百特醫療 (BAX) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Baxter International's Second Quarter 2018 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 Candace. Good morning, and welcome to our second quarter 2018 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 second quarter 2018 financial results along with our updated financial outlook for 2018. A supplemental presentation to complement this morning's discussion can be accessed on our website. This presentation, along with the related non-GAAP reconciliations, can be accessed on Baxter's external website in the Investors section under Events and News.

With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product development, business development and regulatory matters, contains 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?

Thank you, Clare, and good morning to everyone joining us. I'm going to share a few comments on our second quarter performance, then Jay will walk through the financials and guidance in more detail. And we will close, as always, by taking your questions.

I would like to start by saying how energizing it was meeting with so many of you face-to-face at our investor conference. Thanks also to those of you who attended online or watched the replay. Our team was excited to share the next chapter in Baxter's story, our progress to date and more importantly, our opportunities and outlook ahead.

We set a clear path to deliver approximately 5% compounded annual growth through 2023. We will accomplish this objective by building on the strength of our base business and accelerating innovation. As we shared at the conference, we plan to introduce new therapies and products that I expect to contribute approximately $1.7 billion of sales by 2023.

At the same time, we remained relentless focus on re-enhancing operational efficiency to deliver increased value to shareholders. And we will augment this performance with business development, expanding into new adjacencies and unlocking new markets to drive incremental value for all the stakeholders.

Now turning to the quarter, second quarter 2018 sales were up 9% on a reported basis, 5% on a constant currency basis and 4% operationally. Second quarter operational sales adjust for the impact of foreign exchange, generic competition for cyclophosphamide in the U.S., the Claris acquisition and our acquisition of 2 surgical products from Mallinckrodt. The strength in the quarter was driven by double-digit growth in our pharmaceuticals business, which benefited from increased sales of injectable pharmaceuticals in the U.S., and the addition of Claris, which contributed $33 million of sales in the quarter.

We also experienced double-digit growth in our advanced surgery business, driven by solid international performance and the addition of RECOTHROM and PREVELEAK, which contributed $17 million of sales during the quarter. Our acute therapies business continued to deliver double-digit growth for the company, performance in the quarter was driven by 20% growth in the U.S., where we remain focused on increasing CRRT adoption and securing new customers.

Increased demand for our contract manufacturing services as well as solid growth in our renal care business also contributed to growth in the quarter. This momentum helped to offset declines in medication delivery and clinical nutrition. Digging into this specific performance a bit further, with respect to large volume parenterals or LVPs, we continued to gain new customers in U.S. following the reallocation of volume from Mexico to the U.S. But the update in timing of these additions has been somewhat slower than anticipated. We are confident in our ability to continue to gain additional new customers in the second half of the year.

Performance in medication delivery was also impacted by the lower sales of small volume parenterals or SVPs in the quarter. While production volumes continue to improve, supply of these products has remained tight. As such, we were unable to restore our distribution partners back to pre-hurricane supply levels for all SVP product codes during the quarter. Given current production levels, we expect this supply dynamic for SVPs to improve in the coming weeks.

For our nutritional therapies, we have experienced a delay in customers returning to their historical purchasing patterns that preceded Hurricane Maria. Our marketing teams are working closely with our customers to reinforce availability of products and recapture those sales.

Overall, our sales performance conveys the strategic benefits of our diversified portfolio, helping ensure that temporary headwinds in certain areas are counterbalanced by performance, company-wide. On the bottom line, adjusted earnings per share was $0.77, a 22% year-over-year increase. This reflects the impact of our top line growth as well as the ongoing impact of our business transformation initiatives.

At the Investor Conference, we emphasized that product innovation is central to our go-forward growth strategy. Some key recent highlights reflect this commitment: expansion of the company's medication delivery portfolio with 2 new innovative drug infusion pumps, FDA and Health Canada approvals of the Spectrum IQ infusion system, with Dose IQ Safety Software, our latest smart-pump platform features bidirectional EMR integration and other enhancements to help reduce programming errors and enhance patient safety; CE marking for the Evo IQ Infusion System in the United Kingdom and Ireland, representing the first in a series of planned regulatory submissions internationally.

In Canada, we advanced the launch of a new indication for our oXiris set. oXiris is the first blood purification set that can be used in continuous renal replacement therapy, CRRT, and sepsis management protocols, and it is now approved in more than 30 countries. And we introduced key program updates for our SHARESOURCE remote patient management platform to support greater accessibility and efficiencies in remotely viewing PD patient data.

Another theme at the Investor Conference was addressing our untapped potential in Japan. In Q2, we continued the successful rollout of our KAGUYA APD system with embedded SHARESOURCE technology, which targets Japan's unique market needs. Plus, we have recently initiated the launch of our PRISMAFLEX system, which positions Baxter in Japan as the only comprehensive one-stop partner in the acute care space.

Before closing, I would quickly share a few words about Claris. As you know, last week, the FDA released a warning letter regarding our legacy Claris injectables facility in Ahmedabad, India. The FDA initiated a site inspection at the time of the closing of our Claris acquisition, which took place 1 year ago this week. We have already taken many corrective actions in response to the FDA's original Form 483 observations. We are continuing to undertake actions and facility improvements as we integrate Ahmedabad into our Baxter quality systems. The Claris deal is an important platform for the expansion of our pharmaceuticals portfolio and pipeline.

Financial results over the past year have tightly aligned with our expectations. And as indicated in our 8-K, we don't currently expect for the warning letter to have any material impact on our long-range financial outlook issued this past May. We are continuing to invest in Ahmedabad to expand local capabilities, technologies and expertise. We have made solid progress, and we'll continue working with FDA to ensure all outstanding observations are resolved as quickly and comprehensively as possible.

In closing, we are pleased with our second quarter performance, which demonstrated the strength of our diversified portfolio. We remain squarely focused on increasing innovation and in strategically deploying capital to further accelerate our performance, always support of delivering even greater value for patients and investors.

I would now pass it to Jay for more details on our Q2 results and outlook for the balance of 2018.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our second quarter results, which represented another solid quarter of continued momentum. I'll start by discussing our second quarter results before providing our updated financial outlook for 2018.

Beginning with the second quarter, global sales of $2.8 billion were in line with guidance, increasing 9% on a reported basis, 5% at constant currency and 4% on an operational basis. Key growth drivers for the quarter included increased sales of ingestible pharmaceuticals, strength in the company's renal care and acute therapy businesses as well as solid performance from our compounding and contract manufacturing businesses. And as Joe discussed, growth was partially offset by performance in our medication delivery and clinical nutrition businesses.

On the bottom line, adjusted earnings increased 22% to $0.77 per diluted share. This exceeded our previous guidance of $0.69 to $0.71 per share, driven by solid top line performance, the ongoing benefit of our business transformation initiatives, a lower-than-expected tax rate and the other income.

Now I'll walk you through performance by our regions and Global Business Units. Note, for this quarter, constant currency sales growth is equal to operational sales growth for all businesses, with the exceptions of our pharmaceuticals and advanced surgery businesses. For these businesses, we will provide operational growth, which adjusts for the impact of generic competition for U.S. cyclophosphamide as well as the Claris and Mallinckrodt surgical product acquisitions.

Starting first with sales growth for our 3 regions. Sales in the Americas advanced 6% on a constant currency basis and 4% operationally. Sales in Europe, Middle East and Africa grew 3%, both constant currency and operationally. And finally, sales in our Asia Pacific region rose 6% on a constant currency basis and 5% operationally.

Moving on to performance by Global Business Units. Global sales for renal care were $931 million, advancing 4% on a constant currency basis. Performance was driven by solid growth in PD therapies globally as well as increased sales internationally for our HD business.

Sales in medication delivery were $681 million, down 2% on a constant currency basis. And as Joe discussed, growth in this business was impacted by the timing of adding new customers in the U.S. for LVPs, residuals, supply constraints for SVPs following Hurricane Maria and lower international sales resulting from reallocation of solutions volume to the U.S.

Pharmaceutical sales were $537 million, increasing 16% constant currency and 11% operationally. Sales growth in the quarter was driven by our injectables business, which benefited from increased sales of the BREVIBLOC due to competitive supply constraints, as well as strength in our premixed injectables and international hospital pharmacy compounding business. Sales of U.S. cyclo were $45 million in the quarter, and Claris contributed $33 million globally.

Moving to clinical nutrition. Total sales were $221 million, down 3% on a constant currency basis. Strong growth in international markets was offset by lower sales in the U.S., which Joe commented on earlier. Sales in advanced surgery were $204 million, increasing 12% constant currency and 2% operationally. Performance was driven by solid growth in the international markets.

As mentioned previously, we completed the acquisition of RECOTHROM and PREVELEAK earlier this year. We're pleased with the contribution of these products, which represented approximately $17 million in the quarter.

Sales in our acute therapies business were $129 million, representing growth of 10% on a constant currency basis. Growth in the quarter was driven by continued strength in global demand for Baxter's continuous renal replacement therapies.

Finally, sales in our other category, which primarily includes our contract manufacturing services, were $139 million, an increase of 20% on a constant currency basis. Performance in the quarter was primarily driven by increased demand for our contract manufacturing services.

Moving to the rest of the P&L. Our adjusted gross margin of 45.5% increased 20 basis points over the prior year. Underlying operational expansion was partially offset by a negative impact from foreign exchange and incremental supply chain costs we absorbed during the quarter.

Adjusted SG&A totaled $641 million, increasing 7% on a reported basis and 4% on a constant currency basis. The positive contribution from our focus on effectively managing our expense base was offset by a lower transition service agreement income from Shire and increased freight expense as we continued to ensure adequate product availability to meet our customer needs. The acquisition of Claris added 1 point to growth in the quarter.

Adjusted R&D spending in the quarter of $164 million increased 6% on a reported basis and 1% on a constant currency basis versus the prior year period. Adjusted operating margin in the quarter was 17.1%, an increase of 70 basis points versus the prior year. Strong operational expansion of over 150 basis points in the quarter was also partially offset by the loss of transition service agreement income and foreign exchange.

Net interest expense was $11 million in the second quarter, reflecting higher levels of interest income due to rising interest rates. Adjusted other income totaled $31 million in the quarter, primarily reflecting the benefit from the recent changes we made to our U.S. pension plan and foreign exchange gains on balance sheet positions.

The adjusted tax rate was 17% for the quarter, which includes a benefit of $15 million from stock compensation. And as previously mentioned, adjusted earnings of $0.77 per diluted share exceeded our guidance of $0.69 to $0.71 per share, driven by solid top line performance, our business transformation initiatives, a lower-than-expected tax rate and other income.

During the second quarter, we repurchased $259 million or 3.8 million shares. These repurchases were partially offset by option-related dilution in the quarter.

Before turning to our 2018 outlook, I will briefly comment on our cash flow performance. In the first half of 2018, we generated free cash flow of $541 million, an improvement of $50 million versus the prior year, driven by underlying operational performance as well as improvements in DSO and DPO metrics.

Let me conclude my comments this morning by providing our guidance for the third quarter and full year 2018. Globally, we now expect 2018 full year sales to increase approximately 6% on a reported basis, given the strengthening dollar. We continue to expect growth of approximately 5% on a constant currency basis and 4% to 5% on an operational basis. Operational base -- operational growth excludes the impact of foreign exchange, U.S. cyclophosphamide sales from the first 7 months of Claris and sales from RECOTHROM and PREVELEAK.

Moving to guidance by business, on a constant currency and operational basis, except where otherwise noted. In renal care, we continue to expect growth of 3% to 4%. In medication delivery, we now expect sales to increase approximately 4%. We now expect our pharmaceuticals business to increase 5% to 6%, constant currency. This assumes 2018 U.S. cyclophosphamide sales of $130 million, slightly above previous guidance of $120 million. We continue to expect full year Claris sales of approximately $145 million. Adjusting for cyclo in the first 7 months of Claris, operational growth is now expected to increase approximately 5%.

Moving to clinicals and nutrition, we now expect sales growth of approximately 2%, as we work to return customers in the U.S. back to pre-hurricane purchase levels. For our advanced surgery business, we continue to expect sales to increase 8% to 9% on a constant currency basis. This includes the contribution of approximately $40 million related to the recent acquisition of RECOTHROM and PREVELEAK.

Excluding the impact of these sales, operational growth is expected to be between 3% and 4%. To the acute therapies business, we now anticipate growth of approximately 10%, given the strong first half performance. Finally in our other business, we now expect growth of 4% to 5%, given increased demand for our contract manufacturing services.

Moving down the P&L. We continue to anticipate adjusted operating margin expansion of 80 to 100 basis points. We expect net interest expense of approximately $50 million and adjusted other income of approximately $95 million for 2018.

For the year, we now expect an average adjusted tax rate of approximately 17%, which reflects the lower rate we reported during the first half of the year and a continued benefit from stock compensation in the second half of the year. For full year 2018, we anticipate a diluted average share count of approximately 548 million shares, which reflects the benefit of ongoing share repurchases, offset by option-related dilution. Based on these factors, we expect 2018 adjusted earnings, excluding special items, of $2.94 to $3 per diluted share.

Finally, for the year, we now expect to generate operating cash flow of approximately $2.25 billion, capital expenditures of approximately $700 million and free cash flow of approximately $1.55 billion. Specific to the third quarter of 2018, we expect sales growth of approximately 3% on a reported basis and between 3% and 4% on both constant currency and operational basis. And we expect adjusted earnings, excluding special items, of $0.72 to $0.74 per diluted share in the third quarter.

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

(Operator Instructions) And our first question comes from the line of Bob Hopkins of Bank of America.

I just wanted to start out with a question on revenue growth in the quarter. And I think I basically heard 3 areas where things were a little slower. On the LVP side, you talked about getting new customers on the med delivery side, about tight supply on the nutritional side, about delay in sort of post-hurricane situation there. Can you just kind of quantify those 3 things and their impact on the quarter? And then talk a little bit more specifically about when you would expect those things to be fully resolved? It sounded like they'd be fully resolved by Q3 or during Q3, but I just wanted to be sure.

I'm going to break this question into 3 areas, so it becomes easier for us to speak about. LVP is the large volume parenterals. We have categorically not lost 1 point of share or 1 customer. We just were slower to convert new beds. We are converting new beds, as a matter of fact, we converted a significant amount of beds but late in the quarter, did not feel the effect. We also had just taken a large OEM customer from the -- from a competitor, and we did this just now in early July, okay? So what -- we were not fast enough. Coming off the hurricane, we've got our volume repositioned. We've got a supply chain with a significant amount of flexibility, and we do have now the ability to direct our volumes, not only to the U.S. but at any place in the world that we need volume. So that, I feel very comfortable. Our team is just taking a little longer, and I feel that we were going to be able to get there in the second half. Just so you know, there was about 16% of growth in the first half of the year in LVPs. So you know. 16% growth in the first half of the year. We were slower in the second quarter, probably some bleed of the inventory and are slow -- and we were slow in picking up new customers. But categorically speaking, we have not lost 1 customer and 1 point of market share. When it comes to SVP or small volume parenteral, Bob, you might do -- mute your line. So there's a -- there is a significant amount of -- thank you, perfect. The SVPs, we are in tight supply level, recovering now quite fast. So these are Mini-Bags and Mini-Bag Pluses. Plus, these products are designed to reconstitute pharmaceutical APIs, okay? So we were now in channel. Meaning, Cardinal, Owens and Medline, people who distribute our products, now we have Mini-Bags into that channel. Mini-Bag Plus is not yet there. It's going to get there in September. Meaning is that when it gets into the channel, you get volume because some of these customers will not buy directly from us. But we have to take them off the channel because we were short supply. So we also are putting these products in more than 100% allocation. And we hope, by the end of the year, early next year, Mini-Bag Plus and Mini-Bags will be off allocation. So 1 point on allocation, LVPs are 100% out of allocation. No more allocation are up for LVPs. Let's now cover the nutrition side. The nutrition side is the part that we had the worst supply issues during the hurricane, those amino acids and other nutrients. Those are slow -- we're feeling those are slower to pick up. Those are practiced changes in hospitals. We are market leaders, and we feel that they will be probably the slowest ones to tick up on the ramp up curve. It's the smallest business that we have among them all. But we feel confident that the next 6 to 8 months, we'll be able to get back into our course. It's a slower process to recover than the SVPs and LVPs. I hope that has clarified some of the questions that you and some other colleagues may have in this area.

Yes, definitely. Helpful. Just curious, Jay, if there's any kind of quantification of these 3 issues. And to sort of summarize all that I just heard, it sounds like the majority of all these issues will be resolved this calendar year.

Bob, this is Joe. It is correct. In terms of quantification, we prefer not to get into the number of customers and things like this. I'll just give you just a bit of reference. We will probably convert approximately 4,000 beds in the second half of the year, okay? And we did about the same number in the first half. But most of that happened in the first quarter, not the second quarter. But just gave you numbers for reference, and I will stop here.

Our next question comes from Vijay Kumar of Evercore ISI.

So maybe I'll start one with the -- on the guidance here. Maybe just one clarification on some considered organic operational numbers in the Q. Operational was in line with how you guys were expecting it, it's just cyclo came in a little bit better. So a difference in how we do the math, so I wanted you to clarify that. And the guidance now for the year, given that 3Q operational growth guidance, that implies a big step up in a high single for Q4 for. Can you just walk us through on what changes in Q4?

Yes. Just to give a little context on our overall sales performance in the quarter, generally speaking, we were pleased. Our operational guidance, which excludes the impact of cyclophosphamide and it also excludes the acquisitions that we've undertaken, it was 4%. Our previous -- the guidance that we've provided was 3% to 4%. So sales came in strong. I think probably the most important aspect of Joe's commentary was the diversified nature of the portfolio that we have and the fact that we were able to offset some short-term challenges with strength elsewhere in the portfolio. Now moving to the back, on an overall annual basis, our guidance operationally is 4% to 5%. And again, there is a meaningful step up in the fourth quarter. The third quarter, we guided operationally to 3% to 4%. Now you'll recall, last year, we had a settlement with a compounding customer, which was about $20 million or 1 percentage point of growth. So that's one of the elements that takes this Q3 as a little bit more challenging for us on driving this 3% to 4% growth, which again, organically, were in line with our expectations. And then going to Q4, we do have the $70 million hurricane impact that's included in our numbers last year. So you will see fast -- the fastest growth of the year we expect to take place in the fourth quarter.

Got you. And then just one on the margins, Jay. So the guide for the year is, call it, low 17s, right? And if I go back, the long-term guidance range, so we're looking at north of 20% for 2020. So that would imply 300 basis points margin expansion between '19 and '20, right? So that's a step up in margin expansion when you're looking at '19, '20 versus '18. And maybe just talk about what would cause some optimism on the margin expansion side for '19 and '20?

Yes. I mean, look, we are extremely pleased with the margin progression of the business. And this is very much in line with the expectations that we've outlined. And this is tracking very well. You'll recall, Vijay, at the spin-off, we had a 9% or 10% margin. We outlined specific plans to take that to 17% over the course of 3 years. But we also recognize in the 2018 time frame, there would be a number of headwinds that we would experience with respect to things like cyclophosphamide, the sunsetting of transition service agreement. And so if you were to adjust for those items, the 80 to 100 basis points that we expect this year is a number that's much higher than that. I mean, so as we get some of these factors behind us, in 2019 and '20, we have a clear line of sight, plans and expectations to drive the margin consistent with what we shared, targeting to 20% to 21% by 2020. I'll remind you that when we put together the long-range plan, there is no sort of unidentified item in the plan, in the sense that every single cost program is delineated and specific, included in our numbers. So there is no unidentified go get that we have to get after. It is simply about executing the plans that we've laid out and managing against that.

Our next question comes from Robbie Marcus of JPMorgan.

I wanted to talk, maybe if you can, about the pharmaceutical business as that was one of the standouts there. Particularly, cyclophosphamide revenue's gumming up for the year and a difficult comp in the U.S. business, as there was the Transderm Scop benefit last year. So maybe talk about some of the underlying trends there and how sustainable that is.

Robbie, the strategy of pharmaceutical is, one, to use the strength of the company in its formulation and drug delivery technologies. And it always comes back to our ability to make products consistently like cyclo, like BREVIBLOC and other drugs that are -- the generics and the competition is coming, but people have a hard time consistently making this product. So hence, the strategy that we placed in front of you guys in the -- in our Investor Day in May. It's important that we continue to expand our pharmaceutical business in tough to make molecules, cytotoxic, oncolytics. Because despite the fact that other people have the desire to get in, they don't make it consistently. So right now, there is another competitor in cyclophosphamide in the market. In BREVIBLOC, there is one coming in the month of September. And we've planned another one coming in cyclo at the end of the year. As you can see, we continue to sell cyclophosphamide. We haven't seen the one that was approved coming to the market. I think it's just a matter of time. But we have the advantage of having a consistent production of this product. And I think our team here in the U.S. has done a wonderful job, really creating the commercial opportunities to make this business more reliant on us than other people and more resilient. As you can see this business, we have spoken about this cyclophosphamide issue 2 years, 3 years ago. And we're still making the product and making a lot of money when we sell it, and we will continue to do it as long as the competitors are not getting -- or hesitant in getting the market. But I want the folks to understand that Baxter has unique capabilities, and that's the reason why we're doubling down in pharmaceuticals. We -- now we, at this moment in time, we are planning for a second cyclo to come in -- it's a third because Sandoz is already on the market. Another 2 coming in, 1 just came in, another one at the end of the year and BREVIBLOC coming in September. Those numbers are baked into our forecast and estimates.

Okay. Great. And then maybe just a quick follow up for you or maybe for Jay. At the Analyst Day, you laid out your capital allocation plans. But even just since a few months ago, you continue to generate strong free cash flow, that guidance is moving higher, your stock price continues to move higher and so do other asset prices. So maybe in that context, give us your latest thoughts on how you plan to use your capital and maybe timing or expectations around that.

Thank you, Robbie. Listen, our intention is as is -- it's very easy to buy shares back and we have the cash, and we've been doing a good job at that. But our intention on working very hard is actually to deploy capital in acquisitions that will positively impact the business. And we have 3 thresholds that we have to cross when it comes to acquisitions. One is sustainable revenue growth. It has to be accretive to Baxter's growth at minimum. Stronger market position and leadership and accretive to Baxter's current margins and clear path to drive margin improvements. So -- and this is not about size, it can be a niche or it can be a large market company. We are looking at significant amount of opportunities as we speak to expand Baxter's adjacencies and even looking at other opportunities that are, at the moment, available. So we want to make sure that we deploy the capital where the returns to the market can count on Baxter to return. Our execution is starting to get really good. Even with the setback that we had on the 483 at Claris, we're executing on that business extremely well. Not only that, we not only covered a vast majority of the things that the FDA wrote us up for but also have improved significantly the operation and capacity at the plant, and you can see we're up 20% on sales that came into Baxter's acquisition. The same thing with Mallinckrodt. So we're starting to get the execution in Baxter now, with an SG&A between 21% and 22% and probably next year, going sub-21%. We will be able to integrate much better acquisitions in our systems and everything else. So we need to find a good opportunity for Baxter. We're looking forward to do it, and we have the capacity and the capability to do so.

Our next question comes from Larry Keusch of Raymond James.

So maybe, Joe, just to start, if my math is correct here, it looks like the U.S. growth accelerated in the 2Q from the 1Q. So maybe just some thoughts on the U.S., how the environment feels?

The environment is not bad. I think you still have low single-digit growth but consistent growth. We see no less admissions. You always have the seasonality. And now in the mid of the summer, people will not voluntarily sometimes go through for procedures. And this is not a heavy time of the year, primarily for most of the Baxter products, which are related to the times to flu and heavy hospitalization in general. But we see the U.S. market as a healthy, healthy market. We'll continue to see consolidation on the provider side. And I think a lot of movement in the payer provider area. So -- but in terms of population being treated, it's a healthy market, and it's a good market to be part of.

Okay. Perfect. And then just the other question is, clearly, new products are important for the second half of the year. I think that's embedded in your guidance that you'll start to see some revenues here. Can you just, again, give us some thoughts on the status of those new products? What are the drivers? And I would assume it would be mostly weighted towards the fourth quarter.

Yes. Let me start with the KAGUYA launch in Japan. We are excited about that. We are -- we're slightly ahead of our plan to the point that we had, actually, to accelerate some purchase of production equipment at our partner to be able to supply the market. So it is a super exciting market, Japan, because it's a high-paying market with very, very low penetration of peritoneal dialysis. So we're starting to see some good movement there. We just launched our Spectrum V9 in the U.S. We converted 1 account and a significant prospect of accounts coming up. So this is -- our U.S. team or Scott Luce and his team in the U.S. need to execute now in the second half, bringing new customers and some conversions to the table on the V9. Evo IQ and -- is our new pump outside the U.S. The first time in, I think, 15 or 17 years since we launched a new product outside the U.S. when it comes to pumps. We were growing and not only secure our current base of products in the U.K., Australia, New Zealand and Ireland, but we also plan to gain market share there. So we have now an installed base of COLLEAGUE pumps, the name of the best, that is still being used outside the U.S. And this product was launched in partnership with a company outside the U.S. We were able to bring this product to the market with the Baxter trademark points, meaning some of the features that we have in our pump is built into this product in [18 months]. So we're excited about that as well. We have PRISMAFLEX in Japan. We're now a comprehensive player in Japan. We also have PrisMAX in Europe in Q4 and more stuff coming in 2019. So we're excited about -- this is a Baxter that we haven't seen in many years, with so many launches. Now it's on us to execute.

Our next question comes from Danielle Antalffy of Leerink Partners.

Just wanted to follow up on Robbie's question regarding potential capital deployment and M&A. There's a lot of possible assets out there and potential adjacencies where you could fill some product gaps or potentially go even bigger. And I was just hoping to get a better sense from you guys on what does make the most sense strategically as it relates to adjacencies? So some examples from the Analyst Day is you're getting back into nerve repair. Is it kind of building out specific areas like that? I mean, can you give any more color on where -- what were the priorities are as it relates to parts of the business from a BD perspective?

We are -- we have presented to you the adjacencies that makes sense to us, right? So we are strong in hospital, we're strong in home. So we have that channels, we have the key account management. But also, in terms of bringing synergies to the market, we have the capability now with one of the industry's lowest SG&A, okay? So I feel that we bring that part, and we also bring the commercial ability to grow businesses. I -- we like parts of surgery, but more so, we like hospital supplies. We also like some niche products into the doctor's office in areas that may bring some of our expertise in all the setting. So we now have some very interesting things that we're looking at, some a little different than others, but it is not a lack of desire and a lack of opportunity now, and then it boils down to value. And hopefully, we can cross that bridge because value is one of the things that we continue to be focused on despite the fact that we need to meet the 3 criteria that I just outlined before at Robbie's question.

Okay. That's fair. And just one follow-up question on the long-range plan as it relates to sales growth guidance and the operating margin expansion. I mean, this quarter, you saw another nice step up in operational sales growth. It seems like you're heading in the right direction. I just wanted to get a feel from you on your confidence in achieving the long-range plan based on these results as this is the first quarter you've reported since updating that in May.

Long-range plan, as it says, is long-range. So we still -- we remain confident in our ability to meet those numbers, first of all. For several reasons, I outlined a series of new products we're launching and our effectiveness in doing so. We also have market share leadership in many areas of care that we participate. So one quarter doesn't give you the right picture for the long-range because if you think about the mix of products that Baxter is going to have in 2023, it is going to be different than what we have today. So it's going to be focused on 100-plus molecules in pharmaceuticals. It's going to have significant presence in the ICU. It's going to be in the specialty monitoring with our pumps. So things that we don't have today. So our confidence in achieving the plan on the base business is solid. We have no questions about that. The part that we need to execute and we need to launch and I'm feeling confident because the amount of products coming onto the market is the technology and the innovation. And the third piece of it is really capital deployment, so we can get that thing done correctly and continue to augment because I'm starting to feel more confident in our ability to take really tough stuff, like Claris, and turn things around and -- as we use that asset as well as tuck-in acquisitions. But I feel comfortable with a solid confidence on our LRP.

Our next question comes from David Lewis of Morgan Stanley.

Maybe just one quick one for Joe and then a follow-up financial question for Jay. Joe, just coming back to medication delivery and the comments around customer acquisition speed. Is the ability to acquire a new customer or supply those new customers, is that being impacted in any way by better supply by competitors? Or any change in pricing dynamics in the saline market?

Well, we'll start, David, from the back -- from the end of your question. No, no price dynamics. These are long-term contracts. As a matter of fact, of the 3 GPOs that are in the market today, the largest ones, we have 2 already re-signed with us, and we're going to continue to re-sign customers under them, extending the longevity of this contract. So the price -- and the price that is built in is a modest increase, just to maintain with the inflation or maintain up to a certain index. So it's not the pricing that would change the dynamics and -- at least in the next 4 to 5 years because accounts actually are 5 and some have extensions built in, they go up to 7. The availability of other competitors, I would assume that one of the competitors who had a -- which had a significant issue with capacity, will come back to the market. I don't doubt that. But the contracts are locked. So for us, right now, we're picking up beds that are available. But also importantly, is to supply what most of you don't -- probably did not recognize, there's a large OEM opportunity that is out there, and we just signed one not too long ago. That brings a significant volume into Baxter from somebody else. And when that is locked, it's locked for many years. So in everything, David, it has to do with consistency of manufacturing and distribution. And I feel absolutely comfortable with our plant in North Cove, doing a wonderful job, really a wonderful job. A plant manager came in, Jon Rushford, about a year ago and has really transformed the culture of that place. Secondly, getting the network in Latin America now to be flexible that I can ship into the U.S. if I need or I can revert back to Latin America or go to Europe if I need and vice versa. That creates a unique advantage to Baxter. Not putting any of our competitors down, but we bring a different dimension of supply stability and partnership to this market.

Okay, Jay. Very clear. And then -- sorry, okay, Joe. And Jay, just a couple of dynamics here on the numbers...

I'm surprised that you're confused on our accents. Jay has a New York accent, and I have a Brazilian accent.

Well, I just -- I hold you both at such high esteem. You're the same in my book. So a couple of things, Jay, just on numbers here. So number one, just -- you're seeing a benefit obviously of some customer or competitive disruption in BREVIBLOC in the OEM business. We have that as sort of 2 points in terms of growth impact this year. Kind of is that close, Jay? And when could we think about those dynamics beginning to reverse? And just a second broader question, Jay, on guidance. In the back half of the year, the 4% to 5% number, at the low end, you have to have some modest acceleration to get there, obviously, more at the higher end. Are you as confident at the higher end of the range here of 4% to 5% now as you were to begin the year? Those two.

Yes, certainly. On the guidance question, we are very confident in the guidance in the second half of the year. I think there's a few factors in play that sort of distort the quarters a little bit. One of which is the compounding that I referenced, one of which is the hurricane that I referenced. If you were to adjust for those items, really, the piece that starts to contribute meaningfully is -- are some of these new product launches, along with some of the customer gains that we've started to see in the medication delivery business. So I think, overall, we feel quite good about it. And it's one of these areas where our line of sight to delivering the plan is as consistent as it's been. On the BREVIBLOC item, certainly, that was a contributor in the quarter. We saw maybe $15-plus-million in terms of incremental BREVIBLOC sales above plan. We do expect this to subside as we have a competitor entering in September. So -- and there are some use cases for this particular product, which we believe will abate over time. But that's been a factor -- that was factored in the quarter.

Jay, just the OEM quantification on the OEM benefit, on the revenue?

We don't really give specifics -- yes. In terms of OEMs -- I'm sorry. So there's 2 different pieces, right? Joe referenced this concept of OEM, which is sales of IV bags to other institutions that are not necessarily hospitals, right? We're going to stop short of quantifying that particular item because from our standpoint, we don't want to get into specific customer dynamics. As it relates to other -- our other business, which did experience solid growth in the quarter, there were a number of factors going on with respect to our, what we call, our B2B business, which is really contract manufacturing for others. We were able to generate a number of new customers, and then also we saw incremental volumes being sold to current customers. So again, a good performance for us in the quarter from the "other" business. It's something that we'll see some continued performance in that regard going forward.

Our next question comes from Isaac Ro of Goldman Sachs.

Joe, I wanted to come back to your earlier comments on the IV solutions dynamic there. And my reason for asking is the marketplace, clearly, you guys have been able to bring back some capacity. You mentioned the long-term contracting. But I'm curious if given the supply shocks that we saw last year, the -- if the nature of some of these contracting terms have changed at all to maybe incentivize vendors to ensure capacity or supply in future crises. And to the extent, that might be an advantage you can take to the market, is that something that's helped you win business? And to the extent that you might have new competitors coming in down the road to help you maintain that share in pricing that you talked about?

Isaac, it's very relevant. As a matter of fact, I don't -- I think all of our future contracts, there will be some kind of clause that has a guarantee of certain volume or more penalties if you don't provide the volume. And we like that. And now we're in a comfortable position because I think spot market sellers are very opportunistic, but they may not be able to provide for the longer-term. I think with us, on the LVPs and SVPs, we are getting to a lot of contracts that have that language. I feel very comfortable in the LVPs. The SVPs, we're going to get more comfortable towards the end of the year. And towards the mid- to late '19, we're going to have more Mini-Bag Plus capacity in different locations as well, in 2 different locations, 1 coming up this December, coming from Europe, and then 1 in the Americas. New capacity for Mini-Bag Plus that can be altered between Mini-Bag Plus and Mini-Bags. So for us, having capacity on long-term contracts assure us in a tough, tough situation that happens more often than people think, which is the flu season is already hitting places like Brazil right now, we need to have solutions. And last year, it was a good lesson, I think, for the industry and for us in terms of how to be more prepared and have contingencies in place. We've been working very hard as well with the FDA to get redundancy for emergencies and things like that. But that plays a role in the contract because having that clause in the contract makes our customers more at ease with -- in a situation of a crisis and allows us also to plan for the longer-term.

That's helpful. And maybe just a follow up on Claris. If I look at your comments on the 8-K regarding time line, it looks like we have something like 6 to 12 months before we'll get the next FDA inspection. Could you maybe just walk us through the top handful of priorities that you guys need to execute upon during that window to make sure that the next inspection goes well?

Well, we will not do anything much different than we've been doing in the last 12 months. We are relentless working in correcting all the observations by the FDA in things that we, as Baxter, our Baxter quality system calls for. That was different before, by the way. So we are converting their documentation systems. We have -- we've built a significant amount of the plant. We have new air handling systems. We have a bunch of different things that we've been doing in preparing the plant really to be a great plant for Baxter. It is already doing well in terms of exceeding our expectations in sales in the short term. But we have a backup plan. If we cannot get to the new molecules fast enough, we're looking for CMOs that would be able to come in and get the APIs in, so we can finish the product someplace else. So we do have backup plans for that. But I have to say that our quality team, led by Jackie Kunzler; our operations team by Scott Pleau, they are squarely focused in making sure that, that plant work with the best it can to have a successful series of inspections by the FDA. Because it's not one inspection. You have to have a series of successful inspections. So we can get into the launching phase of the acquisition, launching product phase of the acquisition.

Our final question comes from the line of Joanne Wuensch of BMO Capital Markets.

I'll keep it brief. First of all, Jay, could you quantify the impact on the P&L or the operating margins in the quarter from the recent acquisitions of Claris and also the Mallinckrodt products? And then second one is a larger picture for you, Joe, is the emerging markets. Anything new in terms of the approach there? Or how -- can you give us an update on that area?

Okay. Let me take the emerging markets first, and Jay will close the call, answering your question. We, right now, are looking at the emerging markets of close to 5%, our outlook for the year, with significant and good growth in China, close to 8%; Eastern Europe, over 6%; and Emerging Asia, close to 5%. I think -- don't forget, we call it emerging markets, but those are 23% of our sales okay? So they are not as emerging as one may think. I'm particularly happy with China. I think China is a place that we haven't spoken much about. We took a lot -- talked a lot about Japan, but China is a country that within our long-range plan, we will exceed $1 billion, and we feel excited about that business. So I think the Two-Invoice System in China and how some changes in regulatory in China are not concerning by our watch-outs, but I think those are the things that the industry and us will overcome. It's still a significant opportunity. It's still a great market. And I think Baxter is well positioned because it has a strong team in China. So great leadership there. As a matter of fact, we're going to be there next week, doing a Growth Summit to make sure we can get even more growth in new white space opportunities within our Chinese group. So now, Jay?

Yes. Great. Thanks, Joe. Overall, we're pleased with the performance, as Joe mentioned earlier, of both of the acquisition, the Claris acquisition and the Mallinckrodt. In the quarter, those 2 acquisitions contributed approximately $0.02 and maybe improved the operating margin of the company about 10 basis points, although there may be some rounding in that. It's just a small amount. But from an overall standpoint, sales moving ahead in line with our expectations. And then EPS impact, very much in line with how we thought about these transactions earlier in the year.

And that concludes our question-and-answer session for today. Ladies and gentlemen, this does conclude today's conference call at Baxter International. Thank you for participating. Everybody, have a great day.