Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Baxter International Inc (NYSE:BAX)

February 25, 2013 3:00 pm ET

Executives

Robert J. Hombach - Chief Financial Officer and Corporate Vice President

Mary Kay Ladone - Vice President of Investor Relations

Analysts

Matthew J. Dodds - Citigroup Inc, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

I'm Matthew Dodds of Citigroup, for those on the webcast. And I'm very pleased next to have Baxter International. We've got Bob Hombach, who's the Chief Financial Officer; and Mary Kay Ladone, who's Vice President of Investor Relations, with us. Baxter, we've got a lot to talk about. We've got a lot going on in the recombinant side, a lot going on in the immune globulin side, we've got Gambro.

So Bob is going to give a short presentation, and then we're going to do mostly Q&A. And I'm going to encourage everyone to chime in during the Q&A. So with that, Bob, thank you.

Robert J. Hombach

Thanks, Matt. And good afternoon, everyone. Before I begin my formal comments, I'll just remind you of our Safe Harbor statement. For more information, please refer to our website for our SEC filings, including our 10-K and 10-Q filings.

As you know, Baxter is a global, diversified healthcare leader with extensive global footprint. We remain committed to advancing new therapies, to improving the safety and cost-effectiveness of treatment and expanding access to care around world. Baxter has built up a very strong international presence over the last 80 years. Today, approximately 60% of our sales are outside the U.S. We continue to see great growth opportunities going forward particularly in emerging markets. Today for Baxter, emerging markets represents approximately 20% of our total sales. Over the next 5 years, given the strong growth prospects we see, we expect emerging markets to account for approximately 30% of our sales by the end of 2017.

Baxter operates under 2 main business sectors: BioScience and Medical Products. I'll give you a very brief overview on this. As Matt mentioned, we'll spend some time talking through the particulars here in the Q&A. For BioScience, BioScience is arranged under 4 key franchises: hemophilia; BioTherapeutics, which includes our immune globulin products; BioSurgery; and vaccines; and emerging new therapeutic areas that I'll discuss in a moment.

So just a couple of quick highlights. We are the global leader in hemophilia treatments, particularly with our ADVATE product, which is a gold standard in hemophilia A recombinant treatments. Our focus in hemophilia is to continue to expand access to care and improve treatment regimens, particularly through prophylaxis going forward. We've expanded our presence in emerging markets for the last several years. As you know, we received approval for ADVATE in China. And as you know, approximately 50,000 patients are living with hemophilia A in China today at very low treatment rates. And you also saw the announcement recently of the agreement we signed with Brazil to be exclusive provider for recombinant factor VIII going forward. And today, that's the third-largest market in the world for factor VIII utilization, but it's almost entirely plasma-derived factor VIII.

Within our BioTherapeutics franchise, our focus has been to continue to differentiate our product offering, and I think we've made great strides there, both in dosage forms and delivery mechanisms, getting a 30-gram approved, a subcu 10% approved as well in the U.S. which continues to do very well. We remain focused on advancing our HyQ formulation through both the U.S. and European regulatory processes. And we continue to look to provide data on the Alzheimer's trial in the second quarter of this year. I'll just also mention, under new specialty therapies, we're very excited about both the Momenta agreement we signed last year or, actually, late 2012 for the development of a number of biosimilars and also the in-licensing of the compound with Onconova which we expect to get data later this year on the Phase III trial for MDS. And that, we think, is a tremendous opportunity for the company going forward, as well.

Moving very briefly onto Medical Products, in which Medical Products key franchises include fluid systems; specialty pharma, which includes our anesthesia and nutritional franchises; our BioPharma Solutions business, which is our B2B business, with contract manufacturing and compounding constituting approximately $1 billion in annual sales; and finally, renal, which there are a number of exciting things going on in our renal franchise. Today it's a $2.5 billion franchise. We're the market leader in home dialysis through our Peritoneal Dialysis therapy. And we're very excited about the opportunity coming up here over the next year or 2 to launch Home HD as we continue to work through the clinical trials on that product, also some next-generation PD cyclers in a few key markets around the world, and of course the Gambro acquisition that we recently announced that we look forward to completing here shortly. I'll spend just a couple of minutes highlighting a few things on Gambro. I'm sure we'll talk about it more in the Q&A.

This one, we think, is a very strong strategic fit for Baxter. It's one we've looked at a number of times over the years. We think it complements very well our portfolio and their portfolio, both in the chronic segment for treating chronic PD patients and HD patients but also, in an acute setting with an emerging technology for CRRT that Gambro is the market leader on and a product line that's growing double digits for them, that we expect to be able to continue to enhance to growth profile and drive that into acute settings around the world given our strong acute market presence in many markets. We do expect this transaction to close by the middle of this year as we work through the regulatory processes around the world. We already have received U.S. approval, and other key approvals will be focused in Europe and other markets outside the U.S.

From a financial standpoint, there are many attractive aspects of this deal. The financing aspects are certainly one of them. It's approximately a $4 billion transaction. We expect to use $1 billion of offshore cash and raise about $3 billion in the debt markets at very attractive rates. Over time, we'll be able to utilize offshore cash to retire a portion of that debt as we expect to able to deleverage by approximately $1 billion over the next several years. From a synergy standpoint, we see very strong commercial synergy opportunities here and some well-defined cost synergies totaling approximately $300 million, 80% of which we expect to be able to deliver by the end of 2015, which is a little more than 2 years into the deal. Important to note, of those cost synergies, we expect about 60% of those to come within the cost of goods sold line as we look to leverage the manufacturing and operational aspects of our 2 businesses that we think has tremendous value and then also, of course, some redundancies in our G&A as well.

From a financial impact, we've identified within our guidance this year that Gambro will be $0.10 to $0.15 dilutive to 2013 earnings. That's almost entirely due to the anticipated amount of amortization of intangibles and that, in 2014, it will be neutral to modestly accretive. We expect that amortization of intangibles to be about $0.20 on an annual basis. So excluding the estimate of amortization, this deal would actually be neutral to 2013 and $0.20 to $0.25 accretive in 2014. Now until we close the deal, we won't know exactly how much the amortization is, so that $0.20 number is an estimate at this point in time.

As you know, we've spent quite a bit of time advancing our R&D pipeline over the last 7 or 8 years, and we've seen great progress there, as we laid out at our Investor Conference in October. We -- as of 2012, we had 18 programs in late-stage development. Going forward, we do expect to be able to maintain an R&D as a percent of sales ratio of about 7%. So while R&D has grown faster than sales in many of the last several years, we'd be able -- we feel we'll be able to leverage and continue support those late-stage programs without growing R&D faster than sales going forward.

I'll just spend a moment on, first, 2013 guidance and then a refresh of our long-range plan or LRP outlook that we provided back in October now that the Gambro deal has been announced.

For 2013, we've guided to approximately 10% sales growth. And Gambro's accounting for approximately 6% of that, so x Gambro, about approximately 4% growth for the core Baxter business. That does include the impact of about $90 million related to various austerity and healthcare measures impacting us in 2013. Gross margin, given the amortization of intangibles I mentioned, is being impacted by 100 to 120 basis points versus the prior year. And our EPS guidance of $4.60 to $4.70 includes both the $0.10 to $0.15 of dilution I mentioned from Gambro, but also approximately $0.10 of incremental pension expense that we're incurring here in 2013 given how low interest rates were at the end of 2012.

Cash flow from operations though will grow about 6% to 7% and reach about $3.3 billion in 2013. So we continue to see strong growth on the cash flow side. And then from a free cash flow standpoint, given the significant investment in Georgia to expand plasma capacity, our free cash flow will be approximately $1.6 billion this year.

On the right-hand side of the page, pro forma long-range plan outlook. This is over the next 5 years. And given the Gambro transaction, we do expect this to accelerate both top and bottom line growth for the company. So we've guided to approximately 7% to 8% top line growth; operating margins actually improving versus our prior guidance and coming in at about 25% by the end of 2017; and that's EPS growth, including the negative impact of amortization, growing in 8% to 10% range. We expect cash flow from operations and free cash flow to increase significantly over this time frame, reaching approximately $5 billion in cash flow from operations -- or $5 billion plus, I should say, by 2017.

Very briefly, on capital allocation. We've been very committed to a strong and transparent capital allocation framework over the last 6 or 7 years, and that's going to continue going forward. As you saw, we increased the dividend significantly in 2012 by 34%. And going forward, even after the acquisition, we remain committed to approximately 40% payout ratio, which means the dividend will continue to grow roughly in line with earnings as we go forward. In the near term, though, given the significant CapEx in Georgia and the acquisition, and wanting to delever somewhat, we are going to modulate share repurchases down to approximately $300 million in 2013 versus the approximately $1 billion number we've been running at for the last several years.

So with that, I'll just wrap up by saying the company remains committed to driving operating leverage and creating synergies here as we integrate Gambro, despite a very tough macro environment. We think we've been able to do that over the last several years. As we've encountered significant headwinds in all of those years, yet we've been able to continue to drive EPS growth and, more importantly, cash flow growth going forward.

Thanks.

Question-and-Answer Session

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. So for Q&A, Bob has graciously agreed to answer a couple of the thematic questions that we put out before the conference. I'm not sure if any of you seen those in the other rooms. It's been a little lasting in med tech. So we're just going to hit a couple and then we're going to get to the meaty stuff related to Baxter. So first, do you agree that the dominant challenge facing healthcare companies over the next decade will place a greater emphasis on value from global public and private healthcare payors?

Robert J. Hombach

I don't know about the word dominant, but I would say, yes, they're definitely -- we're already seeing a migration towards governments around the world really wanting to understand the whole value proposition for what you're offering, not just the price, but price and outcomes for patients. And certainly, we believe that, the medically necessary nature of the product lines that we're in and the high level of efficacy that those products carry with them, that we're very well positioned to not only react to that but actually be in front of it. And that's part of what you've seen in some of the public-private partnerships that we've already entered into. We highlighted a few of those at our investor conference back in October, including a PD First initiative within Thailand, where the government of Thailand is working very close with us to start new patients on PD First because it is effective treatment at a lower cost than in-center HD, at least initially. But you also saw that with the agreement in Brazil for the recombinant factor VIII exclusive position that we have there. We think we are bringing the gold-standard product to hemophilia patients in Brazil which offers them the state-of-the-art in terms of care, but also at a very valuable price from a Brazilian standpoint. That deal is very accretive to our growth and operating margins, but again provides incremental benefit to the country of Brazil. So it's those types of win-wins that we think are going to be necessary to be successful. And again, we feel very confident about the position we're in.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay, and then a follow-up on that. Do you expect the purchasers of your services, products to successfully drive reimbursement/price per unit lower over the next 2, 5 and 10 years?

Robert J. Hombach

Well, frankly, we've seen reimbursement pressure in most of the markets we've been in for the last 2, 5 and 10 years. I've been with the company for 24 years, and this has been a topic for most of them. And so the onus has really been on us over time to manage our cost position. We have a very well-defined cost improvement program within our manufacturing environment that's been there since at least 1995 when I supported the group, where the expectation is you offset inflation, at least offset inflation, with cost improvements on an annual basis. And so as we go forward here, we expect to continue to see the kinds of things that we've seen in the last several years. As I mentioned, $90 million of austerity measures impacting our top line this year; in the $40 million to $50 million range, the last several years prior to that, depending on how you look at some of the recombinant factor VIII tenders even more of an impact; and yet we continue to drive cash flow growth and earnings growth going forward. And that's the reality of the world we're in, and we expect that to continue.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay, here's one, I think, that fits pretty well, considering your mix and how large your emerging markets versus the peer average in med tech. For your markets, how long will it take before the key emerging markets, such as China, Brazil and the Russia, start to resemble developed markets? What inning do you think where Baxter is in, in that curve?

Robert J. Hombach

Right. Well, I'd hate to state to a specific inning, but I would say that emerging markets see what's developed in developing -- developed markets over time that, the burden that healthcare has placed on the overall budgets of governments, they're well aware of that. And again, they're already looking for -- whether it's China or Brazil or Russia or India or other markets as well, they're already looking for partners to help them be part of the solution to expand access to care, which is what they're all trying to do, but do it at an affordable price. And so we think -- again, franchises like PD, like our hemophilia franchise and, frankly, eventually our BioTherapeutic franchise, we think we're very well positioned to be that partner with them going forward. And we're actively looking for ways to do that.

Matthew J. Dodds - Citigroup Inc, Research Division

All right, onto the Baxter questions. Immune globulin, let's hit that first, okay? The market growth, from what I can tell, in the U.S. has been above the 6% to 8%. There's -- the view is Europe is lower. But in the U.S., it seems to me that it's trending well above that. And what I'm trying to figure out is, how much of that do you think is increased neurological use versus expansion in PID? Because those are the 2 obvious parts where you're going to see the growth. What's Baxter's view on what's having the bigger influence on the growth of IG the U.S.?

Robert J. Hombach

Okay. I think it's actually a number of factors. And so you mentioned neurological indications. Neurological indications use about twice as much product per patient as primary immune deficiency does. And so as those indications expand, and we are seeing that, utilization of IGs in terms of grams is going to naturally go up. You also see a trend within PID of more utilization of subcu administration at home. Well, the current formulations of subcu in the market, including Baxter's own, use more product than the base IV administration, some up to 150% of a normal dose. Ours is about 137%. And so that also was a -- is a bigger call on units of volume production in the marketplace. Now just as a quick aside, that's why we think HyQ is so important not only for patient convenience but also for utilization because HyQ, in our clinical trials, only utilized 107% of a normal IV dose versus the current subcus again being considerably higher. So I think those are certainly a couple of factors. But also, we do think these are fundamentally under-diagnosed and under-treated states not only in the U.S. and in Western Europe but certainly in developing markets around the world. So we think there's plenty of runway there. We've invested in additional resources in the U.S. to raise awareness, even going back into 2010.

Matthew J. Dodds - Citigroup Inc, Research Division

Is that in PID as well?

Robert J. Hombach

Yes, yes. Oh, yes, that's our on label indication of -- well, now that we have MMN as well in the U.S. But the primary indication that we've been focus on in the last several years has been primary immune deficiency, and that's really where the resources went. And I think you're seeing some of that pay off not only by us but maybe others in the industry as well because we -- as we look globally, we've pegged that somewhere in the 30% range in terms of current levels of diagnosis versus where it otherwise should be.

Matthew J. Dodds - Citigroup Inc, Research Division

And then one of the things I look at for immune globulin is, with the capacity constraints you're facing in 2013, you've gotten a nice geographic mix shift, I'll call it, going -- more products in the U.S. You've -- I'd assume that subcu has been growing faster than the average since it hasn't been out that long. How am I -- I mean, if we look at 2013 broadly, can we assume that half your growth will come from, not volume, it will come from more of this mix, whether it's subcu or geographic? Is it big enough...

Robert J. Hombach

No, no, no. A couple of things. I would say, by the end of the third quarter of last year, we had largely done the shift that we were -- that we meant to do in terms of bringing more product to the U.S. and not as much in Europe. So I think there'll be a partial year impact on that but nowhere near the kind of magnitude that you're talking about. So I think it really is a combination of growing volume in kind of mid single digits, with modest price increases and a little bit of residual mix shift, as you call it. But not the significant driver of growth in 2013 for us.

Mary Kay Ladone

And Matt, I would also add that our subcu products is GAMMAGARD LIQUID that's indicated for both subcu and IV dosing. So it's difficult for us, when we sell a unit, to know whether the patient is actually doing the therapy subcutaneously or not.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then Europe is becoming a smaller piece of immune globulin, but what's your take on the market there? There's been comments it's a little slower. Do -- is that -- from what you can see, do you think it's volume, price or reach [ph]? Is there any gating factors?

Robert J. Hombach

Yes, I think it's -- if anything, it's a slight bit of price and some volume. But we've seen softness in volume across pretty much all of our product lines in Europe over the last several years, and I expect that's going to be the case here in 2013. But we haven't seen anything dramatic. And again, there are a number of markets there where we think, over the long term, there's tremendous opportunity to raise awareness and diagnosis and treatment of PID patients in Western Europe as well.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then when we talk about the supply, it's pretty clear now, although a -- selling product again, towards the back end of the year, making it now. What about Rieti? I know -- I think that we've talked in the past that Rieti you plan on expanding. Where is that in kind of the year cycle? When should we expect Rieti to expand? And then also for Sanquin, is that on track? And what do you have to do approval-wise, reconfiguration-wise to get to the 2014 time line for at least some product coming out?

Robert J. Hombach

Okay, so just a couple of quick things there. So as it relates to the older L.A. facility, we are bringing that up for production here in the month of February. Given the production cycle, though, in the business, it will be in Q3 before we're able to sell that product to the marketplace. But we expect to be back online. So all the refurbishment we are looking to do has been completed on schedule and on budget, so we feel very good about that. Rieti, we got the approval from the FDA late last year, so we're in the process already of starting to ramp up that capacity addition, and that'll be supporting growth here in 2013 and beyond. And as it relates to the Sanquin contract manufacturing agreement, again we're very pleased to be working with them on that. That was a great opportunity for us to access capacity and debottleneck in our overall situation and to do it very efficiently, very cost effectively. So really, it's just a matter of getting our process approved and the paste [ph] approved so that we can then put that through our purification and fill-finish process and sell it as GAMMAGARD LIQUID. So the time line from a regulatory standpoint is what's driving the 2014 gauge [ph].

Matthew J. Dodds - Citigroup Inc, Research Division

I would assume you're actively involved in that transition to your type of...

Robert J. Hombach

Well, yes, we are partnering very closely with Sanquin, including having folks on-site assisting to move this forward. By the way, they do contract manufacturing for other players in the industry. Their process is very compatible with ours. There's just the minor tweaks that we need to do. There was a little bit of equipment installed to drive some of the capacity expansion for them. Again, that's in process as well.

Matthew J. Dodds - Citigroup Inc, Research Division

So is there any chance that could come online a little early? Or is there...

Robert J. Hombach

I think it's less likely it's going to come on earlier. Middle of 2014 now is 15 months out. I don't think there's going to be a significant earlier arrival there for the capacity.

Matthew J. Dodds - Citigroup Inc, Research Division

One more capacity question. The [indiscernible] brand new plant. As far as I know, early in the process. Why can't you -- or are you planning on trying to get a meaningful improvement in the immune globulin needles out of this facility? There's been industry talk that it can be done but you need a new plant, you need a kind of a fresh start, you're doing this. Is it possible, or is it not yet time?

Robert J. Hombach

Well, I would think about -- I think about parallel paths here because, given how long it takes to get any capacity in place when you're starting a Greenfield, which is what we're doing in Georgia. We -- as we've mentioned, the first 3 million liters is to support the market growth as it exists today that we expect to happen in that time frame. So we need that capacity to come online. So our approach there is to largely utilize processes we have elsewhere and replicate that so we ensure that we can continue to meet market demand. But you can imagine that we're spending time on the development side also looking at ways to enhance yields in IGs. Frankly, we've been looking at that for a number of years, as have many, many folks. If you can just fractionate for IGs and don't go down the path of looking for other fractions, you can slightly improve, but we're talking marginal improvements here, not a quantum leap. So the quantum leap, I think, is going to have to happen as a development program, but meanwhile, we need to ensure we've got capacity to support the market as we know it today.

Matthew J. Dodds - Citigroup Inc, Research Division

So the reason is you probably wouldn't be able to get the timing because the timing would be delayed, if you tried something that we [ph]...

Robert J. Hombach

Right. That's a separate distinct project that we would be looking at differently.

Matthew J. Dodds - Citigroup Inc, Research Division

And last one, HyQ, any update? I thought you were supposed to -- there's some meeting possibly coming soon or...

Robert J. Hombach

Ah, well, no, a couple of things. So HyQ, we're in the regulatory process with Europe and we expect to hear here in the front half of the year where that's at. And we have a meeting set up in the second quarter with the FDA at which time we'll be able to discuss some of the interim data with the preclinical trials that we are expected to do by then. And that meeting then will gauge what the go-forward process looks like and what the time line might be for submission in the U.S. of an amendment to our original filing.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then shifting over to albumin. This is a market that's held in relatively well. A lot of it seems to be from China. Is it possible for Baxter to gain share in China? And or is that market well locked by a couple of players that have existing long-term kind of channels in there? I mean, it's clearly benefiting you, I think, in the U.S. because you're not selling at all in China, but China is a pretty high-price market. I mean, is there the chance -- or are there tenders that -- is there a way for Baxter to gain share in China in albumin?

Robert J. Hombach

So I would say the gating factor for us is going to be capacity, more than gaining share. The demand is very high. Access, it's something again -- the Chinese government would like to continue to expand access. Given some of the collection issues they've had locally in shutting down collection centers, they've had to import a lot more product than they have historically and that's not something that's going to get fixed in the very near term. And so our expectation is really, over the next 5 to 10 years, is this is going to be -- continue to be a great growth opportunity for us within China. And so I would not characterize this as a share battle in China. I think it's trying to meet a strong and growing demand in China for the industry, really.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then just one Alzheimer's because I know it's going to get beaten to death. The process again, you were saying -- we're talking a Q2 top line release. Data will follow, probably early 3Q at a major medical meeting. What takes so long to get the data from last patient in to an April, May, June top line results? I know you said part of it is there are some third parties that have to do some of the analysis. Is it also, the partnership, like -- what kind of happens from that date of last patient, it's [ph] follow-up at 18 months, to whatever this date will be.

Robert J. Hombach

Yes. Well, just to back up a second. So we've talked about releasing top line data on the 2 primary endpoints first, and then the full data set, which would include a number of secondary endpoints and exploratory endpoints that are pretty extensive. And so having that full data set is what we're talking about...

Matthew J. Dodds - Citigroup Inc, Research Division

That's not [indiscernible] that, that's the actual meeting.

Robert J. Hombach

Yes, that would be at a conference, yes. But really, the data is going to drive what we released in the initial press release. Depending on whether we achieved the endpoints or not and so on, that will drive some of this as well. But assuming success, primary endpoints would be the first press release, and then the full data set a few months later at an appropriate conference.

Matthew J. Dodds - Citigroup Inc, Research Division

And so the concept of who's seeing data, how it's getting compiled [indiscernible]?

Robert J. Hombach

Oh, yes, sorry. So we've been working from really the day -- at the very beginning of this clinical trial, which started back in, I think, 2006 -- in '06, '07, with the Alzheimer's consortium. And so both we and they will be working on data and reconciling data on primary endpoints, secondary endpoints. We've got MRI data as well that we've been tracking throughout this process and so on. So there's a lot of data and a lot of coordination and reconciliation that have to go on across 2 groups instead of us being in complete control of this one. So with that in mind, we're just trying to be realistic about what the time line is going to be to review all the data appropriately and make sure we really understand what we have here before we go public with it. But clearly, we recognize, to the extent there's material information to provide and we have that information, we recognize we need to do that in a timely manner, and we will.

Matthew J. Dodds - Citigroup Inc, Research Division

I've got plenty more questions. Anybody in the audience have a question? I'll just keep going otherwise. All right, I'll keep going. So moving on to regenerative medicine. Biosurgicals, broadly. It's a very strong business for you. It's been growing very well for a long time. You've got a broad base of products. Is there a risk that not having sort of the general surgery products market, whether it's like stapling or the energy devices, chokers [ph], all that, is there any risk down the road that not having access to that could influence bundling or your ability to grow that business?

Robert J. Hombach

I think that's something that we think about, but really, if you look at the portfolio we have, which is primarily biologics, but you also look on the other side of the equation, we have very strong relationships with hospitals across the U.S. and really around the world and almost half of our BioSurgery business is outside the U.S. today. So that's one of our more global franchises. So that strong hospital presence allows us to leverage across the portfolio as and when that's appropriate from a contracting standpoint. So up to this point, that really hasn't been an issue for us across the broader aspects of the BioSurgery products. There may be 1 or 2 products specifically, where something like that might make sense, but I don't think that would fundamentally change our go-to-market strategy in BioSurgery.

Matthew J. Dodds - Citigroup Inc, Research Division

And then on biosurgicals, I didn't skim the September meeting -- the October meeting before the session. Was there anything coming in biosurgicals that's meaningful, a new product or a launch there [ph]?

Robert J. Hombach

No. I mean, we continue to evolve the portfolio but nothing significant relative to some of the other larger ones in the BioScience pipeline. That one again, geographic expansion continues to be a great opportunity for us there to continue to drive double-digit growth in that franchise, which is what we expect here going forward.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then recombinants. For the -- I know with the long-range plan, you assume the business will grow. If we kind of take a step closer to the current time line and we look at, say, the next 18 months, I think, when you gave guidance, you did have some assumption of new competition, I think, coming in later this year. If I just look at it kind of on a time line, would it be fair to assume that the company view is, "could lose a little share initially but then, when you launch your own longer-acting version," this is just fact for recombinant factor VIII, then it would offset, potentially grow. Is that kind of a fair way to look at the cycle?

Robert J. Hombach

Well, I'd look at it a little bit differently. So we do expect competition to come fourth quarter this year or early in 2014 both Biogen and potentially other gen-1 products, let's called them, or knock-off gen-3 products. And so we do expect some impact in the growth rate from that, but we also continue to be very pleased with the uptake of our ADVATE prophylaxis label in the U.S. Growth continues to be very strong there. And given the ability to extend from every 2-day dosing to every 3-day dosing today that you can do with the on-label indication for us in the U.S., we feel like we're in a very good position to do as much as we can to blunt the impact of competitors coming to the market, but they're coming into the market, in any case. But as we tried to highlight at the investor conference: the treatment rates for hemophiliacs globally continues to be very low, again in roughly the 30% range for hemophilia A. And so the opportunity to expand geographically remains significant. The Brazil opportunity is just one example, but certainly, places like China again where treatment rates are incredibly low and 50,000 patients there who need treatment. So I think, over the next several years, it's going to be as much about growing emerging markets and further penetrating and raising treatment levels even in developed markets because I would tell you that prophylaxis is definitely the standard of care and very high compliance for children and adolescents. But as adults age, they tend to become less compliant. And so that is something, the data, as well from the ADVATE label expansion. We've been publicizing that and raising awareness in the community as well. So I think, whether it's expanding prophylaxis utilization in existing markets; expanding in emerging markets; launching our own recombinant longer-acting factor VIII as well as other recombinant proteins in the franchise of factor IX which we have submitted for approval in the U.S. already, of recombinant von Willebrand and VIIa and so on, that the hemophilia franchise, we think, has very nice growth prospects even in the face of what I'm sure will be very stiff competition going forward.

Matthew J. Dodds - Citigroup Inc, Research Division

You jumped my next question. So I was going to paint a very positive scenario. If in fact recombinant factor IX, von Willebrand's, and factor VIIa, if they all hopefully do get approval, what is the biggest of the 3 that we should be thinking about potential-wise for new sales for Baxter?

Robert J. Hombach

Well, a lot depends on timing of when they're approved and who else is in the marketplace, and also our ability to develop the market. So I would look at recombinant von Willebrand as a great example of a market development opportunity but one that's probably going to take 5 to 10 years to play out in terms of reaching full potential. Today, plasma-derived von Willebrand factor is about a $250 million business globally. We'll be the first and only recombinant once it's approved. And so -- but that may take some time to penetrate the market. But there's also an opportunity, I think, to expand treatment for folks with von Willebrand factor deficiencies because, again, there's a spectrum of deficiency and treatment rates are pretty low for everyone other than just the severe. So I think that one, if we're successful in the market development, could be significantly bigger than what IX or VII could bring to us relative to the fact that other players will be in the market in those spaces.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then shifting gears to vaccines. This scenario you've been kind of quiet on, but you still every once in a while, seem to be pulling in some nice revenue from governments. Is anything -- other than kind of having a sort of a flu capability, is there still a plan or a longer-term opportunity to do more in vaccines, in that kind of base piece?

Robert J. Hombach

Yes. Well, we highlighted a couple of development programs at the investor conference, including a Ross River opportunity. It could be approximately 50 million in peak sales. And then also, a lyme vaccine that's under development. That's in Phase II. That market potential could be significant. To the extent we're successful, that will play out over the next 3 or 4 years as we move through clinical trials. So I think we continue to be focused on getting a seasonal flu approved in the U.S., we have one in Europe, but also continue to look for pandemic flu opportunities with governments like some of the contracts we've had in the past. So we continue to see good opportunities in the vaccine business, going forward.

Matthew J. Dodds - Citigroup Inc, Research Division

Yes, I was going to ask on the pandemic flu? If something occurs again, preparedness for Baxter this time around? And I mean, we did get the impression that you can get the product out quicker. Have you made any changes from the last go-round?

Robert J. Hombach

Well, I think we did a pretty good job last time. But the H1N1 virus was more difficult to grow in cell culture than what we've seen with H5N1, as an example. So I think, somewhat, it depends on what the pandemic is in terms of what the yields are. But we feel very good about the H5N1 yields and that partnership we have in Japan is focused primarily on that one.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then I know you want to get a few questions on Gambro and the value of Gambro. Biggest thing for me is how important is bundling between PD and HD? Since you haven't had much HD in a while, where do you think that's going to have the most value? Is it across all geographies? Or are there certain markets or areas where not having a strong HD franchise hurts your PD franchise?

Robert J. Hombach

Well, I think it gets back to what we talked about in one of the first questions. Governments, particularly in emerging and developing markets, want a holistic solution and partners to work with. So not having a full-line HD offering, in some small cases, already has been an issue but I think, over time, will become increasing an issue for us. We've acted as the distributor for some smaller players in this space, but that really hasn't been as effective as we would like. And looking at Gambro and their global footprint, they're very strong in Western Europe. About 20% or a little bit less of their sales are in U.S., but we think they're under-represented in Latin America and Asia Pacific where we have our strongest PD franchise and our strongest growth profile. So we think there's a great opportunity to leverage the momentum we have in PD in those geographies and raise the profile of the HD capabilities that Gambro brings to the equation. That frankly, they want a holistic solution. And as we launch HHD, having that platform and that credibility as a HD provider, I think, is also going to be an additive aspect of this deal for us.

Matthew J. Dodds - Citigroup Inc, Research Division

So where are they strong that Baxter is not as strong? Is there -- or I think you mentioned briefly U.S., but I -- is there any region where...

Robert J. Hombach

I would say they're very concentrated, relatively speaking, in Western Europe. Historically, that's been their strongest, whereas we have a strong PD business in Western Europe, but relatively speaking, we're growing faster in Asia Pacific and Latin America and, frankly, Eastern Europe, Northern Africa and kind of on the fringe of Western Europe. So I think it's really expanding their strength beyond the Western European base that represents the great opportunity for us.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay, just a couple of P&L's last question. For the dividend. You've got over 3. That's the -- I've been told that's a pretty big number for med tech. It's kind of an initial hurdle to hit. Is there a chance Baxter can then get to 4? Is 4 kind of in the sights? Or are you pretty happy getting to 3?

Robert J. Hombach

We're very much focused on a payout ratio and managing our capital structure along those lines. What happens with the yield very much is determined by what happens with the stock price. And so I don't want to wish for a 4% yield, frankly, but again our focus really is on the payout ratio because that really drives investment -- funds available for investment in other parts of the business: for M&A, for capital expenditures and so on. So that's not really where we're focused.

Matthew J. Dodds - Citigroup Inc, Research Division

And then one other question, on the cash. You bring back some cash, I feel, from markets where the tax rate difference isn't that high. So you have a bit of an advantage over some others who have a bigger spread. Is there a risk that you're moving as you're selling more in other countries with lower tax rates or, if you move manufacturing to other jurisdictions, the spread might increase over time and you will not be able to repatriate as much cash? Is that fair?

Robert J. Hombach

I don't think that's a big concern of mine. We have been regularly repatriating somewhere between $750 and $1 billion over the last 5 years. You've seen our tax rate drift up a little bit from the 18% range up to about 22%. So we think it's sustainable at that level given the amount repatriation we're doing. We are going to think differently about repatriation here as well as it relates to the Gambro transaction because we're not going to be in the position of wanting to pay down debt through intercompany loans versus doing repatriation. So there may be actually some tax benefits here in the short term, plus not having to do as much repatriation to support the buyback program. Now as it relates to mix of earnings, if I look at 2012 and some of the things that happened, we had a very strong year for our hemophilia business with ADVATE in the U.S and we the shifted some product to Europe with IG. So U.S. cash actually grew faster than o U.S. cash in 2012. And as we look forward, we'll see how things play out like HyQ in Alzheimer's, but those could shift the balance in favor of the U.S. So I think it's something that's going to be balanced and we're going to -- we'll keep a close eye on it but I wouldn't assume that's going to be a bigger issue for Baxter, okay?

Matthew J. Dodds - Citigroup Inc, Research Division

We'll wrap it there. Bob, Mary Kay, thanks very much.

Mary Kay Ladone

Thank you.

Robert J. Hombach

Okay.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Baxter International's Management Presents at Citi 2013 Global Healthcare Conference (Transcript)
This Transcript
All Transcripts