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

Executives

Mary Kay Ladone – VP IR

Bob Parkinson – CEO

Rob Davis - CFO

Analysts

Mike Weinstein - JPMorgan

Bob Hopkins – Banc of America

Bruce Nudell – UBS

Matt Miksic – Piper Jaffray

Rick Wise - Leerink Swann

Matt Dodds - Citigroup

David Lewis – Morgan Stanley

Glenn Navarro – RBC Capital Markets

Ben Andrew - Willilam Blair & Company

Baxter International Inc. (BAX) Q3 2009 Earnings Call October 15, 2009 8:30 AM ET

Operator

Good morning ladies and gentlemen and welcome to Baxter International’s third quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Miss Mary Kay Ladone, Vice President Investor Relations of Baxter International. Miss Ladone, you may begin.

Mary Kay Ladone

Good morning everyone. Welcome to our Q3 2009 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Rob Davis, Chief Financial Officer.

Before we get started, let me remind you that this presentation including comments regarding our financial outlook, new product development, and regulatory matters, contain forward-looking statements that involve risks and uncertainties, and of course our actual results could differ materially from our current expectations.

Please refer to today’s press release and our SEC filings for more details 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.

Bob Parkinson

Thanks Mary Kay, good morning everyone and thanks for calling in this morning. While Rob is going to provide more detail on our financial results and outlook in just a few minutes, what I’d like to do is take a moment to highlight just a few key points at the outset this morning.

First as you saw in the press release that was issued earlier this morning, adjusted EPS of $0.98 exceeded guidance for the quarter and increased 11% versus last year. This was primarily the result of continued margin expansion derived from favorable product and business mix, price improvements, and enhanced manufacturing and cost efficiencies, as well as expense leverage and benefits from our ongoing share repurchase program.

Third quarter sales excluding FX was 6% and excluding transfusion therapy from both years, sales increased 7% generally in line with our sales growth over the last several quarters. I continue to be pleased with the improvement in two key value metrics; gross margin and operating margin.

On an adjusted basis, gross margin in the third quarter was 52.8% and operating income as a percentage of sales exceeded 24%. Both metrics showed significant year over year improvement and represent new record levels for our company.

In addition we’re advancing and expanding our global pipeline through investments in research and development augmented by business development initiatives. In the quarter R&D spending increased by 5% on an adjusted basis or high single-digits on a constant currency basis.

Recent achievements include the following, first the commercial launch of HYLENEX in the US for use in pediatric rehydration. As you know, HYLENEX, is an enzyme that allows fluids to be administered under the skin or subcutaneously as opposed to intravenously.

This facilitates rapid initiation of treatment and delivery of IV fluids for dehydration in children, a potentially serious consequence of viral respiratory diseases including influenza and other conditions that can cause fluid loss.

Second in our renal business, the Investigational Device Exemption, or IDE, was recently submitted to the FDA four our new home hemodialysis system, which will allow the initiation of a clinical study to collect the safety and effectiveness data required for a 510(k) approval.

Third in our regenerative medicine business, we initiated a Phase III study evaluating the use of ARTISS in facial surgery in the United States. This is the second of three pivotal studies required by the FDA to obtain a broad adherence label.

As you know, ARTISS is the first and only slow-setting fibrin sealant indicated for use in adhering skin grafts in adult and pediatric burn patients. And is the newest agent in our expanding biosurgery portfolio.

Fourth in our vaccines business, we achieved several milestones including the completion of the seasonal influenza Phase III confirmatory study in healthy adults in the United States. We expect final study reports to be available by the end of the year, that will support our regulatory filing in the US in the first half of 2010.

Also in the quarter, we completed the acquisition of the hemofiltration business, also known as Continuous Renal Replacement Therapy or CRRT, from Edwards Life Sciences Corporation. CRRT provides a method of continuous and adjustable fluid removal that can gradually remove excess fluid and waste products that accumulate with the acute impairment of kidney function, and is usually administered in an intensive care setting in the hospital.

Before turning the call over to Rob, let me briefly update you on the status of Baxter’s CELVAPAN H1N1 pandemic vaccine. As you all know, the European Commission granted marketing authorization for CELVAPAN earlier this month.

This vaccine is the first cell culture-based and non-adjuvanted pandemic influenza vaccine to receive marketing authorization in the European Union. While our current license calls for two doses of CEVAPAN, the clinical data would suggest that a one-dose regimen may be possible and we’ve recently submitted this data to the appropriate regulatory authorities for their consideration and approval.

As mentioned in our recent Investor Conference, initial quantities of CELVAPAN have been delivered to a number of countries for use in their national vaccination programs. Also as previously discussed we’ve received orders to date of approximately 80 million doses.

I’m pleased to report that we continue to see significant improvements in manufacturing process yields versus our earlier production batches. While we’re confirming our revenue guidance of $30 to $40 million for the fourth quarter of 2009, we increasingly believe this has the potential to translate into a significant longer-term opportunity for the company.

Having said that, its premature to speculate on the financial upside beyond this year due to several factors including further optimization of process yields, final dosing regimens, and the virulence of the strain, any one of which may impact future demand and existing purchase commitments.

So given these factors, the evolving nature of the global crisis and our continuing internal efforts, we’ll provide you with more definition on the CELVAPAN financial opportunity for 2010 at our fourth quarter earnings conference call in January.

In closing, I would say the building momentum of our pipeline and continuing strong financial results validate the strength of the diversified healthcare model and reflect our ability to achieve the longer-term objectives that we laid out at our Investor Conference in September.

We believe we’ve established a strong track record of consistently improving our financial profile and executing our strategy and we’re confident in our ability to sustain that in the future. As always, I’ll be happy to address any questions that you might have during the Q&A. In the meantime let me now turn the call over to Rob for a more detailed discussion of our Q3 results and full year outlook.

Rob Davis

Thanks Bob and good morning everyone. As Bob mentioned our third quarter results included continued margin expansion and earnings that exceeded our guidance. As we mentioned in our press release, our GAAP results did include after-tax special charges totaling $69 million or $0.11 per diluted share.

These were primarily for non-cash fixed asset write-offs related to the discontinuation of the SOLOMIX drug delivery system in development, and costs associated with the planned retirement of the SYNDEO PCA syringe pump.

As you may recall, SYNDEO has been on hold for some time and therefore this has no impact on the company’s ongoing sales and earnings. Now let me briefly walk you through the P&L by line item before providing you with an update on our financial outlook for [2009].

Starting with sales, our reported sales totaled $3.15 billion, which was flat to last year and in line with our guidance. Sales growth excluding foreign currency was 6%, and was impacted by a change in the timing of plasma orders primarily in Latin America and Eastern Europe versus our expectations. Also excluding foreign currency and transfusion therapy sales from both years, sales increased 7%.

In terms of individual business performance, let me start with medication delivery which had third quarter sales totaling $1.2 billion, an increase of 1% on a reported basis. Excluding foreign currency, medication delivery sales grew 7%. US sales increased 4% and international sales in medication delivery declined 2% on a reported basis. But excluding foreign currency, international sales were up nearly 10%. ‘

Turning to the product categories, IV therapy sales totaled $396 million and declined 2%. Excluding foreign currency, sales increased 6% and were driven by increased demand globally for IV solutions and nutritional products as well as improved pricing.

Global injectable sales increased 7% to $433 million. Excluding foreign currency sales grew 13% due to increased pharma partnering sales, growth of select multi source generics, and strong growth of our pharmacy compounding business outside of the United States.

Infusion system sales totaled $208 million and declined 11%. Excluding foreign currency sales declined 8%. While sales have improved sequentially from the first and second quarters, the decline year over year is largely the result of lower infusion pump remediation revenues.

And finally anesthesia sales totaled $123 million and increased 10%. And excluding foreign currency sales increased 14% as a result of strong sales of both of both SUPRANE and SEVOFLURANE. Moving along to renal, third quarter sales totaled $576 million and declined 3% on a reported basis.

Adjusting for foreign currency sales increased 4%. US sales increased 2% and international sales declined 4% on a reported basis. But excluding foreign currency international sales were up in mid single-digits.

Consistent with our expectations and recent trends global hemodialysis sales of $103 million declined 9%. Excluding foreign currency sales declined by 1% due to lower HD product revenues. Globally PD sales totaled $473 million and declined 1% on a reported basis.

Excluding foreign currency global PD sales increased 5% due to patient gains, particularly in Latin America and Eastern Europe and double-digit growth across Asia. In addition we continue to see improvements in US PD patient growth resulting in PD revenue growth of 4% in the quarter. This performance is encouraging especially in light of the upcoming reimbursement changes that will begin taking effect next year starting with the patient education programs.

In BioScience, global sales totaled approximately $1.4 billion and increased 2% and excluding foreign currency BioScience sales increased 8%. Within the product categories, Recombinant sales of $528 million increased 2% on a reported basis and were up 7% excluding the impact of foreign currency.

Growth last year of 30% internationally created a tough comparison but overall we continued to be pleased with our performance which can be attributed to the success of ADVATE, with global sales advancing by more than 15% this quarter as we remained focused on improved standards of care around the world and driving conversion.

Moving on to plasma proteins, you may recall that our plasma protein portfolio includes a broad array of proprietary and differentiated products including FIEBA, an inhibitor therapy, ARALAST, a treatment for hereditary emphysema, and FLEXBUMIN, or Albumin, provided in a flexible plastic container.

In the third quarter global plasma protein sales were $331 million and declined by 2%. Excluding the impact of foreign currency plasma protein sales increased 7%. Last year significant tenders primarily for FIEBA, contributed to plasma protein growth of 37%, the highest quarterly growth in 2008.

Excluding tenders, the timing of which can be uncertain, plasma protein sales increased by more than 15% including robust sales of Albumin and ARALAST, both of which grew in excess of 20% in the quarter.

In addition to a difficult comparison, growth was impacted by a change in the timing of plasma orders, primarily in Eastern Europe and Latin America versus our expectations. We now expect these sales in the fourth quarter. To summarize, we continue to see strong demand and favorable year on year price improvements across the entire plasma protein portfolio.

In antibody therapy, sales of $336 million grew 9% and excluding foreign currency sales advanced 12%. This is the continued result of increased demand and higher year on year prices. Additionally we continue to estimate demand growth in high single-digits, at the high end of the mid to high single-digit longer-term guidance we provided at our Investor Conference last month.

Sales in regenerative medicine, which includes our BioSurgery products, totaled $109 million and increased 5%. Sales excluding foreign currency grew 10% reflecting robust growth for FLOSEAL. And finally revenues in the other category, totaled $81 million versus $89 million last year.

The decline is related to lower sales of the [FSME] vaccine in Germany as we continued to discuss with you in the second quarter of last year. Also, I would point out to you that we did not plan for any H1N1 revenues in the third quarter. Although we did start shipments of the vaccine in early August, we expect to recognize revenues in accordance with the terms of our contractual obligations which included provisions that precluded us from billing customers until receipt of EMEA marketing authorization, which as you saw, occurred earlier this month.

As we mentioned last quarter, sales of CELVAPAN, our H1N1 vaccine, are expected to total approximately $30 to $40 million in the fourth quarter.

Turning to the rest of the P&L and starting with gross margin, gross margin of 52.8% improved sequentially and reached the highest level of the year. Year over year gross margin improved by 220 basis points. This performance is driven by margin expansion across all three businesses, improved business and product mix, pricing improvements, and manufacturing and cost efficiencies.

SG&A of $672 million declined 1% compared to prior year. Excluding foreign currency SG&A increased in low single-digits as we continued to tightly manage general and administrative costs. R&D spending of $228 million increased 5% and excluding currency R&D grew in the high single-digits.

As we highlighted at our Investor Conference last month we continue to focus on innovation and investments across all three businesses to advance the pipeline. This includes our efforts on bringing to market a new home hemodialysis therapy, increased spending on clinical trials for the evaluation of Gammagard liquid, for a number of potential [indications], investments in Recombinant proteins, vaccines, formulation and delivery technologies, and new therapies that will broaden our regenerative medicine portfolio.

As a result a gross margin expansion and operational leverage, our operating margin of 24.1% reflects and improvement of 210 basis points versus the prior year in line with our full year guidance of approximately 24% which represents a historic level for the company.

Interest expense was $23 million compared to $20 million last year and other was $3 million of income similar to last year as foreign currency translational gains more then offset miscellaneous expenses. Our tax rate of 18.7% was in line with our guidance and finally, as previously mentioned, adjusted EPS of $0.98 increased 11% and exceeded our third quarter guidance of $0.95 to $0.97 per diluted share.

Turning to cash flow we had another strong quarter. Cash flow from operations totaled $875 million reflecting an improvement of more than $60 million compared to last year. DSO ended the quarter at 58 days, which is almost three days higher then last year.

This increase however is entirely due to our receivables outside the US as our US DSO declined slightly from the prior year period. The international DSO increase is mainly due to isolated non-recurring factors in select markets. While we continue to monitor for macroeconomic impacts, to date, we have not experienced any deterioration other then a few isolated cases and this has not resulted in any meaningful impact to our overall results.

Inventory turns of 2.2 are slightly below the prior year and the prior quarter partially due to the timing of plasma orders. Capital expenditures for the quarter totaled $247 million compared to $251 million last year. We continue to expect capital expenditures to total approximately $1 billion for the full year as we invest in appropriate capacity across our businesses to support our future growth.

And lastly to date, we have repurchased 18 million shares of common stock for $965 million. On a net basis, that is net of cash proceeds from option exercises, this amounts to repurchases of 13 million or $764 million in line with our expectation to repurchase a total of $750 million in common stock on a net basis for 2009.

Finally let me conclude my comments this morning by providing our financial outlook for the fourth quarter and full year before opening the call up for questions. First, for the full year as you saw in the press release, we expect earnings per diluted share of $3.79 to $3.81.

More specifically we continue to expect full year sales growth excluding the impact of foreign currency of 7% to 8%. Based on our outlook for foreign exchange rates, we expect our full year sales growth including the impact of foreign exchange of zero to 1%.

By business excluding foreign currency, we continue to expect full year BioScience sales to increase in the 10% to 12% range. Renal sales growth of 4% to 5% and medication delivery sales growth of 5% to 6%. For the full year we continue to expect gross profit as a percentage of sales to improve by more than 150 basis points.

We continue to expect our annual R&D growth to be in the mid to high single-digits and on a constant currency basis, R&D is expected to increase at a double-digit rate. While we expect SG&A to decline in the low single-digits, on a constant currency basis SG&A is expected to grow in low to mid single-digits.

For the full year we continue to expect our operating margin to improve by approximately 200 basis points to approximately 24%. We expect interest expense of approximately $100 million and other expense to total approximately $20 million. We expect our tax rate to approximate 18.5% to 19% and finally we expect a full year average share count of approximately 615 million shares, as a result of our share repurchase activities.

From a cash flow perspective, we continue to expect cash flow from operations to exceed $2.6 billion and capital expenditures to total approximately $1 billion. For the fourth quarter as we mentioned in our press release we expect earnings per diluted share of $1.02 to $1.04 and sales growth excluding the impact of foreign currency of 6% to 8%.

Based on our outlook for foreign exchange rates, we expect reported sales growth of approximately 8% to 10%. With that let me now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mike Weinstein - JPMorgan

Mike Weinstein - JPMorgan

Let me start with the plasma protein piece, it would probably be helpful if you could quantify the impact of those tenders in Eastern Europe and Latin America falling into the fourth quarter rather then the third quarter, which you were anticipating.

Rob Davis

Its about $35 million that we expect to shift from the third quarter to the fourth quarter.

Mike Weinstein - JPMorgan

And so that $35 million that would have been on the plasma and protein line this quarter that should fall into the fourth quarter.

Mary Kay Ladone

About $10 of it is in IDIV, or antibody therapy. So $25 will be plasma.

Mike Weinstein - JPMorgan

And so the guidance for the full year implies that the BioScience business and it sounds very consistent, that the BioScience business re accelerates back to 10% to 12% growth in the fourth quarter, am I reading that correctly.

Rob Davis

Yes you are and I would say that our guidance we’ve given previously for the full year for plasma protein, with high teens, hasn’t changed. So we’re still confident we’re going to see high teens for the full year on a constant currency basis.

Mike Weinstein - JPMorgan

So the last piece on the BioScience side I just want to check on is on the H1N1, and you really didn’t give us that much that was new here today to try and read the scaling at the manufacturing and yield as we go into 2010, can you give us anything incremental that can give us a feel for how much you’ll be able to ship in the first quarter which will obviously be your big quarter next year.

Bob Parkinson

We’ll address that in January as part of our guidance. Look the takeaways even from a month ago when we had the Investor Conference are obviously we got the approval, that’s a big milestone. Secondarily our yield improvements continue even at a better rate then even what we communicated to all of you at the Investor Conference in September so we’re encouraged by that.

The basis for not changing our guidance for sales in the fourth quarter frankly as Rob mentioned in his prepared comments we really can’t bill anything until we got approval so that’s why there were no sales in the third quarter and frankly there’s a 30 day lag between shipments and our ability to bill them.

So when you stack it up, its really why we didn’t change our guidance for the fourth quarter. This is going to be a significant opportunity for our company as I mentioned last quarter and reiterated with my comments this morning, but I don’t really want to go down a path to be more definitive for that in 2010 given the fact that there continue to be a lot of moving parts in this whole discussion.

Mike Weinstein - JPMorgan

And let me just follow-up because I’ve gotten [inaudible] in the middle of this by a bunch of different investors who just want to clarify in your view on the plasma and protein side of the business, IVIG or other proteins, is has anything changed relative to your view that the health of the market or price in the market.

Bob Parkinson

No.

Mike Weinstein - JPMorgan

And last question here on the finance side of it, the Administration appeared to back off this week the elimination of tax deferral on overseas profits, assuming the White House doesn’t reverse course in 2010, shouldn’t we rethink the tax assumptions that were in the LRP that you gave back in September.

Rob Davis

Yes, as I said at the time, I think I even reiterated in several conversations at the Conference, the increase in the tax rate was driven by our assumption of what we expected to see coming out of a tax rate change driven by what the Administration was proposing around changes to the way the foreign tax credit is calculated and some other loss of deductions.

If that doesn’t happen our tax rate over LRP still will go up nominally but more probably to the 21%, 22% range as opposed to the 25% range we talked about. So we really were building in expectations for tax legislative changes that if they don’t happen we will have upside to the LRP. I would note though one thing, I know a lot of people read what was published in The Wall Street, as we read it, they have agreed to postpone it.

I wouldn’t say they’ve agreed to not do it. I think we’re still going to see something next year and if you read closely, that’s effectively what they were saying is they’ve deferred it off. We had always frankly assumed internally that this was an event that wouldn’t impact us until earliest January of 2011 where you’ll recall we had a phase in of our rate going to 23% and then the full impact hitting us in 2012 to 25.

So yes, its an upside but I think its too early to dial it in until we actually see what happens over the coming year.

Operator

Your next question comes from the line of Bob Hopkins – Banc of America

Bob Hopkins – Banc of America

A question on gross margin to start, gross margin was as you mentioned strong in the quarter even with the plasma delays, and I’m just curious if those plasma delays had not happened is it safe to assume that the gross margin would have been up by another 20, 30 basis points or so.

Rob Davis

No, actually as you look at our plasma margin, I think this was a misconception, they’re much closer to our actual corporate average so, whether we had them or not it wouldn’t have materially moved our margin one way or the other.

Bob Hopkins – Banc of America

And then on flu, I know you’re not commenting on 2010 and still a lot of uncertainties here, but I did notice in your prepared remarks some increased optimism relative to the long-term opportunities, so I was just wondering if you could talk about what the drivers of maybe that increased optimism were and if there’s any way of sort of framing in your view the incremental recurring revenue opportunity longer term from flu, either pandemic or seasonal, that would be very helpful.

Bob Parkinson

I think, its fair to say there probably is some increased optimism and I think part of it is internal as a result of our continued progress we continue to make with yield improvements and our ability over time hopefully to come closer to fulfilling the outstanding orders we have and so on.

But I think the other piece of it is really more the external environment. We commented at the last quarter’s call, and in fact I think even at the recent Investor Conference on this opportunity and is it a one-time opportunistic kind of thing or is this a sustainable business and I think we’re increasingly feeling that this is a sustainable business opportunity.

You may have read a communication that came out from the WHO was either earlier this week or late last week that actually commented to that effect that it was the view of the WHO that in fact this is something that government’s, matter of fact the world, are going to have to continue to live with.

And so in that regard, that probably flavors into our sense of optimism as well. So those would be the comments I would make on that.

Bob Hopkins – Banc of America

And then just real quickly lastly on back on the plasma shipment delays, could you just give a little bit more color, sort of country by country, what went on there and caused the delays. I know this happens fairly frequently but I was just wondering if there’s any more color that’s worth sharing.

Rob Davis

Not really, these are several tenders across multiple countries, mainly across EMEA and Latin America but I wouldn’t say as we look at the individual situations, it is a timing shift. I would point out to you that as we look at already now in October we’ve already booked about a third of those timing shifts in the quarter.

So we are seeing it come back and that’s probably I think enough to give you confidence that we do see the timing effect.

Bob Parkinson

It purely is timing. One of the discussions we’ve had on previous earnings conferences and so on is whether or not given the macroeconomic environment underlying demand for our products would decrease and would that manifest itself in parts of the world in terms of either fewer tenders or less volume on tenders for plasma proteins and so on and frankly we’ve really seen none of that. \

Its not like there’s tenders that we had last year that aren’t reoccurring this year. So it purely is a timing dimension.

Operator

Your next question comes from the line of Bruce Nudell – UBS

Bruce Nudell – UBS

Just looking at kind of antibody therapy, its like around 7% volume growth around the world and I think one of the things that you look at is given the pricing this quarter in the west, it looked like it was [inaudible] to volume, is there anything to that or are we somehow misreading that and does this [inaudible] trend or is it just the luck of the draw in the quarter.

Bob Parkinson

I was having trouble catching the second part of that but—

Bruce Nudell – UBS

In other words it looks like volume demand in US for antibody therapy this quarter may have been in the low single-digits for you, or is that just incorrect.

Bob Parkinson

It may have been down a tad in the third quarter frankly but that’s why Rob commented in his prepared comments the way he did. Our view of the market is this is still certainly a mid to high single-digit if not closer to high single-digit in terms of underlying market growth and on the pricing front as you know we’re not going to comment on that in detail, but I think as Mike asked earlier, our view on that is unchanged from what we’ve previously communicated.

Mary Kay Ladone

I would add our volumes were up year over year in the US but I what I would say as well is as in the past we do see Q3 volume somewhat softer then Q2 and we’ve seen that historically as well.

Bruce Nudell – UBS

And just a clarifying question regarding [H5N1] you noted that you had 80 million doses ordered and you also noted that you may be able to get away with one administration per patient. What is that shift imply in terms of the total number of doses that will be consumed on a worldwide basis and the economics of that shift from two administrations per patient to one perhaps.

Bob Parkinson

Well obviously to the degree we had demand that’s greater then our capacity and we can get regulatory approval for one shot versus two, that represents a material upside. But I think that we have to certainly go through the regulatory pathway, see whether or not we’re successful in getting approval in that regard but if we can get approval for one shot instead of two, then that obviously frees us up to meet other demand that frankly continues to emerge from around the world.

Bruce Nudell – UBS

We’ve seen the [inaudible] report, on the 510(k)’s for class three devices being something you’re not happy with, is there any risk with regards to the home dialysis that, more cautious FDA will push this down a [PMA] route.

Bob Parkinson

I don’t know that we have enough information at this stage to answer that definitively. Obviously you know what our preference would be but I think its too early to make a call on that at this point.

Operator

Your next question comes from the line of Matt Miksic – Piper Jaffray

Matt Miksic – Piper Jaffray

So I wanted to look on the front end of the plasma business, the collections trends that you’re seeing, if you could talk about what you’re seeing, what you saw in the quarter both in terms of source and recover plasma and then also it would be great to understand how that’s potentially impacting your costs there, maybe how we should think about if it’s the back half of next year, are you storing more now, are you changing your strategy for collection, some color there.

Rob Davis

We are seeing our collections slow down and we are trying to be very planful in how we manage our overall collection base both in terms of number of centers, hours the centers are open, fees we pay, any kind of marketing programs we give. So all of those things are items we are looking at to make sure that we are again planful of how we approach this.

The end result of that is our collections are down and as we look forward it will result in a lower cost to collect. I would caution you though that to try and translate that into a significant margin benefit to the extent that we slow down collections and as a result slow down [fractionation] there is an offsetting loss of throughput variance on our plants.

So as we look at it right now I don’t see that as a material upside or downside, it kind of just is offsetting what will move through our fractionation chain next year.

Matt Miksic – Piper Jaffray

And then just one quick follow-up here, and then I had a question about your specialty products, but just on the topic of margins, and next year and as you get into I guess the tail end of 2010 and 2011, can you give us again maybe just help me understand how that transition of going [inaudible] is going to work, is there any improvements in margins leading up to that or is really just as you begin to shut that down and take those costs out of your overall absorption that we see the benefit in 2011.

Rob Davis

As we’ve talked about in the past right now we are bearing the full depreciation of the new facility and we are still accelerating the depreciation off of the old, not a meaningful number but that is there so we are [bearing] the full cost of both. Either plant is running at full what I would say, full optimum throughput because of the fact that we’re in the midst of slowing down old LA to transfer to new LA.

As we move forward its beyond 2011 before we probably would expect to see any kind of meaningful yield benefit as we expect to get up the learning curve in our new LA frac facility but for now until 2011, its probably going to be a slight drag on overall operations and part of that will depend on the ultimate timing of how quickly we shut down the old facility.

Matt Miksic – Piper Jaffray

And just to clarify so not much yield improvement until beyond 2011 but do you see a margin benefit in 2011 or is that also beyond.

Rob Davis

That’s probably, if there’s any its going to be small, any kind of meaningful benefit will be beyond 2011.

Matt Miksic – Piper Jaffray

And then any color on ARALAST and FIEBA, you gave the global growth, it would be helpful to understand what the trends are here in the US and OUS.

Mary Kay Ladone

FIEBA in the US is growing. I’d call it mid single-digit range. Obviously given the FIEBA tenders from last year its down year over year.

Matt Miksic – Piper Jaffray

And then ARALAST.

Mary Kay Ladone

ARALAST we commented growth is growth, over 20%.

Matt Miksic – Piper Jaffray

And that’s mostly—

Mary Kay Ladone

Its mostly US. We have very little sales. I think actually we don’t even have sales internationally.

Bob Parkinson

One thing I would interject, is its you find that oftentimes folks externally kind of group all the plasma proteins together think that the dynamics of the, the price dynamics move hand in hand and so on. The reality is we sell a comparable amount of non-antibody based plasma proteins as we sell Gammagard, right. And the composition of that as Rob pointed out in his statement are a lot of proprietary products like FIEBA, like ARALAST, like Albumin in a flex container.

All of which continue to grow and prices continue to do very well. So part of our strategy including IVIG over time as we get new indications and new delivery forms is to continue to differentiate those products.

Operator

Your next question comes from the line of Rick Wise - Leerink Swann

Rick Wise - Leerink Swann

First just on the, back to the plasma protein, on the US side Mary Kay you were very clear about saying reminding us about the seasonality, the US seasonality in IGIV seemed a shade more this year, is there anything unusual there in, it seems a shade more than then the, it was basically flattish sequentially last year.

Mary Kay Ladone

No actually we did see last year our volume growth slow in Q3 versus Q2 as we did this year. I don’t have visibility into the rate.

Rick Wise - Leerink Swann

Just to make sure I know you’re not giving 2010 guidance, but in terms of expected price increases, it still, as part of the mix of growth for the plasma protein antibody business, is it still reasonable to expect low single-digit price increases in 2010 or is that an unreasonable expectation.

Bob Parkinson

I don’t want to get into specific pricing this morning for reasons you understand, not the least of which is we’re in the middle of negotiating contracts with a number of folks and so on, okay. As I stated earlier our view on this is unchanged from what we communicated to you previously.

Rick Wise - Leerink Swann

On the H1N1, you stopped taking orders at one point, when do you think you could start taking new orders, when there’s a confidence in your manufacturing process and yields etc. are likely to be enough.

Bob Parkinson

Don’t know but you know as, I think it was, I forget who asked the question earlier, or whether it was Bob or Bruce, but the single dosing variable is a big piece of that so until there’s definition on that, its really impossible to answer the question.

Rick Wise - Leerink Swann

And last just a general question, we’ve heard some confusing positive negative signals from other companies about the general environment, procedure volumes generally pricing, generally capital spending, generally but it seems like what we’ve heard so far is the environment seems to be sort of stable and seeing some improvement. How would you characterize it for Baxter.

Bob Parkinson

I wouldn’t necessarily say improvement for our situation because I think our position from the get go is we didn’t see a meaningful impact in the underlying demand for our products and we have not so what’s happening is generally very much in accordance with I think what we anticipated, I do think if you look at hospital activity, if you look at capital spending, and so on, generally its fair to say you’re seeing a little improvement in those various parameters in the US.

Operator

Your next question comes from the line of Matt Dodds - Citigroup

Matt Dodds - Citigroup

I guess a little broader then just plasma but on a recombinant factor in plasma, can you say how big is the tender market represent generally, is the majority of your OUS sales related to large tenders and then in the US how frequent are the GPO contracts, is there a point in time where over the next 12 months you see any large ones come up. That’s the first set. And then second quickly, on the vaccines, you didn’t get any APA revenue this quarter, I just want to make sure that’s correct.

Rob Davis

Just to make sure I understand the first question, were you asking about recombinant or plasma proteins.

Matt Dodds - Citigroup

I think, at least for the US maybe both, but internationally I assume the tenders are more based on just the plasma.

Rob Davis

Yes, OUS clearly a majority of our business is tenders in one form or another. Now I would differentiate, we have large government tenders but outside the US in a lot of markets, even at a hospital level, they will run it by tender so it’s a mix of both.

But it is a majority of our plasma business outside the United States. In the United States recall that most of our sales are under GPO contracts or contracts with the alternate care providers. As we talked about in the past, that’s not really a tender business, that is where we negotiate annually a contract which I think Bob kind of referred, we’re in the midst of some of those now, that run for the year generally speaking.

So its not like we have graded new contracts that come into play through the year in the United States.

Matt Dodds - Citigroup

Internationally are the tenders generally annually as well, or are they more mixed.

Rob Davis

No, they’re definitely mixed and probably less annual then semi-annual or quarterly or in some cases even—

Bob Parkinson

But is fair to say the recombinant tenders OUS are actually longer-term in most cases.

Rob Davis

Yes. But I was stressing just the plasma protein.

Bob Parkinson

But I think Matt was asking when he said more broadly the plasma proteins, were you not specifically asking, and wanted some insight on recombinant tenders OUS.

Matt Dodds - Citigroup

No, actually for the US. I’m just trying to understand the GPO contracts.

Bob Parkinson

Sorry, I misunderstood.

Matt Dodds - Citigroup

Its okay, they’re annual and it seems like there’s a few coming up in the fourth quarter, you have more that occur towards the end of the year then during the year, is that fair.

Mary Kay Ladone

I’m not sure I understand your question, but the tenders aren’t annual. These are tenders that occur with a couple of months’ notice for us. Like Rob said, 30% of the orders of these tenders specifically we were talking about have already been placed and we’re already, before the fourth quarter. So we’re waiting on hearing from government on their needs for the rest of the quarter.

Rob Davis

But again these are, to the way I commented earlier, in most cases these are not annual tenders for plasma proteins and they are, in some cases somewhat intermittent because its based on a government’s need and budget and that can drive timing, so for instance, what we saw, that drove both in some cases need and in some cases timing, drove the shift.

And this could be literally from the last week of the third quarter into the first week of the fourth quarter to the point that of those timing tenders we’ve talked about 30% we’ve already gotten the orders in now so we did see them in fact shift as we expected.

So its not as easy to forecast as just looking at an annual run rate.

Matt Dodds - Citigroup

So I got the OUS, perfect, so in the US what I was asking about was the GPO’s since they’re annual—

Rob Davis

Yes.

Matt Dodds - Citigroup

Are there a larger percentage in the fourth quarter coming up in the normal annual kind of run rate.

Rob Davis

Well again, we negotiate most of our contracts on an annual basis to take effect January 1, so we are in the midst of negotiating contracts for, starting January 1 through the fourth quarter, they continue to be covered by the contracts we have today.

Matt Dodds - Citigroup

Okay, that’s all perfect for the plasma and recombinant, and then just quickly the advance purchase agreement, was there any in the quarter or is that gone.

Bob Parkinson

We didn’t have any in the quarter, I don’t think.

Mary Kay Ladone

I think we had some revenue.

Bob Parkinson

Residual that flowed through, yes.

Mary Kay Ladone

There was some revenue.

Operator

Your next question comes from the line of David Lewis – Morgan Stanley

David Lewis – Morgan Stanley

You did a lot of kind of [consternation] around pricing and for the balance of the year Baxter remains extremely well insulated versus some of these macro concerns, so pricing aside, given new competitors coming into the US markets specifically for IVIG or any sort of GPO contracting dynamics, are you concerned at all about market share issues not pricing for US plasma proteins or IVIG.

Bob Parkinson

I would say not really. Look, we continue, one of the things that our improved inventories have allowed us to do is frankly be more proactive in terms of demand creation. As we’ve discussed before, PID is still highly under diagnosed and treated even in developed and mature markets like US and Western Europe and our improved inventories have enabled us around the world to selectively invest in marketing programs and so on to capitalize on that.

So there’s no indication at all that certainly that we’re losing market share and we don’t plan on losing market share.

David Lewis – Morgan Stanley

Baxter is generally ahead of most of the competitors on fractionation capacity so it sounds like you think that as emerging as a competitive advantage here in the marketplace either this year or heading into next year.

Bob Parkinson

What do you mean by ahead of on fractionation capacity.

David Lewis – Morgan Stanley

When you think about Baxter is about to bring on significantly more capacity, other competitors don’t have the same type of capacity dynamics, it sounds like—

Bob Parkinson

Actually we’re not yes, just to clarify, we’re not bringing on significant incremental capacity certainly not new capacity certainly beyond LA frac, but of course that’s a conversion from the old facility to the new facility so we’re not bringing on significant new fractionation capacity in terms of overall capacity.

I would say anybody who has been through that LA frac facility knows that its absolutely state of the art and this is one of the most highly regulated areas of healthcare so being in the protein fractionation business and from a compliance regulatory compliance point of view and making sure you’re ahead of the curve in that regard, frankly we feel very good in that capacity.

David Lewis – Morgan Stanley

Thinking about this taxation issue as well as your free cash, you’re getting to a point where CapEx is beginning to normalize, which free cash flow seems poised to accelerate very materially here over the next couple of years which create the dramatic amount of optionality for Baxter balance sheet, at least in our view is this taxation dynamic effect your ability. It seems like one of the reasons you’re able to give the kind of EPS guidance you’ve given with the increased taxation is dramatic free cash. So depending on what happens with taxation, does that effect your ability to be more acquisitive, or have more optionality on this balance sheet or do you see significant optionality regardless of what happens with taxation.

Rob Davis

I would say we see significant optionality regardless of the tax. Obviously when we guided on the growth both in terms of earnings per share and on our cash flow at our Investor Conference, that was assuming the tax rate increase so overall, yes, you would expect to see a, have that optionality. The other thing to note, as we think about the tax rate arising, there’s not necessarily a dollar for dollar change in your cash taxes paid.

Some of this is purely a change in the timing of how you account for your taxes as they flow from, through deferred taxes. So its not a one for one that as the tax rate moves that in a given year you’re going to see our cash taxes move with it. So it’s a little cloudier then that.

But under either scenario, we have meaningful free cash to deploy.

David Lewis – Morgan Stanley

There seems to be a significant amount of excitement in the channel regarding SIGMA, is there sort of a quota we should be thinking about over the next two or three quarters where you feel that that relationship is fully functional either from a capacity perspective or marketing and [inaudible] perspective.

Bob Parkinson

I don’t want to comment on the future of the relationship, I will comment on how its working today which is very well. We continue to penetrate a number of hospitals with the SIGMA spectrum device. Its been very well received, not only in terms of the technology and connectivity features and so on, but of course the fact that its used with standard Baxter IV sets is a great advantage.

So I would just say we’re very pleased several months into the relationship with how its progressing and we’ll see where it goes from here, but I don’t want to comment as to what the likely end point might be.

Operator

Your next question comes from the line of Glenn Navarro – RBC Capital Markets

Glenn Navarro – RBC Capital Markets

Last week I saw some commentary out of [Griffals] that had mentioned plasma softening of pricing, and some pricing pressure in Europe and I know in Europe pricing differs from country to country, but I was just wondering if you can give us any commentary about what you see in general with respect to pricing in Europe on the plasma side. That’s question one, and then secondly you had mentioned on the call that you expected to file your seasonal flu vaccine early next year in the US, what’s the FDA pathway, is this standard 10 to 12 month review and I’m wondering if you could have product approved for the 2010, 2011 flu season.

Bob Parkinson

Second part, yes it should be about that kind of timing in terms of the review and approval, that we’ll have product available for next year’s flu season. On the first question on [Griffals], look, we’re not going to be specific and comment beyond what we already have on our own pricing. We’re certainly not going to comment on a competitor’s price so I’m just going to leave it at that.

Glenn Navarro – RBC Capital Markets

Can I just ask then one follow-up just on the flu, can you somehow quantify, because you’re obviously excited about the multi year opportunity of H1N1, what’s the level of excitement for the seasonal flu opportunity and I’m wondering if you can quantify somewhat how big the opportunity could be for Baxter.

Bob Parkinson

I think the key thing there is if we’re successful in getting approval on the seasonal flu its going to compete with H1N1 in terms of defined capacity in our [inaudible] facility. So to some degree the more sustained the H1 opportunity is and the more successful we are in that regard, to be very candid, the less latitude or capacity we have to capitalize on the seasonal flu market and so let’s get the approval on the season flu first.

Let’s see things continue to evolve on the H1N1 front, and I think the takeaway is there should be some nice opportunities here to optimize that capability in [inaudible] to create value for our shareholders.

Operator

Your final question comes from the line of Ben Andrew - Willilam Blair & Company

Ben Andrew - Willilam Blair & Company

Just briefly we haven’t talked a lot about the infusion pump systems, you had some difficult year over year comps on the remediation side for Colleague is that going to continue in Q4 and when do you think you might be able to give us an update on Colleague.

Bob Parkinson

It will continue in Q4, probably not to the same degree because it was like midyear last year if I call that we really had the peak remediation revenue because of the cycle that started to flatten in the year.

Mary Kay Ladone

That’s correct. Q3 was really a difficult comp and Q4 we should see growth probably more in the mid single-digit range.

Ben Andrew - Willilam Blair & Company

Is that mid single consistent with sort of your set growth as kind of separate from the pump growth.

Mary Kay Ladone

Yes, that growth I’d say generally was pretty flat. It was a little down in the quarter but it was down by less then $5 million in sales.

Operator

This concludes today’s conference call with Baxter International. Thank you for participating.

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 Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts