百特醫療 (BAX) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference 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, Candice. Good morning, and welcome to our first quarter 2017 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 2017 financial results, along with our updated outlook for 2017 before taking your questions.

As a reminder, we have posted a supplemental presentation to complement this morning's discussion. This presentation can be accessed on Baxter's external website in the Investors section under Events & Presentations. (Operator Instructions)

With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product developments, business 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 details 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.

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

Good morning, everyone, and thank you for joining us today. I'll get started by sharing some comments on our first quarter performance. Then I will turn it over to Jay, who will walk through the rest of the P&L and provide an update on our guidance for the year. After that, we will close with Q&A.

We opened the 2017 with a strong quarter, reflecting continued progress across our 3 strategic vectors for the management and innovation, operational excellence and capital allocation. On the top line, Baxter delivered sales growth of 4% on a reported basis and 5% on a constant currency basis.

Operationally, Baxter sales rose 7%, which excludes the impact of foreign exchange, generic competition for the U.S. cyclophosphamide market and the previously communicated selected strategic product exits the company is undertaking. The results were driven by strength across our U.S. businesses, as well as growth in peritoneal dialysis, acute renal therapies and nutrition globally.

On the bottom line, adjusted earnings were $0.58 per diluted share. This reflects solid execution on the top line as well as the sustained momentum of our business transformation efforts.

Now we'll walk you through performance by business, and I will be speaking to growth figures on an operational basis to provide a clearer understanding of underlying performance.

Global sales for Hospital Products were $1.6 billion, advancing 10% operationally. Breaking this out by business. Sales in Fluid Systems were $585 million, up 13% operationally. Performance was driven by IP Solutions' strength in the U.S., along with increased sales of IV Access sets, reflecting the ongoing pull-through from our growing SPECTRUM pump installed base.

Moving to Integrated Pharma Solutions, or IPS. Global sales were $552 million, increasing 4% operationally. Contributing to performance in the quarter was increased demand for the company's nutritional therapies globally and for premixed injectable drugs, enhanced drug reconstitution systems in the U.S.

We are continuing to bolster growth in the IPS business through both organic and inorganic opportunities particularly in the generic injectable pharmaceuticals. We remain on track to close our acquisition of Claris Injectables in the second half of 2017, which will greatly expand our marketed portfolio and pipeline.

And in the first quarter, we announced a new strategic agreement with ScinoPharm, one of the world's leading API manufacturers to help develop, manufacture and commercialize 5 injectable drugs using a range of cancer treatments with an option to partner on an additional 15 molecules. In addition, we are preparing to launch 7 proprietary premixed injectable molecules in 2017 through our internal research and development pipeline. As we have stated previously, we tend to continue expanding our presence in the generic injectables space.

Moving to Surgical Care, which includes anesthesia and biosurgery. Total sales were $334 million, increasing 11% operationally. Performance in the quarter was fueled by strong U.S. growth for anesthesia and critical care products, driven primarily by increased demand for Transderm SCOP due to a temporary supply disruption in alternate product during the quarter. Increased sales of BREVIBLOC, a fast-acting IV beta-blocker, also contributed to the growth in the quarter.

The BioSurgery business advanced mid-single digits on a global basis, driven by double-digit growth internationally of our core hemostats and sealants. As we have previously mentioned, we have increased our investments in this business. In an effort to turn around performance, we expect to begin recognizing the benefits of these actions towards the latter part of this year and beyond.

Some recent highlights include the acquisition of Wound Care Technologies, Incorporated, the manufacturer of the DermaClose Continuous Tissue Expander. DermaClose is a highly innovative device used to facilitate the suturing and the stapling of the skin around moderate to large wounds and represents our entry into a complementary product category.

We also focused on enhancing growth organically. Earlier this month, we've unveiled costumer-centric enhancements to both our FLOSEAL and TISSEEL hemostatic agents that are designed to improve safety for patients and ease-of-use for clinicians.

And in March, we announced the publication of 2 compelling analyses in the Journal of Medical Economics supporting FLOSEAL as a cost-effective hemostat that may contribute to broader cost savings at hospitals as compared to other options.

Finally, in the Hospital Products sales in our other category. We were $108 million, up 18%. Growth in the quarter benefited from continued demand for our contract manufacturing services, including our expertise in cytotoxic manufacturing in our Halle, Germany facility.

During the first half of 2017, we expect higher growth for this business as we continue to anniversary the impact from one of our customers bringing manufacturing in-house.

Turning to our Renal business. It's worth $896 million in the first quarter, up 2% operationally. Globally, peritoneal dialysis achieved mid-single-digit operational growth, reflecting an increase in patient base and ongoing market momentum of our new automated peritoneal dialysis or APD cyclers, AMIA in the U.S. and HOMECHOICE CLARIA for international markets. The success of AMIA and HOMECHOICE CLARIA APD is due in large part to our proprietary SHARESOURCE telemedicine technology, which recently surpassed 0.5 million patient treatments.

In a related development, Baxter also received the go for the order for a new Kaguya APD system in Japan, which we expect to launch later this year. Japan is a market in which we are looking to broaden our presence across the portfolio.

Renal growth in the quarter was impacted by a mid-single-digit decline in in-center hemodialysis globally. Positive performers -- performance, rather, in our U.S. in-center agency business was offset by lower sales internationally due to continued competitive pressures on dialyzers.

We continue to focus on enhancing the profitably of this business while also stabilizing the growth profile. The acute Renal business delivered solid mid-single-digit growth globally in the quarter. As we have previously mentioned, we believe the acute market holds substantial opportunity for us. And we are pleased to report that our next-generation leading-edge PrisMAX acute care technology now is being deployed for patients used in several European locations as part of the initial -- of an initial limited distribution. Clinician in-patient response today has been favorable, and we look forward to the full European commercial launch in 2018.

In summary, our company-wide results for the quarter reflect our focus on disciplined executions of driving improved operational performance. Certainly, our business transformation efforts have been centered to margin expansion and we are by no means finished. We are pursuing several new fronts to accelerate these efforts, which we expect would generate incremental savings going forward, a portion of what -- which we tend to redeploy back into the businesses to drive innovation and growth.

The most important point to stress in closing is that we are on a continuing journey on our results this quarter, reinforce our confidence that we are on the right path to achieve our goal of sustained top quartile performance.

With that, I will turn it over to Jay.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our first quarter results, reflecting continued momentum towards delivering on our long-term financial goals.

Sales in the quarter increased 4% on a reported basis and 7% operationally, which was ahead of our expectations, driven by favorable performance in the Fluid Systems and Anesthesia businesses. Volume and mix were the primary drivers of growth in the quarter with price contributing approximately 1%.

Walking through the rest of the P&L. Adjusted gross margin of 44.3% represents an improvement of 200 basis points over the prior year, driven by improved pricing in select areas of the portfolio, favorable manufacturing performance and the benefit from our business transformation efforts aimed at simplifying the portfolio to drive efficiency and reduce costs.

Adjusted SG&A totaled $560 million, decreasing 10% on a reported basis. The primary driver of the improvement was our ongoing focus on effectively managing our expense base to eliminate costs and reduce inefficiencies.

Transition service agreement income totaled approximately $20 million in the quarter compared to approximately $28 million in the first quarter of 2016. TSA income from Shire will continue to decline as the need for these services ramps down, which is expected to be by mid-2017. For the year, we expect TSA income to decline by approximately $45 million versus 2016.

Adjusted R&D spending in the quarter of $130 million decreased 4% versus the prior year. As Joe mentioned, we expect to continue to ramp up our investments in R&D to drive innovation and augment top line growth.

Adjusted operating margin in the quarter was 16.4%, an improvement of 590 basis points versus the prior year. Operating margin compared favorably to our expectations, driven by improved gross margin and disciplined expense management.

Interest expense was $14 million in the first quarter. Adjusted other expense totaled $2 million in the quarter, reflecting a lower benefit from gains on balance sheet positions as compared to the prior year period. In addition, performance in the first quarter of 2016 benefited from dividend income from Baxalta and gains on the sale of select investments.

The adjusted tax rate was 18.5% for the quarter, which reflects a benefit of $0.03 related to the adoption of new stock compensation guidance. And as previously mentioned, adjusted earnings of $0.58 per diluted share exceeded our guidance of $0.50 to $0.52 per share, driven principally by operational strength.

During the first quarter, we repurchased approximately $50 million or approximately 1 million shares. These targeted repurchases were more than offset by option-related dilution.

Finally, before I turn to our updated outlook for 2017, I will provide some commentary regarding our cash flow performance in the quarter. During the first quarter, we generated free cash flow of $83 million, driven by strong operational performance, disciplined management of capital expenditures, which declined approximately $60 million to $123 million, along with continued focus on improving the company's working capital. This performance enhances our confidence that we are on track to achieve, if not exceed, our full year objective of approximately $1 billion of free cash flow.

Let me conclude my comments by providing an update on our outlook for 2017. Starting with sales on a reported basis, including the impact of foreign exchange, we expect full year 2017 sales to increase between 1% to 2%; and on a constant currency basis, 2% to 3%. And after adjusting for the U.S. cyclophosphamide impact and select strategic product aggregates, we expect underlying operational growth of 4% to 5%.

All 3 of these sales ranges represent an increase from our prior guidance. This growth does not reflect any benefit from the proposed Claris acquisition, which, as Joe mentioned, we expect to close in the second half of 2017.

Following completion of the acquisition, we'll provide updated expectations. We now expect growth in the Hospital Products business of 2% to 3% on a constant currency and 4% to 5% on an operational basis.

Within Hospital Products, we now expect Fluid Systems constant currency sales growth of 4% to 5% or 5% to 6% on an operational basis. For the Integrated Pharmacy Solutions business, we expect constant currency sales to decline low single digits.

We expect full year sales for cyclophosphamide to total $135 million as compared to our original guidance of $115 million. Our updated assumption is that additional competitors will enter during the third quarter of 2017.

On an operational basis, IPS sales are expected to increase approximately 4%. Within Surgical Care, we anticipate sales to grow approximately 3% constant currency or 3% to 4% operationally. And finally, for the Hospital Products business, we now expect EPS and other to increase high single digits. For the Renal business, we continue to expect full year constant currency sales to increase 3% to 4% or 4% to 5% operationally.

Moving down the P&L, we now expect an operating margin of approximately 15.5% or approximately 200 basis points of improvement versus 2016, reflecting a strong first quarter performance and a lower impact from cyclophosphamide. As mentioned last quarter, we expect to provide updated long-term financial guidance on our second quarter earnings call.

We expect interest expense to total approximately $60 million and other income of approximately $15 million for 2017. For the year, we expect an average adjusted tax rate of approximately 21%. This is a slight increase in previous guidance, driven by the geographic mix of earnings.

For full year 2017, we anticipate an average share count of approximately $555 million. Based on these factors, we now expect 2017 adjusted earnings, excluding special items, of $2.20 to $2.28 per diluted share.

And finally, for the year, we continue to expect to generate operating cash flow of approximately $1.75 billion, and as I mentioned earlier in my prepared remarks, free cash flow of approximately $1 billion.

Specific to the second quarter of 2017, we expect sales to increase approximately 2% on a constant currency basis and to be comparable to the prior year on a reported basis. Operationally, sales in the second quarter are expected to increase approximately 3%. And we expect adjusted earnings, excluding special items, of $0.55 to $0.57 per diluted share.

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

(Operator Instructions) And our first question comes from Matt Taylor of Barclays.

I guess, the first question I had, I wanted to understand in your guidance what you're assuming for some of the new things like Claris, the ScinoPharm partnership and the contribution from the molecules that you talked about launching as you sold that injectable stuff.

Sure. Good morning, Matt. Thanks for the question. With respect to Claris, we've included no impact from that transaction. We expect that the transaction will close in the second half. Upon closing the transaction, we will provide updated guidance, both from sales and an EPS standpoint. As it relates to ScinoPharm, there is really no material impact in 2017. The large majority of those molecules will launch in 2020. So we have a few years before we start to experience the benefits from that important partnership. And then finally from the other injectable products, we haven't broken out the specific sales related to the [Carrera] molecules. What we have said is we expect the original set of molecules to generate approximately a little north of $200 million in annual sales, but that ramps up over a number of years. In 2017, the impact is still modest. So what I would say overall is we're very excited about the generic injectable space. It's an area where we believe Baxter can win and do very well. But we're really setting the stage for that success in the first half and second half of 2017.

Okay, Jay. And then I just wanted to see if you could give us a little bit more color about what's going on in the Renal business. That's an area where we'd expect that you might do a little bit better this quarter with the launch of AMIA and you continue to see a little bit below market growth there. So what can get that to pick up? And I guess what's causing kind of the lower-than-average growth in that segment now?

Matt, the performance of our Renal business in the PD, peritoneal dialysis, and acute Renal care, is doing very well. And because we are market leaders in both of them, our growth for the vast majority dictates the growth to the market. We have added a good number of patients for the PD business, and AMIA has been a tremendous success in the U.S. As a matter of fact, the growth is at or above what we have said before in terms of market. The issue that we have is simply in-center HD and is focused in Europe for the vast majority. We have had -- we spent amount of competition, a price competition actually in Europe on the dialyzer, and we have plans to come back at that with growth opportunities in Asia to offset that. And now our issue in Renal is primarily Europe in-center HD, and we are attentively looking at that. Just a note on the general business of Baxter for Europe, we have made significant change in management and as well as country management. We had really vamped in that organization and looking forward to the new folks to make an impact. So that's the area of focus that we have right now. But in terms of the Renal business, not only we are very happy with the PD business and acute Renal care. As a matter of fact, acute Renal care, we are taking market share in the U.S. as we speak. We continue to convert a large rate -- in large rate hospitals in the U.S. And the profitability most importantly has increased significantly in the Renal business. So we're quite happy with that. So the focus, as I said, is fixed in Europe in-center HD.

And our next question comes from Vijay Kumar of Evercore ISI.

Maybe the first one, a big picture question for Joe. We've had a number of deals hit the pay up recently. A lot of consolidation. Just given your thoughts on portfolio optimization rate, some of the valuations seem here pretty healthy. I'm just curious how you're thinking of acquisitions tuck-ins versus even possibly divestitures.

Vijay, good morning. My perspective has not changed about where Baxter stands. We're open to the tuck-ins, and we're doing them. And we're working very hard to get even more opportunities. We have a good pipeline in our pharmaceutical business between partnership and some tuck-ins and even in our advanced surgery Baxter business. With the performance of the company and the work that Jay and Cathy Skala have done in our business transformation process and how quick we're integrating and simplifying our back office, I feel more confident that Baxter could do a 20%, 25% of our market cap deal without a problem, okay? Doesn't mean that we're going to do it, but my confidence has increased in the management of the company in really pulling off something that would be a good deal for our shareholders in terms of bringing synergies to the bottom line and a good accretion for the top line.

That's helpful. And then maybe one follow-up for Jay. Jay, I mean, operating margins was impressive, right. It really was. But when you look at the guidance of 15.5% versus what you did in the quarter, right, it sort of implies maybe 15-ish in the back half. Maybe the delta, it sounds this is TSA maybe cyclo. I'm just curious is there anything else going on the operating margin line?

Great. Yes, from the first half to the second half, there are a couple of drivers that impact the operating margin and EPS. Just to run through those, one is cyclophosphamide. From first half to second half, we expect $40 million run rate decline. And so that's about $0.06 of impact. We also expect a ramp down in TSAs of approximately $30 million. So that's roughly $0.04 of impact. And then the other important thing that we're doing in the second half of the year is we're accelerating some investments in R&D. It's important for us to really set the stage for accelerating growth in the future. It has been a core area of focus for us over the last 8 quarters. And so for us, we are ramping up some spending about $40 million or roughly $0.07 of impacts related to first half to second half increases in R&D spending. The final point I would make with respect to second half EPS nonoperating margin is the tax rate. Because the primary source of benefit related to the new stock option exercise and stock issuance guideline is a first quarter impact, the tax rate picks up in the second half of the year, roughly $0.03. So interestingly, if you total all of these, we're talking about $0.20 of impact in the second half of the year or roughly $100 million, $110 million, $120 million worth of pretax impact in the second half. So that's really the drivers as to why we're not seeing the standard rates of growth that we've seen previously in the second half of this year.

And our next question comes from Mike Weinstein with JPMorgan.

Joe, you keep raising that percentage. Today you said 20% to 25% of market cap for the upside of the size on M&A versus 15% to 20% prior. Is that where you're headed now that bigger deals were making more sense than maybe 12 months ago?

Mike, you have good memory. And I'm happy that you listen to what I say. We do have more confidence in Baxter. First of all, as a new CEO of last year, you're just getting to know the company. You're getting to know the management and its capabilities. Now we have a solid team, very, very good team. And the execution has been great. So that gives me confidence that we can do something bigger if the opportunity arises and things are in the right place and there's value for our shareholders, never compromising what we think is our primary reason in doing deals, which is the deliver more value to our shareholders. So basically, our confidence goes up, the percentage goes up. And I think it's really reasonable to assume there's an opportunity. Baxter has the balance sheet, has the borrowing capability, and we feel comfortable with that.

Okay, there's a couple quick financial follow-ups if you don't mind. So one, you didn't raise your operating cash flow guidance. And I know you raised your -- effectively your net income guidance by $50 million, and you had a very strong cash flow quarter, so maybe, if you could shed some light on that. And then second, can you just give us more on what's going on in the SG&A line and then what we have so far? And maybe give us a sense of headcount changes or anything else you can share. Your underlying SG&A expense was down 10.5% this quarter. But obviously pretty dramatic and it's hard for us outside the company to see some of those changes that are going on.

Sure. First, as it relates to cash flow. Great performance in the quarter and it was definitely a little bit ahead of our expectations. It was certainly ahead of last year. But as you will remember, Mike, we did have a tax payment last year that distorted the Q1 results. But importantly, the pieces that I think we are pleased with, days payable we held flat, but days inventory on hand we improved 16 days roughly year-over-year. DSO was down 9 days year-over-year. So this relentless focus on working capital balances is paying dividends and the teams are hard at work driving the results in this regard. The other piece of this relates to CapEx, where we continue to focus on driving savings where possible, taking a zero-based approach to CapEx and capital spending. The reason we haven't raised guidance, I said -- in my prepared remarks I said, our confidence in our ability to beat or exceed guidance has increased. So much of our free cash flow is concentrated in the fourth quarter of the year that it's very difficult to have a line of sight at exactly how payables and receivables will land at year-end. And given the back-end load of cash flow, it's a very volatile number. So I think for us, we have an improved line of sight, increasing level of confidence. We'll watch this throughout the year and perhaps on the -- if things continue along the current trend, in Q2 or Q3, we'll be able to update guidance and provide some updated numbers in that regard. As it relates to the SG&A initiatives, yes, I will tell you, we, as a team, are very proud of the progress that we've made in the transformation of Baxter. We started this in the second half of 2015. You will recall, really accelerated the efforts in earnest in 2016. And our business transformation office led by Cathy Skala it is focused on a number of important initiatives. One of them relates to zero-based budget. And I will say that in 2017, in the first quarter, we benefited from a lot of the zero-based efforts that we put in place last year related to organization efficiencies, related to spending initiatives. So really, the primary driver of the benefit in the first quarter was driven by many of these savings initiatives that we initiated last year. And then the other thing that we've done is for the back office functions, principally finance, IT, HR, we started an initiative to drive and improve the efficiency of those functions. The most notable area to-date, the most achievement in this area has been led by our IT team. So Paul Martin, our CIO, and his entire organization have been incredibly focused on creatively driving down the cost of the IT infrastructure. And so that was one element of driving improvement in the first quarter. So those are a few of the highlights, I would say. We'll stop short of getting into specific headcount. We have delineated this program in detail in our 10-K where we talk about the spending requirements to the program but also the overall savings programs. And I would say that this is very much tracking in-line or ahead of expectations at this point.

And our next question comes from David Lewis of Morgan Stanley.

Maybe a quick one on long-term guidance for Joe or Jay. So as it relates to long-term guidance next quarter, you've been pretty transparent about that. I think investors are very focused on margins, Joe. And I think given your comments on your comfort in transformation, it sounds like we've got a material update as it relates to margins. But I wonder if you could talk about organic growth transformation for a second. Have you seen enough from some of the pipeline developments in biosurgery and the continued traction in Renal and Fluid Systems to kind of have a fundamentally different view for how this business can grow in the future from an organic perspective?

David, I would say that all the efforts that we're putting into innovation and the better deployment of R&D dollars and portfolio management are all starting to give us more comfort that our top line growth can be augmented organically towards the end of '17 into '18. Those are not overnight programs. Those are programs that take a significant amount of time if you know our products. Even our hemostats, those are long-term studies that need to be done. But as what I've seen so far, coming out our R&D reviews and portfolio business reviews, that we're going to start getting momentum towards the end of this year, beginning next year were the things that we started since we started as CEO. I would say that there is some very notable upticks in areas like PD, with AMIA and HOMECHOICE CLARIA. We are seeing the launch of some technologies across the board that were not before emphasized by the company such as our extracorporeal technologies as well as our acute Renal care new technology, PrisMAX. So I tell our investors that there's a significant focus in innovation, but innovation is the part that takes a little longer. And we'll see that hitting mostly in '18. Our story is one of providing value to the shareholder. We went very hard at our cost structure as well as our efficiencies, selling products in the market, you can see that. The Claris acquisition will bring some really good molecules between 150 to 175. I gave the team, led by Robert Felicelli, a specific goal that by 2021, we need to have more than 300 molecules in the marketplace as well as understanding any potential pipeline of biosimilars. So we are just in the beginning of our journey to develop a really strong top line organic growth company. And in the meantime, to deliver value to our shareholders, we are hitting everything that we can in terms of making this company the most efficient and effective in everything we do.

Okay, Joe. Very, very clear. Let me just -- a quick couple of follow-ups for Jay. Jay, just second quarter numbers seem a little conservative to some modest comp adjusted deceleration. It is your toughest comp of the year. But the question is just is there anything momentum perspective in your mind that really changes into the second quarter? Or is that just the comp? And then Fluid Systems really significant upside relative to our number. Can you just give us a snapshot of what's happening with momentum right now between pumps, disposable pull-through and price?

Sure. First, as it relates to Q2, to your point, David, it is the most difficult comp of the year. Q2 last year, we had 12% growth in the U.S., so really strong performance. And we had a very strong pump placement quarter, along with strong sales in our Surgical Care area. So from a comp standpoint, it's a challenging one. I would say there's 2 other factors in play that are factors that are well understood from our perspective. First is Fluid Systems in the U.S., 20% growth, we do expect that to come down over time as we anniversary certain agreements and as we start to get to a more steady-state approach from a pump placement and sets growth standpoint. So that 20% growth is not a number that we expect to see for the continued future. That will moderate down. And then the other factor is, as Joe referenced in his comments regarding sales, we did have a bolus of sales related to a product called Transderm SCOP about $20 million or so of sales in the first quarter. We expect the alternate supplier to be back on the market. In fact, they are on the market. So now those sales will moderate down. That benefit will be more muted as we look to the second quarter. So what I will tell you is it is, however, consistent with our original expectations from a sales growth standpoint. As it relates to the Fluid Systems business, 20% growth in the U.S., 0% international. If we're to exclude strategic exits, we would see 3% international growth, 12% growth overall or 13% on an operational basis, excluding the strategic exit. Really the way to think about that, our infusion systems was high single digit growth and really with the pumps -- it wasn't really a pump story. It was more about the sets associated with the pumps because we had good pump placements in Q1 of last year. And so we saw double-digit near-teens growth from a sets standpoint. Our whole theory in terms of our pumps business is as we grow the installed base, it sets right along at a higher margin and it helps transform the margin profile of the company. That clearly played out with the Q1 result with the double-digit growth in sets. And then the IDE business in the first quarter in the U.S., we saw a very significant growth, north of 20%. And that was very much a mix of volume along with some pricing. So again, it was ahead of our expectations overall. We're pleased with the progress there and continue to focus on driving sales of the SPECTRUM pump because that's such an important aspect of our overall business.

And our next question comes from Larry Biegelsen of Wells Fargo.

Yes, I wanted to ask about the Renal pipeline and then one on M&A. So Joe, you've talked about being excited about the acute Renal pipeline in new areas. But I don't think you've given us much color on that. And also can you talk about the point of care PD regulatory pathway? How close are you to getting FDA sign-off on that trial? And then I just have one follow-up.

Hi, Larry. The Renal pipeline is one of the richest that we have right now. And we reorganized our company that would squarely, under the general managers and presidents of the businesses, the research and development management. So that is -- with people there we bought -- that we brought from other companies to Baxter. It has enhanced significantly our ability to not only develop, put products in the market, but also accelerated clinical studies that we're doing. So give an example, we're very excited about THERANOVA. We're going to be investing in the next few years $25 million in clinical data because we are convinced and have sufficient data in hand right now that proves this product is superior to any dialyzer in the market today. When it comes to acute Renal care, we have great products for sepsis treatment. We're going to continue to double [diagnosis] places like Japan and bring back technology on a global basis. And then let me talk about the point of care. A lot has been said by a bunch of different people about point of care and our PD and all the stuff. And Baxter is the -- probably the only company that has the capability to vertically integrate all these technologies. And to that end, we'll be putting our first patient on point-of-care treatment at the towards the end of 2018. So we have a very strong belief and our best way is now determined that we can do that. So that is a great achievement the chronic Renal team that has put that together. So as I say to the folks at Baxter in our goal, go compete for the dollars, go show the best ROIC and Renal has done a great job so far. I hope the other divisions will follow through and go fight for that dollar that we have available for product development and clinicals.

Joe, that's really helpful. Just one clarification on that and one follow-up. The first patient on point of care by the end of 2018, is that the first patient in your clinical trial? Or is that when you're basically saying when you can launch?

Clinical trial. Clinical trial will be -- first, it's a bit of I would say fourth quarter of 2018, we're going to have our first patient clinical trial. And from that point on, we're going to roll it out as soon as we can in terms of getting the population defined by the agencies in terms of clinical trials. And the launch will be looking at probably towards the end of 2019.

That's very helpful. And then just on M&A, could you talk about M&A pipeline and why we haven't seen more activity besides the Claris deal? And given the change in the deal size that you talked about earlier on this call, have your targets or areas of interest changed or evolved since you last provided update?

Larry, this is a very dynamic marketplace and a lot of things happening. We have a relentless focus in inorganic opportunities. But inorganic opportunities is now what will drive our company solely. So we do a very good balance between how much time we spent in looking for new opportunities, how much we spend managing Baxter's current businesses and making sure that all the businesses are performing well. We are every month looking at, at least 10, 12 opportunities. Some fall off for financial reasons. Some of them have changed in dynamics and performance and situations. With the expansion of our reach in terms of size, it brings a bit more opportunity to the table in terms of evaluating. This doesn't mean that we're going to do the deal, but this means that we're going to evaluate. And one thing Baxter is trying to do very well, we're very fast in evaluating the deal, coming to the table, having had significantly our internal capabilities, which are under Andy Kidd, who runs the strategy for us in BD&L, and David Roman, who is in strategy as well here. So these teams have been put together, a significant amount of horsepower. So we are doing everything we can. But the first thing is if it strategically makes sense, it needs to make sense for our shareholders. The money when we look at this, this is not our money, we're just here taking care of the money for our shareholders.

And our next question comes from Bob Hopkins of Bank of America.

So I wanted to ask a quick question for Jay and then a follow-up for Joe. So Jay, just to start out, obviously, a lot of people are looking forward to next quarter when you give us an update on the long-range plan. I was just -- in anticipation of that, are there things that you think we should be focusing on in terms of major puts and takes to the long-term plan, things that you'd want to highlight that investors should be considering as we think about the long-term relative to your previous guidance, obviously?

Look, I don't know that we would -- we have items that are new items to point out with respect to our long-term guidance at this stage. The biggest driver, the biggest note I would make is we are certainly ahead of our expectations. And the guidance that we give for this year in 2017 currently sits at $220 million to $228 million. I believe that's above the 2018 guidance we shared in July of last year. So a lot of work, a lot of strong momentum. That's probably the biggest change that we've seen in our overall guidance. In areas like working capital or CapEx, we've also seen some improvements. So those would be a couple of other items that we're hard at work in our long-range financial planning process isolating. Beyond that, there's no major dynamic change. We are excited about some of the portfolio items that Joe highlighted in his comments earlier and some of the work that our teams have done from an R&D standpoint. So that should feature. But again, the biggest impact, those will come a little bit later in the long-range plan.

Okay. And then for Joe, just on this M&A commentary. I was wondering if you could kind of talk a little bit about your priorities. And 2, I guess 2 specific questions. One, as you consider M&A, would you consider something that's a little bit more of a white space? And then secondly, on the wound management side, I was wondering if you could just talk about that transaction a little bit more and your interest broadly in wound management as a category?

Hi, Bob. we have 4 areas that we consider core growth in our portfolio. It doesn't mean that we don't pay attention or either invest in those other areas, we do when we pay a lot of cash dividends. But Renal is about new therapies and end-to-end care of our patients. Then we have critical care, which is an augmentation of what we already have between acute Renal care as well as our IPS or fluid management business. Then we have the Baxter pharmaceutical business, which is to go into generics and eventually into biosimilars, okay, all injectables. Cyclophosphic molecules and oncolytics, so that's the Baxter pharmaceutical. And then you have advanced surgery, which is to complement our products. So the way we think about this, by defining broader categories within Baxter, allows us to look at spaces that is less singularly focused on the product but more focused in the areas of care. So in process of looking at this, we will stumble in -- at opportunities and encounter opportunities that have a little bit of white space in them. At the moment, we are looking at all the medications to support areas of growth for us, not specifically and exclusively in white space. We're not there yet. We have our venture capital group here at Baxter, where we look at opportunities in white space but those are the venture capital level. So this should give you a bit more color on how we think about deals.

The second in wound management specifically is our natural adjacency of our biosurgery business, which is in the adjunct technology in the OR. There are opportunities such as this one we just acquired so small business that goes nicely into our reps bags. The wound management per se in terms of traditional wound management is specifically is not an area of interest. As I said, we may come across a company that we like overall products, but has that as a small business is a different conversation. But to have us specifically targeting wound management is not something that is in the cards at the moment in time. This has to do with wound closure, which is very adjacent to our hemostat and sealant business.

And our next question comes from Danielle Antalffy of Leerink Partners.

Jay, I wanted to ask you about fiscal '17 guidance and the incremental guidance on EPS beyond the Q1 outperformance. What segments do you expect to drive incremental strength versus prior expectations there?

Sure. So as we look at the updated guidance, the midpoint of the range increases about $0.10. And principally, $0.07 of that has arrived in Q1. We expect another $0.03 related to cyclophosphamide. So really those are the drivers as we look at the margin improvement on a full year basis. The Q1 driver clearly Fluid Systems had a standout quarter. That was an important aspect, along with some SG&A savings that contributed ahead of schedule to drive the $0.07. But really, as we move forward, the big change to guidance relate to cyclo. As we look at other factors like foreign exchange sundry, interest tax and share count, they all net -- essentially net out to 0. So the big drivers are the 2 that I've mentioned.

Okay, that's helpful. And then just longer term, if we think about Claris and what that brings to the generic injectables business, how does that change the growth profile of that business? That's a market -- a global market that I think is growing in the 9% to 10% range. So curious if you think Claris is something that gets you to within that market growth range, above that market growth range? And then do you feel like generic injectables, Joe, you mentioned augmenting existing businesses. Do you feel like generic injectables is now set with Claris and you'll look elsewhere to augment your businesses?

Danielle, if you look at our long-term objective, it's to be a mid-single-digit growth rate, okay? And the only way to get there in the markets that we are today is to go into a business like the generic injectables, which has a weighted average -- will change the weighted average market growth rate of our company. So I would say that Claris will have an impact slightly in 2018. And then when you go in 2019 and '20, they would bring probably 50 to 100 basis points of incremental growth to the company because not Claris itself but it's everything else that will be attached to Claris. Claris has great manufacturing capabilities. In our integration plans, we already signed to expand a couple of their buildings to put more capability like to our (inaudible) and other things there. So we are looking at that as a platform. So I would say that with comfort, that 50 to 100 basis points in the midterm growth rate is acceptable. We're looking at Brik Eyre and Robert Felicelli to really deliver on those numbers and also to augment our molecule pipeline.

And our next question comes from Matt Miksic of UBS.

So I wanted to follow-up, Joe. I know you've gotten a couple of questions on M&A and strategic thinking on acquisitions. And I just -- I guess one of the questions that we got and we hear in the press particularly following some of the recent deals is sort of this idea of scale or leverage on a platform or leveraging your distribution. And you could say the small -- the wound care, wound closure acquisition you talked about sort of fits that on a smaller scale. But with -- and especially the injectables kind of in place and your ability to sort of continue to add molecules there, you're talking about a larger deal, I guess. To what degree does the growth, the scale, the leverage, the distribution overlap kind of play a role in your thinking? And then I have one follow-up.

Matt, you have to think about why -- what are the major prerequisites for something to get into the funnel, and one of them is being within those 4 pillars I mentioned before. The second thing is to make sure there is category leadership and the products that people make and sell. Then once you pass through those broad lenses is about what can Baxter do to be a better owner for that business? And if you look at our contract capability in the U.S. now as comps business growth in the U.S., there's a phenomenal drive doing that. So that is a positive effect. Baxter is a hospital company and we are a supply company. We are in every hospital in this country. So we still have the ability to bring inner systems of distribution as well as how we manage sales and marketing within the regions of the world because we are effective and very efficient in doing it. Above and beyond that, the scale of products and the ability to synergize on them by channel. You have the whole efficiency of cost to maintain the infrastructure. The fewer G&A, which I think now we are in a position to really bring a lot of synergies to the table that about 1.5 year ago, we were not. So that gives me confidence that once -- and if we find the right opportunity for Baxter and our shareholders, we will have the channel synergy as well as the cost synergy. Now remember, we always have this conversation about improving our weighted average market growth rate. And that's the only and sole focus of going into businesses on an inorganic manner. To get businesses that have markets that they serve that will be complementary to ours and the growth will be accretive to ours. So once we get those things on the table, we can make our decisions more clearly.

Now it's very clear. And I have one follow-up on just one of your business lines, the pump business. And I apologize, I've been hopping back and forth between a couple of calls. So if this has been asked, just let me know. But your thoughts on sort of the health of that general business. You've obviously done quite well in that in terms of regaining share. So where should we think about that business going from here? And is there anything else than the product pipeline that we should be looking forward to, to kind of sustain this growth rate that you've been able to put up?

Sure. We'll forgive you for flipping calls back and forth (inaudible). So this is a platform for Baxter. Baxter had this product line for decades in several different shapes and form. We are here to stay. We have the SPECTRUM platforms today in the U.S. and Canada, which is doing very, very well. Most importantly is not only the pumps, but also the ability to play the sets. And the sets are what continues to deliver on profitability and revenue growth. We have couple more generations of our SPECTRUM pump coming out in the next couple of years, and then we're going to launch a new global platform that includes different Baxter pumps that were currently in development. For outside the U.S., we have a partnership with a foreign manufacturer where we're going to be augmenting our product lines in Anglo-Saxon-speaking countries. So we have the ability to replace our old platform called COLLEAGUE, which is still being sold outside the U.S. in a few countries with a much more modern. But the beauty about our platform on a global basis is our drug library is second to [NIH] . And having that being retrofitted in any platform, including the one that we are developing with the foreign pharma in the moment is really important. So our teams are working very hard. We have augmented our research and development teams across the globe. We have strong center in the U.S. We have centers now in India. We augmented not only with third-party design houses, but also our own people in our R&D centers in India. So we're ramping up to really make this business a leading business in the industry it competes.

And our next question comes from Glenn Novarro of RBC Capital Markets.

Joe, I wonder if you can comment on surgical volumes in the first quarter. One of the companies that we cover last week came in with better volumes, and they thought maybe the uncertainty about health care reform may have pulled forward some volumes into the first quarter. And I look at your Fluid Systems, up very strong. So maybe comment on what you saw in terms of volumes. And do you think there was any pull-forward in cases? And then I have a follow-up.

Glenn, I don't think there was any pull-forward. I think our cycle of sales and growth that Jay had explained there, we have to do a lot with replacements of products that we have early this year and also in the last 1.5 years. So we see the U.S. business -- the U.S. supply business as steady, has a low single-digit growth but it is growing. And we don't see at the moment anything that would create major disruption to the system. Clearly, health care reform is up there. They were looking at tax reform and how things are coming along. But I think in businesses like ours, where the significant infrastructure products that are used for day-to-day operation of a hospital or care center or for patient care like our PD business, we see that the market in the U.S. is still a good market. The growth -- intrinsic growth is about 2%, 3%. So we find no disruption in the near term or foreseeable future to that market.

And then just as a follow-up, can you talk about your emerging market growth in the quarter? And the reason I'm asking is your international results came in a little bit below our expectations. And I know you've exited some business lines. But I'm just trying to search for why international may have come in a little bit lower. Maybe it's emerging markets. So can you talk about emerging market growth? And has emerging markets growth been meeting your expectation, exceeded expectations or coming in light?

Glenn, once you take out the businesses that we exited, which are mostly -- I'm sorry, not mostly, all in emerging markets. So you're talking about India. You're talking about Venezuela. You're talking about Turkey. Our growth was 6%. And in emerging markets, it's 20% to 22% of our overall sales. You have an impressive growth in Latin America, excellent as well as 10%. We had good growth in China, 5%. Remember, we are not in position preferred medical devices in China. We are local manufacturer of fluids in China for PD and some specialty fluids for IV as well as nutrition. So 5% is a good growth in China for those products. Emerging Asia, 5% and East EMEA which is all that Eastern Europe, Middle East and Africa is about 4%. So I'm quite happy with that. We have to exit those businesses because the profitability profile of them were way below what we had set as acceptable for our company. But ex those businesses, we are pretty good there. The issue that we have in international is some parts of Europe, which are underperforming, as I said, we're taking matters to replace management by also to expand product line offerings and clinical trials to get new products in the market there.

Thank you. And that concludes our question-and-answer session for today. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.