Baxter International Inc BAX
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Good morning, ladies and gentlemen, and welcome to Baxter International's Second Quarter Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's call.

As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Ms. Mary Kay Ladone, Corporate Vice President, Investor Relations at Baxter International. Ms. Ladone, you may begin.

Mary Kay Ladone - Corporate VP, IR: Thanks Sean, and good morning, everyone, and welcome to our Q2 2013 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; Bob Hombach, Chief Financial Officer; and Ludwig Hantson, President, BioScience.

Before we get started, let me remind you that this presentation, including comments regarding our financial outlook, new product developments, 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 detail concerning factors that could cause actual results to differ materially.

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

Now, I'd like to turn the call over to Bob Parkinson.

Robert L. Parkinson, Jr. - Chairman and CEO: Thanks, Mary Kay. Good morning, everyone. Thank you for calling in. As you all saw in the press release that was issued earlier this morning, Baxter reported solid second quarter financial results with earnings that topped our guidance and we’ve also confirmed our outlook for the full year 2013.

In the second quarter, adjusted earnings per diluted share increased 4% to $1.16, and worldwide sales excluding currency also increased 4%.

Our financial outlook for the full year now includes sales growth of 8% to 9% on a constant currency basis and adjusted earnings of $4.62 to $4.70 per diluted share. As a reminder, our guidance does reflect the impact of the Gambro acquisition, which is expected to close in the third quarter.

While we continue to meet our financial objectives, Baxter is also advancing care across key franchises in both developed and emerging markets while focusing on innovation and R&D programs that will fuel future growth and enhance value for shareholders. This is evidenced by a number of recent commercial, operational and R&D achievements, including commencement of shipments to Hemobras in Brazil to enhance access to Baxter’s recombinant Factor VIII therapy for the treatment of hemophilia. Through this innovative partnership, Baxter will be the exclusive provider of Baxter’s recombinant or Brazil’s recombinant Factor VIII treatment over the next 10 years, while we work together on a technology transfer to support development of local manufacturing capabilities. As you may recall, we expect peak annual sales related to this partnership to exceed $200 million.

We submitted the regulatory supplement related to the planned modification at Baxter's older Los Angeles plasma fractionation facility and with the acceptance of the submission by the FDA, we expect to begin releasing product in the coming days.

We received marketing authorization from the European Commission for the use of HyQvia as a replacement therapy for adult patients with primary and secondary immunodeficiencies. HyQvia offers patients the ability to administer their treatment in a single subcutaneous site every three to four weeks. This represents an important advance for patients who are managing a chronic disease as HyQvia combines key benefits of intravenous and subcutaneous administration into one product.

We expect to introduce HyQvia in select countries beginning in the third quarter and we'll expand the launch to additional countries in 2014. In the U.S., I'm pleased to report that our ongoing dialog with the FDA regarding HyQvia has been both productive and encouraging. As a result, we are on track to submit additional data to the FDA before the end of this year to address questions raised in the complete response letter and we're on a regulatory path to file an amendment to our BLA. As always, we'll update you as necessary on our continued progress.

Also in the quarter, we received FDA approval of RIXUBIS for routine prophylactic treatment, control of bleeding episodes, and perioperative management in adults with hemophilia B.

RIXUBIS is the first new recombinant Factor IX approved for hemophilia B in more than 15 years and is the only recombinant Factor IX indicated for both prophylaxis and control of bleeding episodes. The approval is based on a Phase I/III study demonstrating that twice-weekly prophylactic treatment with RIXUBIS six months achieved a median annualized bleed rate of 2.0 bleeds, with 43% of patients experiencing no bleeds.

We also continue to advance the development of Baxter's home hemodialysis device VIVIA. As you know, in 2012 we completed the first clinical trial in the U.S., evaluating the performance and safety of the device and recently concluded the in-center nocturnal hemodialysis trial in Canada. Data from both trials will be used to support CE Marking in Europe later this year.

We also completed the enrollment in the pivotal Phase III study of rigosertib for patients with high-risk myelodysplastic syndrome, or MDS, as part of our ongoing collaboration with Onconova Therapeutics. The primary endpoint for this study is overall survival, and top line results are expected during the first quarter of 2014. As you may recall, Baxter has obtained exclusive licensing rights for all potential indications of rigosertib in Europe.

Finally, earlier this week, additional data was presented from the Phase III Gammaglobulin Alzheimer's Partnership study, including certain post-hoc and exploratory analyses of biomarker and imaging data during the Alzheimer's Association International Conference in Boston. As previously disclosed, the Phase III clinical trial did not meet its co-primary endpoints of reducing cognitive decline and preserving functional abilities in patients with mild to moderate Alzheimer's disease. While this study was not powered to show statistical significance among the subgroups, findings in moderate disease patients and ApoE4 carriers are intriguing and may contribute to a better understanding of the disease. We'll continue to analyze the data we've collected, and we'll evaluate our approach and next steps for the Alzheimer's program by collaborating with scientific experts in the field of Alzheimer's research.

In closing, the global environment in which we operate continues to be challenging. Yet, we remain confident in our business model, our ability to innovate and the prospects for growth and the future of our company. We'll continue to focus on achieving solid financial performance, enhancing our commercial and operational effectiveness and advancing Baxter's contribution to expanding access to quality care through innovation and collaboration. Baxter's portfolio remains strong as we benefit from our focus on life-saving therapies and the four growth factors that we previously discussed that support our strategic objectives and enable us to fulfill our mission.

As always, I'd be happy to address any questions on these or other topics during the Q&A this morning, but first, with that, I'd like to ask Bob to review the financial results in more detail for the second quarter and also guidance for the remainder of 2013. Bob?

Robert J. Hombach - Corporate VP and CFO: Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the second quarter, excluding special items, increased 4% to $1.16 per diluted share, which exceeded our guidance range of $1.12 to $1.14 per diluted share. As we mentioned in the press release, GAAP results include after tax special items of $49 million or $0.09 per diluted share, primarily for costs associated with the acquisition of Gambro AB.

Now let me briefly walk you through the P&L by line item for the quarter before turning to our financial outlook for the full year 2013. Starting with sales, worldwide sales of approximately $3.7 billion grew 3% on a reported basis. On a constant currency basis, sales increased 4%, in line with our guidance. Growth improved sequentially by 200 basis points and was driven by acceleration in renal and across several key franchises within BioScience, as well as emerging markets, particularly the BRIC countries, where growth exceeded 20% in the quarter.

In terms of individual business performance, global BioScience sales exceeded $1.6 billion and advanced 5% in the second quarter. On a constant currency basis, sales accelerated 6%. Within the product categories, hemophilia sales of $849 million increased 2%. Excluding foreign currency, sales increased 4%, driven by solid global demand for ADVATE and FEIBA, which was augmented by a benefit from certain tenders and an initial recombinant Factor VIII shipment to Brazil as part of our ongoing partnership with Hemobras.

In BioTherapeutics, sales of $513 million increased 6% on both the reported and constant currency basis. Growth improved sequentially driven by accelerated sales of albumin, particularly in China, while both of our immunoglobulin therapies remained in low single digits.

Sales in BioSurgery of $178 million increased 2% on both the reported and constant currency basis. This performance was driven by Synovis and solid growth in international markets, including sales for surgical sealants like TISSEEL and FLOSEAL.

Finally, vaccine revenues totaled $98 million in the quarter and increased 24%. Excluding foreign currency, sales increased 30%, driven primarily by milestone payments related to our ongoing collaborations on the development of influenza vaccines and strong performance of our core vaccines, NeisVac and FSME.

In Medical Products, global sales in the second quarter exceeded $2 billion and increased 1%. Excluding foreign currency, the sales increased 2%. Within the product categories, renal sales totaled $654 million and increased 3%. On a constant currency basis, sales advanced 5% driven by strong PD patient gains in the U.S. and emerging markets.

Sales in the Fluid Systems category of $755 million increased 2% on both the reported and constant currency basis. Performance continued to be driven by solid demand for IV solutions and price improvements for the injectable oncology drug, cyclophosphamide, which collectively more than offset lower sales of infusion pumps.

Specialty Pharmaceuticals, which includes our inhaled anesthetics and nutritional therapies, posted sales of $366 million, reflecting an increase of 1% on a reported and constant currency basis. Strong anesthesia growth offset lower sales of nutritional therapies resulting from supplier shortages of distributed products.

Finally, sales in BioPharma Solutions, which is our pharma partnering business, totaled $254 million and declined 4% on a reported basis, or 3% on a constant currency basis. This was the result of constraints we discussed last quarter, which affected the timing of shipments to customers. We expect this business to return to growth in the second half of the year as we ramp production to match demand.

Turning to the rest of the P&L; gross margin in the quarter of 52.3% was better than our expectation and reflects an improvement sequentially of 130 basis points. Gross margin also expanded by 50 basis points versus the prior year margin of 51.8%. The year-over-year improvement was the result of mix improvements and a benefit from foreign currency hedging, which offset a number of headwinds, including incremental pension expense, the medical device tax, and government austerity measures.

SG&A totaled $815 million and increased 3%, driven by the impact of incremental pension expense and investments we're making in promotional and marketing activities, new product launches and within international markets to enhance our global presence. In total, these items more than offset the benefit from foreign currency and tight management of discretionary spending and operational efficiencies derived from our process reengineering efforts.

R&D spending in the quarter of $255 million increased sequentially by 4%, but declined 8% versus the prior year period as expected. You may recall that last year we incurred approximately $20 million of accelerated and discreet items, including various milestone payments and expedited supplies of product for using a number of ongoing clinical trials, created a difficult comparison year-over-year.

Given the number of items Bob discussed earlier, it is clear that we continue to make investments to advance a number of programs in our pipeline, including those and our leading hemophilia franchise, our Home HD therapy, as well as earlier-stage programs and key collaborations.

The operating margin in the quarter of 23.1% improved 120 basis points versus the prior year. Interest expense was $17 million compared to $22 million last year, as incremental interest linked to recent debt issuances was more than offset by an unplanned one-time gain of $11 million associated with hedges related to the recent bond issuance to finance the Gambro transaction. This gain was offset by an unplanned cost of $13 million, which book to other income and expense associated with a bridge loan facility put in place to finance Gambro. Collectively these two items did not have a material impact on our quarterly results.

The tax rate was 22% for the quarter in line with our expectations and as previously mentioned, adjusted earnings per diluted share of $1.16 increased 4%.

Turning to cash flow, on a year-to-date basis cash flow from operations exceeded $1.1 billion and capital expenditures totaled $639 million, in line with our expectations. Compared to prior year, cash flow from operations is down by $265 million, largely due to the timing of U.S. tax payments, which was an incremental $150 million in the second quarter and the significant collection of aged receivables in Spain last year, which totaled approximately $200 million. Excluding these two items cash flow from operations grew approximately 6%.

DSO ended the quarter at 53.5 days similar to last year and was higher than the prior year period by 1.4 days due to the year-over-year comparison in Spain and higher DSOs in other international markets.

Inventory turns of 2.2 turns are similar to last quarter and modestly lower than the prior year period. As you know, we continue to increase inventory level to support growing demand, particularly in plasma proteins as we remain on track to benefit from enhanced capacity in the second half of the year.

Lastly, on a year-to-date basis, we repurchased approximately 10 million shares for $717 million or on a net basis 4 million shares for $396 million, in line with our full year objective.

Finally, let me conclude my comments this morning by providing our financial outlook for the full year 2013. As you saw in the press release, we confirmed guidance and expect earnings of $4.62 to $4.70 per diluted share. This includes the impact of the Gambro acquisition which is projected to close during the third quarter.

By line item of the P&L, and starting with sales, we now expect sales growth excluding the impact of foreign currency of approximately 8% to 9% and this includes a contribution from Gambro revenues of $575 million to $650 million. At current foreign exchange rates, we expect reported sales growth of 7% to 8%. Excluding Gambro, we continue to expect sales growth on a constant currency basis of approximately 4%.

For the full year, we expect gross margin for the Company to be approximately 51.0%. This includes margin expansion in the base Baxter business which will be offset by Gambro.

In terms of expenses, we now expect SG&A to increase in high-single-digits and R&D to grow in mid-single-digits. Both line items reflect leverage in the Baxter expense base along with the addition of Gambro. We now expect interest expense to total approximately $140 million, which includes the gain in the second quarter we discussed earlier and other income to total approximately $10 million for the full year.

We continue to expect a tax rate of approximately 22% and we expect the full year average share count of approximately 550 million shares, which assumes approximately 400 million in net share repurchases.

From a cash flow perspective, our plan remains to generate cash flow from operations of approximately $3.3 billion, which excludes any cash cost associated with the Gambro transaction.

We continue to expect capital expenditures totaling approximately $1.7 billion, which includes Gambro and the investments we are making to enhance on plasma manufacturing footprint in Covington, Georgia.

Let me move to sales and expand on our assumptions for the two businesses and the major product categories.

Beginning with medical products on a constant currency basis, including the contribution of Gambro, we expect sales growth of 10% to 12%. Excluding Gambro, we expect sales for medical products to grow 3% to 4%. Specifically, we expect Baxter’s renal sales to grow in low single digits, which will be augmented by the contribution from Gambro revenues totaling $575 million to $650 million.

We continue to expect fluid system sales, which includes IV solutions, infusion pumps and access sets, to grow in mid-single digits. We expect specialty pharmaceutical sales, which includes our nutritional therapies and inhaled anesthetics to grow in low single digits. We expect our BioPharma Solutions business to have comparable sales to 2012 of approximately $1 billion.

For BioScience, we continue to project sales growth excluding foreign currency in the 4% to 5% range. Our outlook includes mid-single-digit growth in our hemophilia franchise, which includes recombinant and plasma-derived Factor VIII and Factor IX therapies and FEIBA, and inhibitor treatment.

Growth will continue to be fueled by underlying demand for ADVATE, where we continue to realize benefits associated with the new expanded label including competitive gains in conversion to prophylactic treatment.

We expect mid-single-digit sales growth in BioTherapeutics, which includes IG therapies, albumin and alpha-1 treatments. This is a result of our enhanced capacity, which will allow us to exit the year with volume growth in the U.S. for our immunoglobulin therapies in the 6% to 8% range and includes annual sales of subcu therapies of approximately $100 million.

In BioSurgery, we expect mid-to-high single-digit growth. Finally, we now expect our vaccine franchise to grow more than 10%. As mentioned in our press release, for the third quarter, we expect earnings per diluted share of $1.18 to $1.21. Including revenues associated with the Gambro acquisition, we expect sales growth excluding the impact of foreign currency of 10% to 13%, or approximately 9% to 12% including the impact of foreign currency. Excluding Gambro, we expect the base Baxter sales at constant currency rates to grow approximately 6%.

Thanks, and now let me open up the call for Q&A.

Transcript Call Date 07/18/2013

Operator: Larry Keusch, Raymond James.

Lawrence Keusch - Raymond James: Just a couple of questions. First off, I know that you guys had some issues in the renal business in China that you mentioned last quarter, so if you could just sort of give us an update there, that would be great.

Robert J. Hombach - Corporate VP and CFO: Yeah, I think what we mentioned last quarter, Larry, was that there was a price reduction mandated in China and that we had factored that into our outlook and update, so really no new change there.

Lawrence Keusch - Raymond James: Just two other quick ones for you guys. First off, on the – Bob, on the revised guidance that you're providing for 2013, does that contemplate a divestiture to be made upon the acquisition of Gambro?

Robert J. Hombach - Corporate VP and CFO: Yes. As was, I think, disclosed recently here, the one remedy that we need to execute here in order to close the transaction is to divest our existing CRRT business, which we acquired from Edwards back, I believe, in 2008. It's a relatively small business, about $50 million in annual revenues with, frankly, below corporate average margins, and so that is something that we will look to divest. But the net-net of that will not have an impact on our outlook and it's factored into our guidance here.

Lawrence Keusch - Raymond James: Lastly, Bob, just now that it appears that we are probably in environment where interest rates are going to certainly be stable, if not rising. Can you remind us again what the headwind was associated with the discount rate and the pension expense this year, and perhaps a sensitivity as interest rates move to what that could mean next year?

Robert J. Hombach - Corporate VP and CFO: Sure. We talked about approximately $0.09 per share negative headwind in 2013, given how much the discount rate moved late last year. Obviously, rates have gone up quite a bit, but the 10-year was at 2.7% not too long ago, and this morning it's heading towards 2.45%. So I think if you tried to peg it at the middle of the year for the last two years, you would have gotten burned pretty badly by the time we get to December when the discount rate is set on December 31. But just to give you a sense, I think we've talked about previously that every 25 basis point move is approximately $20 million in pension expense.

Operator: Mike Weinstein, JPMorgan.

Michael Weinstein - JPMorgan: I'm trying to do the math here on Gambro. So, if we think about the Gambro sales run rate today, is it in about the – call the $1.65 billion if I annualized it, is that about right?

Robert J. Hombach - Corporate VP and CFO: Yeah, I think that's – it's roughly $135 million, $140 million a month.

Mary Kay Ladone - Corporate VP, IR: Mike, remember we had about $830 million in our original guidance which assumes mid-year close, so if you double that and get right in the ballpark of your number.

Michael Weinstein - JPMorgan: Let me just go back on a couple of the updates that you gave. One, it sounds like on the HyQvia conversation, it's basically – it is basically saying the same thing that you were kind of originally thinking, which is that we'll do this additional preclinical work, we'll do the full follow-up rather than just interim look and once we have that full dataset, we'll submit that in the amended filing to the FDA, which will be late this year and hopefully if all goes well, look at an approval later in 2014. Is that accurate, basically what you originally thought?

Robert L. Parkinson, Jr. - Chairman and CEO: I think that's a good summary, Mike.

Michael Weinstein - JPMorgan: Could you just spend a minute on Home Hemo and VIVIA, so assuming you get the CE Mark later this year, what it means to have that approval as we go to 2014 and how much time you are going to spend in dollars on trying to develop the market in Europe?

Robert L. Parkinson, Jr. - Chairman and CEO: Yeah, Mike, Bob Parkinson here. We are not going to quantify what the impact is in 2014, but I think it's fair to say that we are going to launch this product in a very disciplined way. We are very bullish on the long-term prospects associated with Home Hemo, particularly home nocturnal hemo. We are though launching a product and really a system that is reasonably complex and so establishing the reliability of the product, its performance and so on is something that’s critical. As you mentioned, concurrently, we are going to make fairly significant commitments in terms of market development given – investment, given the long-term potential that exists here. So I think, as it relates to near-term impact for a Home Hemo, I think realistically the impact will be relatively modest in 2014. But that doesn’t detract from our long-term view on how significant this new therapy could be.

Operator: David Miller, Morgan Stanley.

David Miller - Morgan Stanley: Bob, I thought maybe we'll just go back to the LRP for a second. If we go back several months ago, I think you laid out 7% to 9% earnings growth, but obviously the lower end of that range for the first couple of years. Just a couple of questions on that. Is it fair to assume the lower end of that range incorporates potential early ADVATE competition and potential generic pressure? Then I wondered if you could just give us an update in terms of Gambro – financing terms on Gambro either on timing, tax that would impact accretion in 2014 versus what you’ve given us previously?

Robert L. Parkinson, Jr. - Chairman and CEO: David, Bob Parkinson here. Let me take the first part of that. Maybe Bob Hombach can take – actually add to my comments on the first part and if he'll handle the second part. Our outlook going forward not just for '14, but beyond is very much aligned with what we communicated at our Investor Conference last fall. As Bob took the Group through, however, we do feel the earlier years of the LRP will be at the lower end of the range due to a number of factors and we'll accelerate throughout the five-year LRP period. Now, specifically to the couple of points you made, a couple of the headwinds, I guess, going forward for into 2014, one would be new competitive recombinant Factor VIII launches wasn't in fact contemplated in the outlook that we provided. Now, obviously, your ability to quantify that and contemplate it exactly is plus or minus one way or the other is subject to the assumptions. But we did reflect impact of new competitive Factory VIII launches. Likewise, we reflected in the earlier years, certainly the LRP impact of prospective generic launches, predominately associated with two areas, one being SUPRANE, our leading anesthetic agent, and the second being cyclophosphamide, an oncology agent. Again, forecasting or speculating what the timing of competitive launches might be, what the impact might be, is difficult, but we did our best to quantify something in the early stages. So that was to some degree reflected in the lower numbers in the earlier years of the LRP. Since we met with the Group last fall, I think it's reasonable to say global austerity measures continue to – not only continue to exist, but probably intensify. Again, we try to reflect that in our long-range plan. Whether we did that adequately or not is to be determined. Now, on the other hand, of course in terms of potential tailwinds, as you know, we hadn't finalized the Gambro deal when we are together last fall. So that's a positive relative to the numbers that we disclosed. The question previously was asked by Larry on the pension, so we'll see where that shakes out. We did reflect in the LRP impact of new product momentum from recombinant Factor IX to HyQvia to home HD, FEIBA prophy and so on, but again, I think that only becomes material in a significant way as we move into 2015. So, there are some non-recurring things that were impacted in 2013 such as the device tax and so on. That kind of summarizes some of the major headwinds and tailwinds, but I think it's fair to say that our outlook for the long-range plan does not differ meaningfully from what we disclosed last year. The earlier years will be somewhat at the lower end of the range. Of course, you got some variables here that are difficult to quantify that could be big, such as generic incursion on things like SUPRANE and Cyclophosphamide and so on. So I'll stop there. Bob, I don't know if you want to add anything to that, maybe give David a chance to respond to that and we can...

Robert J. Hombach - Corporate VP and CFO: Just a couple of quick things to frame this. Between SUPRANE and Cyclophosphamide, there are about $600 million in sales, plus or minus at above average corporate margin, so that's kind of the base of business as we think about generic competition coming in, in '14 and as Bob mentioned timing and approach obviously has a big impact there. We've tried to gauge that as best as we can. I would just mention on pension, we did -- I have talked to you in the past, the main drive of increase in pension expense for last several years has been amortization of actuarial losses that were cumulative, primarily in 2008 and even if interest rate don't improve over the LRP, we were going to see some benefit as we amortized off those 2008 losses and some of that is already baked into our 2014 expectation in the long range plan. As it relates to Gambro, I would say at this point, clearly what we've said in the past around approximately $0.10 to $0.15 of dilution for 2013 was a function of a number of things, including most importantly the timing of the close of the transaction, because the non-cash intangible amortization was the number one driver of the dilution and that's linear. We still don't know exactly what that number is going to be, so it still is an estimate, but some of the other things that would drive this, such as the financing, we do know where we're at, and that did come in favorable. So given the fact that we've shifted the timing out here a bit and that the financing has come in favorable, I would characterize our current assumption around dilution in 2013 related to Gambro in the $0.06 to $0.08 range at this point, and so clearly better than what we have previously assumed. I would say that the major offset to that in the back half of 2013 here for us is really emerging market FX. Clearly, FX rates in emerging markets, whether you're talking about Turkey, Colombia, Brazil, even places like Australia have moved double digit plus against us here since really early second quarter. So we've reflected, call it, $0.04 to $0.05 of downside in the back half of the year in our latest expectation here, which I think largely offsets some of the benefits here we're seeing on the Gambro side. Finally, on the tax piece related to Gambro, I've talked about the fact that we think there may be opportunities there to do better than what we have in our model, but until we close the transaction and really get a better sense of the attributes we'll have at our disposal here around loss carryforwards and other deductions, we might be able to utilize, it's premature to speculate on what that might mean to '14 and beyond.

David Miller - Morgan Stanley: I feel like I got more than I could have hoped for, but if I could sneak in just two more quick ones. First question, just BioTherapeutics guidance, it looks like it came down very, very slightly for the back half of the year. Maybe could you help us -- if I heard that right, could you help us with the drivers of that? Then maybe, Bob Hombach, if you're going to make a decision on cash earnings for Baxter, is that a decision that gets made in October when you officially close Gambro or more likely a decision that gets made in January with '14 guidance?

Robert J. Hombach - Corporate VP and CFO: Yeah, and I'll start with the second one first. Yeah, I think that's a decision that we're still thinking through whether we're going to do it, and then certainly timing of implementation, the later we get in this year, I think the greater the likelihood it's a 2014 implementation just given the complexities around what that might look like. But that's still TBD here as we work through this. The one thing I would highlight and one of the reasons why we're considering it as we are, between what we are already incurring about $100 million a year in non-cash intangible amortization and our estimate of about $140 million would be adding with the Gambro transaction. You're talking about almost a 150 basis point impact on our gross margin, and given that its non-cash, I think that creates an ever-increasing gap between our cash flow and EBITDA margin profile versus what we're reporting on our P&L. So that's one of the key things we're talking into consideration. As it relates to BioT, we did adjust down slightly. Our expectations in the back half, I think that's a function of a number of things. I'll make some comments and certainly we have Ludwig Hantson here today as well, the President of the BioScience business, he can jump in as well. I think we're pleased with where we're at with old LA and the ramp-up in production that we're seeing and the ability to be in a much stronger position from a supply standpoint as we move to the back half of this year and as I mentioned in my commentary, we will be exiting the year being able to support at least 6% to 8% growth from a volume perspective here going forward, what's we're very pleased with. But given where we're at on a couple of key things, namely HyQ, I think we're going to be very thoughtful about how we approach the market here in the coming months and make sure we're positioning ourselves for the long-term. So Ludwig, I don't know if you want to make a comment or two here?

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: Sure. So thanks, Bob. As I mentioned before 2013 is a transition for us, especially from a manufacturing perspective, if you look our sales growth, you see that we are accelerating our sales growth and we expect that for the second half of this year, we will continue to see acceleration, which is driven by, as I said, the manufacturing outputs, but it is a transition year since old LA is coming onboard the second half of this year and we have two dimensions that we need to put into the equation here. First of all, we need to prepare for the HyQ launch so that means that we have to build a Baxter inventory to get ready for the launch, as well as, as you know, we've had back orders over the last couple of years on the IG side, so we have to make sure that we do a better supply management with our customers. So that's what's brining the guidance down a little bit. So overall, I would say it's maybe a positive news on HyQ here.

Operator: Matt Miksic, Piper Jaffray.

Matt Miksic - Piper Jaffray: One, on hemophilia, Bob, you mentioned – I think it was Bob Hombach mentioned some of the progress around PK dosing or rather around prophylaxis and share gains so far with the ADVATE label. I'm wondering if you could give us an update on where the uptick or interested has been on the convenience dosing side of that new label and what that tells you of anything about the demand for this convenience dosing product over the long-term and the common competitor products expected, say, this time next year?

Robert L. Parkinson, Jr. - Chairman and CEO: Okay, Ludwig, why don't you handle that?

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: Yeah, so let me start with the big picture here, what we are trying to achieve with all our hemophilia products and that is we are trying to strive for bleed-free world, that's what we are doing with F8, that's also what we are doing with FEIBA prophy, as well as our RIXUBIS approval, it's the first product with a prophy indication. So, we are trying to move to bleed-free world. So, that's the most important thing here. With respect to your question on PK dosing, so we've (also said) in the U.S. last year, as I mentioned, we had phased approach, where we start in the beginning of the year with the high level of moving to prophy dosing in the midst of the year, we launched the PK aspect of it. So, we are in the midst of this launch. We saw 200 conversions in the U.S. last year. Year-to-date we've seen 100 conversions to prophy and that PK dosing. So, this is work-in-progress, but clearly we see a nice uptick. In addition to the United States, we are working now with the European regulatory bodies to also get PK dosing in the label. We are very close and we're looking at the potential launch of the PK dosing very soon as well.

Matt Miksic - Piper Jaffray: You mentioned shipment in the quarter related to the partnership that you have internationally in Hemo, can you quantify that or give us some sense of what the impact there was…?

Robert J. Hombach - Corporate VP and CFO: As I mentioned the initial shipment, it was a modest shipment, little less than $10 million. So, we're just getting started, but again very excited about the opportunities to ramp that up as we move throughout the course of this year and certainly through LRP.

Matt Miksic - Piper Jaffray: Then on the other side, Medical Products side of the business. With the overseas approval now for Gambro and that transaction going forward, the renal business did just a touch better in the second quarter. I'd love to hear any initial response that you've had from whether it's customers or whether it's healthcare systems internationally on pulling together these two businesses and just maybe what the early read is from the market on what you're doing there?

Robert L. Parkinson, Jr. - Chairman and CEO: Bob Parkinson here. It is early and, as a result, really only anecdotal, but we have gotten feedback from customers actually around the world. I think that are generally pleased with the fact that there will be a new entity, if you will, that can offer the broad spectrum of products in the renal area. I think many customers have thought they have been limited in terms of choice in that regard. As a result, I think there is a pretty high degree of anticipation once we get this deal closed that we'll be able to collaborate with them more broadly what we did previously. As I have commented earlier too, I think once we have the full line of products, it will fit very nicely into what I have described as vector four of our long-term growth, which is public-private partnerships and our ability to collaborate in a different way with governments or payors to assist them in dealing with the escalating costs associated with treating what is a growing population wherever you go in the world with people that have end-stage renal disease. So for lack of a better way to describe it, I guess, once we have all the clubs in our bag, so to speak, I think we will be in a great position to collaborate with the payors. But again, as I pointed out, let's get the deal closed first and let those things then actually materialize.

Matt Miksic - Piper Jaffray: Then finally just on IVIg in the quarter, I mean, I think we now understand I think that supply and bringing that supply back in line is sort of the big variable in your business at the moment for the next six to 12 months. But coming out of the Plasma meeting, I was a little bit surprised in June to hear some of the growth rates for the U.S. kind of maybe in the low double digits and the response they got from investors was the same. Just very, very strong, up a little bit from last year. Your thoughts on that strength and maybe what could be driving that or the sustainability of that strength in the U.S. would be very, very helpful.

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: So what we see is increased diagnosis rate and treatment rate, so that's one dimension that's driving the 10% growth in U.S. Plus when you segment by formulation, you’ll see that the majority of the growth is coming from the sub-Q segment; Sub-Q segment growing more than 30% in United States. That goes – is aligned with what we see in the U.S. and internationally, where some of our business is moving towards home care. So you see home care increasing, so that means that you see sub-Q increasing, and I would say overall this is a great dynamic what we have in order to make sure that the HyQ launch is going to be successful. We believe that HyQ has a great opportunity here within the sub-Q segment, $500 million overall. So, overall, yes, market is healthy, diagnosis rate is increasing and it is especially the sub-Q that is growing.

Operator: David Roman, Goldman Sachs.

David Roman - Goldman Sachs: I was hoping you could talk a little bit about your re-launch strategy or your sort of go-to market plans as you start to have greater capacity. Clearly, Baxter has been growing somewhat below the market given those capacity constraints and per Matt's comments, the market obviously remains pretty strong. But maybe if you could just sort of help us think about what the phase-in is going to look like for you guys. Is this going to be – are there customers waiting in the wings for Baxter products? Is there a pricing dynamic? Is there a contract? Maybe just help us understand how you come back to market.

Robert L. Parkinson, Jr. - Chairman and CEO: Let me just make a comment, and Ludwig and Bob can pick-up on this. As everybody knows, we've been constrained. As Ludwig commented earlier, our number one priority is getting our inventories back up and our customer service levels up, so that we can ensure continuity of supply to our existing customers. As we become increasingly encouraged at the prospects of HyQ approval, we also want to be in a position clearly to have inventory to support that launch over time. Those are really kind of the front burner priorities and will continue to be as we get all the way back into commission, we start to approach some of the additional volume associated with the Sanquin collaboration as we move into 2014. I don't know, Ludwig, if you want to add to that, but those are really the dynamics.

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: I would say the two major dynamics is -- are that we're moving our business more from an IV to subcu, hopefully to HyQ, and this is now happening in Europe, as well as we are getting ready for potential launch in U.S. for HyQ for 2014. So that's number one. Then number two is the change in channel mix where the hospital and the acute setting was, I would say, our dominant channel a couple of years ago and that is moving now towards an SPP channel being our dominant channel moving to towards the subcu. So these are the two major dynamics that we have. But overall, as an organization, we're now getting ready for a successful launch with HyQ.

Robert L. Parkinson, Jr. - Chairman and CEO: Does that answer your question, David?

David Roman - Goldman Sachs: That does. Maybe if I can just follow-up on specifically what I was also wondering. If you look at the scenario, where one of your competitor's ramped up capacity and entered the U.S. market with the new product, they were fairly aggressive on pricing. Has something changed in the market right now, I think, as you ramp-up that capacity that's going to keep pricing a lot more favorable than it has been in the past when companies had been expanding capacity?

Robert J. Hombach - Corporate VP and CFO: Yeah, what I would say, David, two things. One, this is going to be a gradual ramp-up. It's not like we've got a huge bolus that we built up there that we're going to be looking to place in the market. As we mentioned, we're going to be very targeted and thoughtful about how we focus on the chronic channel with building customer loyalty and the ability to differentiate with HyQ over time. As we've talked about numerous times, we think HyQ is a significant innovation here and that we're going to be looking for a price premium in the marketplace. So that's really our orientation and we're certainly not looking to rush back in and price is certainly not a lever we're looking to use.

David Roman - Goldman Sachs: That's extremely helpful. Then maybe just one more. Bob Hombach, in your prepared remarks you referenced BRIC countries growing over 20%. Clearly, there's been some sort of noise in the macro around emerging markets. As we've seen in other parts of healthcare, whether it’s U.S. or Europe, as the macro weakened, you tend to see – healthcare seems to participate in that to some extent. But it looks like emerging markets remain a very strong driver for you. Can you maybe provide any further color on those businesses and just remind us how big that is as a percentage of Baxter right now?

Robert J. Hombach - Corporate VP and CFO: Yeah, I mean we’ve talked about emerging markets being a little bit more than 20% of overall sales and so I mentioned specifically the BRIC countries driving 20% growth, clearly there are challenges in the macro environment in many of those countries, but I think it really speaks to the medically necessary nature of the products that we're in, but the renal, the hemophilia and so on where these are therapies that governments are looking to expand access to in fact and so whether it's the very beginnings of Brazil partnership that we are starting to benefit from, the growth in renal in China and so on, I think we are well-positioned in this environment to partner and drive strong growth because of the medically necessary nature of our products, so we continue to be excited about the opportunities that we see in front of us across the board.

Operator: Bruce Nudell, Credit Suisse.

Bruce Nudell - Credit Suisse: I guess, the thing that seems to me going on with the stock is that people are kind of a little worried about the upcoming (BIB) launch, and I guess for – and there were some very positive things in their data set like 30% of people that are quite well with five-day dosing and you got pretty decent results for even every seven-day dosing, so just stepping back and looking at that threat, how do you guys view the likely encroachment on your current prophylactic base? When do you think standard recombinants in developed markets are likely to go ex-growth? Then, you of course have your own program, how would you gauge the technical risk associated with that program? I know you are working off of very well-known molecules PEGylation is the new wrinkle. Just like how would you couch the technical riskiness of that program which may be very important over the long-run?

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: Lot of questions here. So, let me take a step back and maybe talk about the LRP for hemophilia. We presented last year that we will continue to grow our hemophilia franchise 3% to 4% in the next years to come. We believe that we can do this. This is going to be driven by different aspects. We believe that ADVATE still has some runway as far as growth is concerned. The reason for that is, it's a healthy market which continues to grow mid-single-digit. We continue to see conversion to our ADVATE prophy indication. We see emerging countries becoming more important. As you know, we had our first shipment to Brazil in which – it's part of our 10-year supply agreement with Brazil. We also started to treat our first ADVATE patient in China. We have key tenders are opening up in the next couple of months. So overall, we believe that there is still tailwind with ADVATE. So, that’s the first dimension. You know that overall we are striving for bleed-free world. So ADVATE is still the growth standards 10 years ahead of anybody else coming into this market. So that's dimension number one. The second dimension that will continue to drive the hemophilia franchise is a portfolio and you mentioned 855 as part of it, but when I think about the other opportunities that we have, we have RIXUBIS that is launching as we speak. In addition to that, we are looking at OBI-1 submission later this year, which will hopefully launch sometime next year. Bob talked about the FEIBA prophy indication which will come at the end of this year. So pipeline is pretty healthy and will also help us to continue to grow this franchise. Now, specifically to your technical question on 855, we have started to treatment the first patient in our Phase III study and the comments that we got so far are very positive, encouraging comments. The technology itself, the PEGylation is an older technology. We know that there are more than 10 products on the market that have a similar type of technology, with the peg doses significantly high than we have. So all-in-all, we feel comfortable with what we have seen so far. We feel comfortable with the pipeline, we feel comfortable with the growth expectations for ADVATE and we do feel comfortable with the progress that we are making on 855.

Robert L. Parkinson, Jr. - Chairman and CEO: A comment, if you would though, as well as it relates to the near-term competitive launch of longer-acting, our position in the market research as it relates specifically to efficacy vis-a-vis convenience on the hierarchy priorities because I think that's a really important aspect, okay, of the question that Bruce asked.

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: So it goes back to what I'd mentioned before, that is we're striving for bleed free world one patient at a time. So – and that's the feedback that we get from physicians as well as patients that efficacy is the most important thing. The definition of efficacy is controlling the bleed or preventing the bleeds, zero bleeds, zero ABRs. So that is the feedback that we are getting from market research. The second piece that is important is the tolerability piece is the potential inhibitor formation and what (first) on the list is the ease of use. So in everything we do in all of our programs, we're not going to sacrifice our aspiration of going for a bleed-free world for convenience and ease of use. So that's the feedback that we're getting from physicians as well as from our patients.

Operator: Bob Hopkins, Banc of America Merrill Lynch.

Bob Hopkins - Banc of America Merrill Lynch: So just a couple of quick clarifications around guidance and then something on the pipeline. So I think originally when you guys provided guidance, the guidance for the underlying business excluding Gambro you read ($4.70 to $4.85) and it sounds like that's obviously moved around a little bit, because of some of the emerging market FX issues. So I was wondering if you could just kind of clarify where are you for the year now on that kind of underlying Baxter alone guidance for the full year and what are some of the moving parts.

Robert J. Hombach - Corporate VP and CFO: Actually, we really didn't specifically call that out, and so I would say generally, ex Gambro given some of the strength we've seen in the first half the FX issues I mentioned in the back half, we're basically where we were, certainly well within the range that we originally laid out. So, there really hasn't been any significant change on underlying assumptions about the base Baxter business. We still maintain the approximately 4% constant currency sales expectation for the full year in margin et cetera, I think is very much in line with our original expectations.

Mary Kay Ladone - Corporate VP, IR: Yes, as Bob Hombach mentioned earlier, the dilution of reduction we're seeing related to the timing of Gambro is being been offset by downside related FX, but in the base business, operationally there is no change to Baxter.

Bob Hopkins - Banc of America Merrill Lynch: So that FX comment was related to Gambro specifically?

Robert J. Hombach - Corporate VP and CFO: No, no, I mean we’re differentiating between emerging margin FX issue versus the underlying operational performance of the Company. The FX issue in emerging market is related solely to Baxter.

Bob Hopkins - Banc of America Merrill Lynch: All right, so the underlying earnings profile, nothing has changed. Then just to clarify, in Q3, you do have one extra selling day?

Robert J. Hombach - Corporate VP and CFO: Correct.

Bob Hopkins - Banc of America Merrill Lynch: Then just on the pipeline real quickly for me. Can you just give us a sense on the recombinant Factor IX? Just kind of set expectations for how that ramp goes, I mean, how long does it take that product to get to $100 million? On the HyQ side, for 2014, in your mind is that most likely a second half scenario if things go well, or is there a potential that it could be a first half scenario?

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: Let me start with the RIXUBIS. We're very happy with the approval. As far as the market is concerned, I think the market is $1 billion plus. We are training the sales force. We're getting ready for the launch. There is a major meeting that we're getting ready for, which is at the beginning of October. As far as the other geographies is concerned, we plan to submit Europe before year-end, as well as Japan. As far as dollar ramp up is concerned, I don't think we have…

Robert J. Hombach - Corporate VP and CFO: … but I would say certainly over the LRP timeframe that that would be the timeframe we'd be looking to get it towards that kind of a profile.

Ludwig N. Hantson, Ph.D. - Corporate Vice President and President, BioScience: Yes. When I think about what this could bring to the patient, first of all, this is -- I do believe it's a great treatment option for hemophilia B patients. It's the second product to the market after, I think, 15 years of almost silence in that states. We have 43% of patients without any bleed. So, again, going back to what we said before, striving for a bleed-free world, getting the prophy indication will differentiate us from current competition. For the long-term, I do believe that there is space, there is medical need for a short-acting product, for instance, for patients who are active and patients who need their peaks more than the troughs. So we do believe that this segment will continue to be a healthy segment.

Bob Hopkins - Banc of America Merrill Lynch: Then on HyQ?

Robert L. Parkinson, Jr. - Chairman and CEO: The HyQ timelines, so for Europe you know that we're launching now, so we're looking at treating our first patient this month and Germany will be the first country to go. We have other Nordic countries Scandinavia, Netherlands, U.K., Germany and some other countries that we're launching in the next couple of months. As far as U.S. is concerned, I would say overall we are a little bit more confident, as you know we have been in constant dialog with the FDA over the last couple of months. We know what we're doing in aligned with their request. We will be submitting the data at year end and as far as timing is concerned for the U.S., I keep my fingers crossed, we could be looking at mid-2014, second half 2014 potential approval.

Bob Hopkins - Banc of America Merrill Lynch: Then just lastly real quickly on gross margin. Bob, can you give us a sense as to how hedging impacted the gross margin in the quarter? I mean you mentioned that is directionally a benefit, but I was wondering if you could just quantify that.

Robert J. Hombach - Corporate VP and CFO: Yeah, I think the main impact here is really the yen. As you know, we hedge major currencies but not emerging-market currencies and given how much the yen moved that it definitely affected the top line. But we had put hedges in place back in the middle of last year in the low 80s and the yen is at a 100 right now, so that really what the main driver there, but again that just offset from the other issues that we've seen, so it wasn't a huge impact.

Operator: Glenn Navarro, RBC Capital Markets.

Glenn Navarro - RBC Capital Markets: I have a question on the third quarter revenue guidance, the constant currency growth is equaling for 6%, so that's better than what we just saw here in the second quarter at 4%. There is the extra selling day, you're launching GAMMAGARD, but is there more to the acceleration than just a day – extra day in GAMMAGARD, that's my first question.

Robert J. Hombach - Corporate VP and CFO: We did talk about timing of some shipments in emerging markets this year just happening in the fall more in the third quarter than the second and the fourth last year, and so I think even on the call back in April, we indicated that we though third quarter would be a stronger quarter than the other three this year that's definitely playing out for the timing of the shipments, but also I'd say more modestly on the billing day, I think is relevant for Med products business, primarily the U.S. and other developed market, but a little less relevant for the BioScience business. So it's not a direct impact across the board.

Glenn Navarro - RBC Capital Markets: Can you remind me those shipments, is that – are those BioScience? What segments of the business is it…

Robert J. Hombach - Corporate VP and CFO: Yeah, it tends to be more BioScience because of the tenders tend to be more lumpy in plasma protein, some of the hemophilia and so on and in term of other shipments in emerging markets, again we'll see a little bit of a ramp here as we go throughout the year on the collaboration in Brazil with Hemobras on recombinant Factor VIII.

Glenn Navarro - RBC Capital Markets: Then just one quick follow-up, just on the renal business. About a month or so, CMS announced cutting reimbursements to centers by about 10%. And that's mainly going to impact HD or the HD environment. And I believe that HD is still very small. So, I am wondering if you can put that into context for your HD business. I am wondering does this benefit in any way maybe penetration of PD?

Robert L. Parkinson, Jr. - Chairman and CEO: Bob Parkinson here. There may be a modest negative impact on the HD business in the U.S., the Gambro products after we closed the Gambro deal. But there is no doubt it will serve as a catalyst to home treatment PD and so on, which is more profitable. So, we believe that will work more meaningfully in our favor with our PD business. So, net-net, if it goes through which is still speculative based on the current proposal, but if it goes through, it certainly isn't a negative for us, let me just leave it at that. It may be a slight positive.

Mary Kay Ladone - Corporate VP, IR: Glenn, recall that the combined Baxter and Gambro business, the sales in the U.S. is less than 20% of the total and the majority of the sales are PD.

Robert J. Hombach - Corporate VP and CFO: On the Gambro side, their dialyzers and CRRT and very little on HD machines.

Operator: Kristen Stewart, Deutsche Bank.

Kristen Stewart - Deutsche Bank: Bob, I was wondering if you could just remind us on the expectations for Gambro in 2014 and then also I am assuming that some of the negative impact from emerging market currencies are basically also going to continue into 2014, given where rates are today. I just wanted to clarify to going to comments on the LRP. You are still kind of expecting, I would assume, all of these things, including Gambro that is still pushed to the lower end of that range for earnings growth?

Robert J. Hombach - Corporate VP and CFO: Yeah, the answer to the last part is yeah, because of the timing of new product launches in '15 – meaningful product launches in '15 and beyond and the competition of recombinant Factor VIII and generic competition coming in, in '14, the same thing applies with our without Gambro. So in terms of 2014 expectations for Gambro, we previously had talked about including the impact of amortization neutral to $0.05 accretive excluding of $0.20 amortization assumption, $0.20 to $0.25 accretive. Now, given that the timing has flipped here a little bit, we will certainly need to revisit that as we close out the transaction here and look at timing of realization of synergies and so on, that’s more of an issue frankly in '13 than it is going to be in '14. So I don't expect a significant change in '14. Clearly, the financing benefit we're getting as a result of the bond issuance we did will flow through as well. So again, I'm not going to expect any significant change to our 2014 expectations around Gambro, but I do want to work through some of the timing impacts here. As it relates to emerging markets, we starting seeing this FX move really in mid second quarter. So you are looking at seven or eight months already in the base here for '13 if rates stayed exactly where they are at. So we will have a bit of a headwind on emerging market FX in the first half of next year if things stay where they are at but it is not a full year impact. I don't think at this point it would be a huge headwind, but rates are volatile and we will have to see how things progress throughout the course of this year.

Kristen Stewart - Deutsche Bank: So with Gambro in 2014, including amortization basis, that would still – kind of thinking about that 7% and 9% range push you closer to the lower end?

Robert J. Hombach - Corporate VP and CFO: Yeah. Well, I think we updated our guidance for Gambro to be 8% to 10% EPS growth over time. The 7% to 9% was pre-Gambro. So yes, it is still – that's a lower end of that expectation.

Operator: Ladies and gentlemen, this concludes today’s conference call with Baxter International. Thank you for participating.