cost side on -- and the pricing and the mix side, a lot of those margin improvement efforts that we're undertaking, those are reflected in the $0.06 of operational over achievement that I highlighted.

And if I could just follow up quickly on the $0.06 of operational improvement. I mean, obviously margin is a bit better. How much of it is due to better execution on the sales side [lifting] and/or improving end user markets?

I would say it's clearly a mix of components that lead to the $0.06, and there's definitely some spending controls that we expect to see as we move forward that contributes a portion. But from an end-user market strength, from a pricing and mix strength, that is probably the slight majority of the performance improvement that we expect to see over the year.

All right. Thanks. That's very helpful. Have a good day.

Rick Wise, Stifel.

Joe, I'll start off with a, just a big picture question for you. I know we're going to hear a lot more about it at the analyst meeting, but maybe just share with us some of your early thoughts and your evolving thoughts in these early days. You clearly are busy. You're talking about some management changes, looking at the laggards, et cetera, but do you feel like you're sort of in the place you expected to be?

I'd be curious to hear how your thoughts are changing. Is there more opportunity to drive growth in OpEx than you expected? Is there more opportunity to add incrementally than you expected? Just that sort of at the margin, your early thoughts? Thanks.

Rick, as always, we are happy but not satisfied. So there was a lot of work being done by the Company before I got here but I think where we're focusing around a few themes. The first one is a true strategy with disciplined capital allocation. So what program is really going to make through the Company and give us the big needle movers.

The other thing is to impart the organization to develop what I would call the singles and doubles, and have more of a global entrepreneurial approach to the singles and doubles so we can benefit from all of them instead of funneling everything through a very complex and centralized capital allocation process. So we're doing that. We understand the categories of investment. We understand what buckets and this is what we're going to talk to you guys next week.

In terms of our cost opportunity, I just appointed a Chief Transformation Officer for the Company. He's been with the Company for a while, very well respected and understands the Company deeply. He reports directly to me and underneath this person, Robert Felicelli, we have all of the cross-transformation to simplify the Company, to understand our back office and how to make more effective and more efficient areas of spending.

We're going through a -- no, we're going to talk more in depth next week, zero-based budget, zero-based spending, zero-based organization. We're going very hard at this because I think there's an opportunity to free up some real good cash and turn this back to the investors but also a bit of debt turned back into investment programs to make our Company grow faster.

So we're --I'm excited, I think the people here have known are wonderful. We have great talent. And we're highly motivated to deliver to our shareholders and patients.

That's great. Just a quick follow-up on a more detailed way, maybe for Jay. You talked about the early success with the AMIA cycler, and 500-plus cyclers sold to date. It -- just two-part question there. Is this upgrades to existing systems? Are these new patient starts and maybe just once again, frame the opportunity for AMIA, just a little more granular detail. Help us understand what the potential there is. Thanks so much.

Sure. First of all, AMIA is a very new product from our standpoint so this is a completely new innovative product that we've put on the marketplace and because of not only the user interface, which has a high level of simplicity, but also because of the Sharesource technology that Joe referenced, there's a lot of excitement amongst treaters, patients around this, the AMIA cycler. So the receptivity for this has been great. Our PD US has been doing a great job promoting and moving this product forward.

What's happening as a result of the increased value that we're providing is there is a margin opportunity for us on this product, but what I would say is over time, we will expect to significantly migrate towards AMIA. It's -- we're focused on new patient starts as opposed to flipping existing patients. That would be too disruptive. But over time, this will be a larger part of our US business. Frankly, in the short term, it's not going to be a -- in 2016, it will not be a huge impact on our overall sales, but over the course of this long-range plan, I do expect this to feature very prominently for our Company.

Thank you.

Thank you and we have time for two more questions. Matt Keeler, Credit Suisse.

Thanks for taking the question. Just first on the retained stake can you remind us what the gating factor is to gaining approval to use that to fund the pension or are you still confident you'll be able to do that?

Yes. We are very pleased with the progress on the retained stake. This has gone, I would say, according to our plan. I think, frankly, our treasury, tax and legal teams have done just a fabulous job managing and organizing what is a highly complex process in a condensed timeframe. We've completed two major transactions. I referenced them, the equity for bank line and the equity for debt, really getting the balance sheet to the position that we needed to get to. There are two remaining transactions that need to take place. One is a pension contribution and one is an equity-for-equity exchange and we expect to be able to do both of these.

There is Department of Labor approval that is required as part of this, or I should say, a Department of Labor posting that is required as part of this and there's a final approval of an S-4 related to the equity-for-equity exchange and it's safe to say we're working closely with both the SEC and the Department of Labor to ensure all of these transactions can be done in a timely manner in advance of the close.

Thanks. That's helpful and just changing topics over to Surgical Care, you highlighted the drag from non-core biosurgicals on growth, can you just give us a sense of when you expect to start to lap the impact of that?

The second half of the year. Second -- I just want to underscore, again, that our core biosurgery business sis doing very well. We have to adjust -- you know, the second half who have those products anniversarying. Those are laggard products. They are not part of our core business but they were added to the portfolio a few years ago. We just need to find a disposition for this -- the small products and they are probably detracting our sales force from an even further accelerating.

On the development side, we have HEMOPATCH. We have other things that are going on. Launches, we're going to increase our penetration outside the US by creating more indications. We have a healthy pipeline. We have a new oxidized cellulose product that is now being launched in several parts of the world including Europe. So it's a very exciting franchise that momentarily is having these issues with those two products, but as I said second half, we will be anniversary those numbers.

Thanks so much.

Josh Jennings, Cowen and Company.

Thank you. I was hoping to circle back to the Integrated Pharmacy Solutions business and focus on the organic growth trajectory there. I believe you've talked about six to eight molecules being launched. You just announced that the VANCOMYCIN launched. Can you just help us frame the organic growth opportunities with these new molecules? Are these singles, doubles, triples, and just how it can offset some of the headwinds that we're expecting for cyclo over the next 18 months?

We have a first phase which is about eight molecules but altogether, we have more -- much more than a dozen molecules that will come in the next three to four years, probably close to 2017, 2018. We have all: singles, doubles, triples. We have a third one coming up. I would say it's probably between a single and a double. We have a large one in about a year-and-a-half coming down the pike, so we are working very hard to offset, clearly, the cyclo effect.

But I want to make sure that you understand that those are the organic products of the Company. We also will be very diligently looking for partnerships and acquisitions to supplement that business because we think there's a great deal of opportunity for the Company dialysis synergies.

Great, and if I could just follow up on the cyclophosphamide. I clearly understand that you expect one competitor midyear and another competitor closer to the end of the year. Do you have any deeper understanding of what has been the delay for your competitors? Through last year, only one competitor getting into the market, and then and now waiting till midyear or the end of the year for a second and third generic competitor. Sorry to ask you about competition, but just curious if you had any deeper understating about what's been the hold-up for those generic entrants. Thanks a lot.

We are -- we know as much as you do. The Company, we put very limited resources in trying to understand every single detail about our competitors. Now it can be regulatory issues; it can be all kinds of different things, the ability to manufacture. So at this moment in time, we take advantage of no competitors in the markets. It's a good cash generator for the Company. We understand and we have forecasted the decline of this business, as we have communicated to you.

If we don't see any major activity in the future, we will be very -- the first ones to tell you that the numbers are not changed or changing by how much. We're going to be very transparent with cyclophosphamide. It's not a strategic [partner] for the Company. What it is, is a good cash generator and we're going to use that cash to put that to good use, as I said, in getting into the injectables and double down, triple down in that business. But anything we know, we're going to make it very clear to you what it is, how much it affects us so there's full transparency in our earnings about this product.

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