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Baxter International Inc. (NYSE:BAX)

Q3 2007 Earnings Call

October 18, 2007 8:30 am ET

Executives

Mary Kay Ladone - VP of IR

Bob Parkinson - Chairman and CEO

Rob Davis - CFO

Analysts

Michael Weinstein - J.P. Morgan

Rick Wise - Bear Sterns

Larry Keusch - Goldman Sachs

David Roman - Morgan Stanley

Operator

Good morning, ladies and gentlemen and welcome to Baxter International's Third Quarter Earnings Conference Call. Your lines will be in a listen-only mode until the question-and-answer segment of today's call. (Operator Instructions). As a reminder, this call is being recorded by Baxter and its copyrighted material that cannot be rerecorded or rebroadcast without Baxter's permission. If you have any objections please disconnect at this time.

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

Mary Kay Ladone

Thanks Sean. Good morning everyone and welcome to our Q3 2007 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 investor 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 would like to turn the call over to Bob Parkinson.

Bob Parkinson

Thanks Mary Kay. Good morning everyone and thanks for calling in this morning. We are very pleased with our third quarter financial results that were reported earlier this today. Not only did we again exceed expectations on key financial metrics, we continue to improve the quality of our earnings and also strengthen our overall financial position.

While Rob will provide a more detailed explanation of our financial results in just a few minutes, I would like to point out a few important highlights at the outset this morning. As you saw adjusted EPS again exceeded consensus for the quarter, reflecting a 23% increase versus the prior year.

I am also pleased that the sales growth for the quarter, after adjusting for both FX and the TT divestiture, grew a very solid 7% despite the loss of BeneFIX sales, in Europe in the third quartet. Year-to-date sales growth again adjusting for FX and the sale of the TT was 8% versus 2006. So clearly we are tracking very well against the projections that we provided all of you, at our Investors conference earlier this year.

Another aspect of our Q3 results that I want to emphasis is the continuing improvement in the profile of the P&L. Gross margins improved, as you saw to 50% in the quarter, which his our highest level in many years and likewise on an adjusted basis operating income as a percentage to sales achieved 21.9% for the quarter, both these key metrics continue to improve sequentially, as well as versus prior year.

As I commented during last quarters call, our improving margins are the result of improving product mix and business mix, intense focus on pricing opportunity throughout all of our businesses, disciplined control of manufacturing cost and productivity improvements throughout our global manufacturing footprint, also supported further by the pruning of underperforming and lower margin businesses and product lines most notably the recent divestiture of the TT business.

And finally, we continue to accelerate our overall R&D spending, both internally and through ongoing business development initiatives. As we saw R&D spending for the quarter increased by 13% on an adjusted basis versus the prior year and we are actually up some 16% year-to-date versus 2006.

What I like to do is just take a few minutes to provide some additional color and update you on some business development and R&D milestones that were achieved during the third quarter. Let me start with business development activities, which included first the collaboration in our renal business with DEKA Research and development corporation, for the development of the next-generation home hemodialysis machine. This reinforces our ongoing commitment to innovation in end stage renal disease treatment and expansion of our leadership position in at-home dialysis.

I should also mention that a study, which was recently published in the Journal of American Medical Association and funded by the Kidney Foundation of Canada, highlighted that nocturnal hemodialysis, done six times per week, may be better than conventional in-center dialysis. This further supports the broader use of at-home dialysis where Baxter has unmatched expertise.

In our medication delivery business we finalized the joint venture in the third quarter for parenteral nutritional products in China. This venture will allow us to improve access to care by expanding the availability of Baxter's innovative parenteral nutrition products to patients, physicians and pharmacies in the region and also reflects the importance of China to our continued geographic expansion and growth.

In BioScience, we expanded our relationships with Halozyme Therapeutics, forming a new collaboration focused on the development of subcutaneous liquid IVIG. This delivery enhancement will apply Halozyme's proprietary enhanced technology with Gammagard liquid, increasing convenience and improving delivery of the therapy.

And finally, earlier this week we announced an agreement between BioScience and Kaketsuken, the chemo-sero-therapeutic research institute, based in Kumamoto, Japan, for the worldwide rights to develop, manufacture and market the recombinant protein ADAMSTS13.

In the absence of ADAMSTS13 in the blood, patients develop a severe, often life threatening condition called thrombotic thrombocytopenic purpura, marked by the formation of platelet-rich blood clots in blood vessels throughout the body. Recombinant ADAMSTS13 is being developed for the treatment of TTP and related disorders and will be evaluated for other indications in the future.

During the third quarter, we also achieved a number of R&D milestones. First, we announced promising Phase I/II European study data for our candidate seasonal influenza vaccine, indicating that the vaccine endures the strong antibody response and demonstrated good tolerability in all study populations.

Second, we signed an advance supply agreement with the UK Department of Health for our candidate pandemic H5N1 influenza vaccine. And we continue to work closely with governments around the world on pandemic preparation. As you know, both our pandemic and seasonal vaccines are manufactured in a serum-free, vero cell-based system which offers several advantages over the conventional egg-based technologies.

Third, we announced plans to initiate a Phase III old-timers clinical trial with liquid GAMMAGARD, which will begin in early 2008. This decision was based on the results and preliminary analysis of interim data from a double-blinded placebo-controlled Phase II study completed by Dr. Norman Relkin and colleagues at Weill Cornell MedicalCollege in New York City. In this study 24 patients with mild to moderate old-times were treated with IVIG, and demonstrated a favorable response relative to those given placebo.

We expect the final results of the Phase II trial to be formally published in early 2008. And finally, I'd like to mention that the transition to our new state-of-the-art plasma fractionation facility in Los Angeles is proceeding as planned. In fact, I'm pleased to announce that we've recently received regulatory approval from the FDA to process liquid IVIG at our new fractionation facility. This approval which was actually received earlier than expected marks the final milestone for the US, as we are now labeled to commercialize all key plasma proteins produced at his new facility for the US market. As you know, this facility is expected to more efficient in overtime, enhanced fields of our fractionation process.

Before turning the call over to Rob, let me provide you with a brief update on the ongoing situation with the COLLEAGUE infusion pump. First of all, I'm pleased to communicate this morning that the FDA was recently notified by PAREXEL, our outside expert, that our quality systems have been inspected and certified, thereby triggering an inspection by the FDA within the next 30 days. We continue to make good progress with the remediation of the US installed base of single channel COLLEAGUEs, with now approximately 40,000 of the US installed base of 150,000 devices remediated today. And these upgraded single channel COLLEAGUEs are performing very well in the market place.

We've also defined the fix to the triple channel COLLEAGUE issue which as you know was the basis of the July field corrective action. And we are in the final stages of completing the necessary testing validation of the software modifications. We expect to submit our pipeline to the agency reflecting our enhancements to the pump before our next earnings call on January.

As you know, we did communicate that our financial guidance to the remainder of 2007 does not reflect any sales or earnings associated with the re-commercialization of COLLEAGUE. We'll be in a position to provide guidance regarding COLLEAGUE sales for 2008 when we provide overall Baxter guidance in January. And I'd be happy to discuss any questions on this matter during our Q&A this morning. But first, let me turn the call over to Rob for a more detailed discussion of our Q3 results. Rob?

Rob Davis

Thanks Bob, and good morning everyone. As Bob mentioned, we reported strong financial results today which favorably compare to the guidance we previously provided. The quality of our performance is the result of solid revenue gains and continued gross margin expansion, which again allowed us the flexibility to selectively invest in sales and marketing programs and R&D. You may have noted that our GAAP results included after tax charges totaling $63 million or $0.09 per diluted share. These charges are for in-process R&D associated with collaborations renounced during the period with DEKA Research and Development Corporation and Halozyme Therapeutics, both of which Bob referred to earlier.

And a charge to establish reserves for litigation, related to ongoing disputes concerning historic average wholesaler pricing practices. Excluding these charges, adjusted earnings per diluted share of $0.70 increased 23%, and compared favorably to our earnings guidance for the quarter of $0.64 to $0.66 per share. And I'll walk you through P&L by line item, and I'll spend most of my time this morning on the sales discussion by business and our revised outlook for the year, given that the P&L for the quarter is pretty straightforward reflecting strong operational results.

Now, starting with sales. Our reported sales totaled approximately $2.8 billion and increased 8%. Currency contributed 4 percentage points of growth, so sales growth excluding foreign currency was 4% and in line with our sales guidance of 3% to 4% at constant currency rates. As Bob mentioned, excluding Transfusion Therapies from both years, reported sales increased 11% and excluding foreign currency, sales growth was 7%. In addition, I'd like to remind you that we faced difficult comparisons to prior year in both BioScience and Medication Delivery due to the planned transition of marketing rights were BeneFIX and PROPOFOL which have combined sales totaling more than $60 million in Q3 of last year for these two products.

Turning now to the individual business performance, let me start with Medication Delivery, which had sales totaling over $1 billion, an increase of 10%. Currency contributed 4% points of growth and excluding foreign currency, Medication Delivery sales increased 6%. As we expected, Medication Delivery growth accelerated versus Q2, primarily as a result of strong performance in our anesthesia business and solid improvement across the rest of the portfolio.

U.S. sales for the business increased 8%, while International sales increased 13%. By segment, anesthesia sales totaled a $111 million in the third quarter. Sales increased sequentially by approximately $15 million or 16% and increased 46% compared to prior year.

We remain encourage by the strong underline fundamentals in this business, as reflected by the continued growth and end-user demand. Our success with our proprietary anesthetics SUPRANE, reinforces our position as the only supplier with all three modern inhaled anesthetics in the global marketplace. Global Injectables and pharma partnering sales of $372 million increased 6%, with currency contributing three percentage points of growth.

Strong growth in the pharma partnering business, which was up 20%, partially offset the decline of Propofol, which had sales of approximately $20 million in Q3 last year.

IV Therapy sales totaled $346 million, an increase of 9% with currency contributing six percentage points of growth. U.S. growth in IV Therapy was driven by solid demand and modest pricing improvements, while International performance was a result of growth in our nutrition business, in addition to volume gains in IV Therapy products, particularly in Europe, Latin American and China.

Infusion system sales totaled $207 million, similar to the first two quarter of this year. Sales growth of 5% or 3% excluding foreign currency was in line with overall market growth. I'd also like to point out that given the breadth of our Medication Delivery portfolio, during the third quarter we announced a two year extension of the sole source contract for IV therapy and nutrition products and the continuation of our infusion pump agreement with Novation, on behalf of the University Healthcare Consortium. UHC includes the most prestigious academic hospitals in the U.S. and our new contract is valued at approximately $200 million over the award period.

In summary, we remain encouraged by a number of positive trends across our Medication Delivery business, including the solid fundamentals in our IV Therapy and anesthesia businesses and the growth prospects in pharma partnering. As a result, we continue to expect Medication Delivery to contribute sales growth, excluding the impact of foreign currency in the 4% to 6% range for the full year.

Moving now to renal, third quarter sales totaled $560 million and increased 8% with foreign currency contributing 5 percentage points of growth. Global PD sales increased 10%, with currency contributing five percentage points of growth. This consistent performance is once again the result of strong international growth with the accelerating patient gains, particularly in China, the rest of Asia, Central and Eastern Europe, and Latin America.

In the U.S. the positive patient growth trend also continues, with both patient gains and PD sales growth in the quarter approximating 3%. In hemodialysis, while reported sales increased modestly, excluding currency, sales declined in mid single-digits versus prior year, due to lower sales of dialysers and ancillary HD products. And expected decline in hemodialysis is consistent with our strategy of deemphasizing lower margin businesses in the portfolio.

In summary, excluding the impact of foreign currency, we continue to expect 4% to 5% growth in renal for the full year. The success of our back to basics approach is strengthening our global leadership position and will continue to expand our presence geographically.

BioScience, reported another outstanding quarter with sales of approximately $1.1 billion, an increase of 14%. This growth includes four percentage points of benefit from foreign currency. Excluding foreign currency sales growth in BioScience was 10%. U.S. sales increased 19% driven by double-digit increases in all product categories. While international sales growth increased 9%, with currency contributing 7 points of growth.

As I mentioned earlier, BioScience sales growth was impacted by the planned transition of international market right back to Wyeth for BeneFIX. BeneFIX sales last year totaled more than $40 million in the third quarter. Therefore, BioScience sales growth, excluding BeneFIX was 19% and excluding foreign currency, sales growth was 16%. This is consistent with the growth generated by BioScience in the first half of this year. In addition, international sales growth, excluding BeneFIX was 19% or 12% excluding currency.

In the period, we continue to see conversion to ADVATE globally with ADVATE sales now comprising more than 70% of our total recombinant business. Conversion in Europe remains over 90%, while we've converted more than 50% of our patients to ADVATE in U.S. and the rest of the world, largely driven by Japan and Canada where we are approaching a 100% conversion to the therapy. Recombinant sales of $432 million increased 11% with strong growth in the U.S. of 13% and 10% growth internationally.

In the quarter, I'd like to note that we anniversaried ADVATE launches in both Australia and in Canada. The strong U.S. performance reflects demand for our ultrahigh potency 3000 IU dosage form of ADVATE, which was launched in August of this year. As you may know, the new 3000 IU dosage strength makes it easier for patients requiring higher doses to administer ADVATE by reducing the number of vials needed and the total infusion time.

Turning now to the plasma business. In the quarter, plasma protein sales of $246 million increased 15% with currency benefiting sales by 5 percentage points. Performance continues to be driven by the further conversion to especially therapeutics, like FLEXBUMIN and ARALAST, as well as, increased demand and improved pricing across the portfolio.

Antibody therapy sales increased 25%, and totaled $245 million with currency benefiting sales by two points. Growth was driven by continued conversion to liquid GAMMAGARD and price improvements in US, as well as, in Europe. Sales of our regenerative medicine business increased 14%, driven primarily by strong growth of FloSeal & CoSeal

As we’ve mentioned in previous quarters, we continue to see a balance between supply and demand. Collections which as you know are currently the bottleneck to supply, continue to keep pace with global demand growth. We continue to have good visibility to the drivers of accelerated demand, as well as, our own supply capabilities, and as a result, the market fundamentals and our outlook on this business have not changed. This business remains a sustainable growth opportunity for the company going forward.

Finally, revenues in the other category totaled $94 million and declined 2%. The difficult comparison for BeneFIX offset strong vaccines growth which was the continued result of increased demand for our FSME, encephalitis and meningitis vaccines, particularly in Germany. As well as, approximately $15 million in revenue associated with our influenza development effort in the US.

As you know, BioScience has reported excellent results so far this year. Because of this, we would expect sales growth to be at the high end of our previously issued guidance up 11% to 13%, excluding the impact of foreign currency.

For the fourth quarter, sales growth for BioScience is expected to be in the high single-digits excluding currency. While this may appear to be somewhat lower than previous quarters, excluding the other category where we record vaccine sales, BeneFIX and third party plasma contract sales. Core BioScience sales growth is expected to be consistent with the first three quarters of this year.

Turning now to gross margin. Gross margin in the quarter of 50% improves sequentially and also improved 2.5 points versus last year's gross margin of 47.5%. The primary driver of margin expansion continues to be improved business and product mix. In the third quarter, SG&A of $607 million declined sequentially and increased 8% compared to priory year. This growth includes approximately three points of growth from foreign currency.

R&D spending of $168 million increased 13% on an adjusted basis, joined by significant increases in BioScience related to clinical trials and milestone payments to partners. Our operating margin in the quarter was 21.9%, an improvement of 2.2 percentage points despite increases in SG&A and R&D. Other expense of $21 million and interest expense of $6 million were both similar to last year. And our tax rate in the quarter of 20.2% was in line with our expectation.

Finally, earnings per diluted share of $0.70 increased 23% compared to an adjusted basis, EPS of $0.57 last year. Our share count was 651 million shares down sequentially and down from the prior year contributing a penny of upside versus our original expectation.

Moving to cash flow. Cash flow from operations for the quarter totaled $608 million, and year-to-date, we've generated cash flow from operations of approximately $1.6 billion. Inventory terms of 2.3 terms are slightly lower than 2.4 terms last year. I should note however, that this continues to be due primarily to inventory build in Medication Delivery for the COLLEAGUE remediation efforts, and an increase in BioScience inventory as we seek to reestablish safety stock levels of our plasma proteins.

DSO of 59 days was higher than last year, as DSOs internationally due to change in geographic mix. We are partially offset by lower DSOs in the US. On a country-by-country basis however, DSOs generally remain flat or better till last year. In the third quarter, we increased the pace of share repurchase, repurchasing $827 million of common stock, or 15.3 million shares. This represented one half of our repurchases year-to-date of approximately $1.6 billion, or 30.4 million shares.

We remain committed to returning value to our shareholders, with continued share repurchases and our quarterly dividend. In the fourth quarter, we would expect to return to our historical pace of repurchases, and for the full year we therefore expect to repurchase approximately $1.8 billion in stock, or $1.2 billion on a net basis.

Finally, let me conclude my comments this morning by providing our revised outlook for the full year 2007. As you saw in the press release this morning, given our strong Q3 results, we are now expecting earnings of $2.75 to $2.77 per diluted share. For the full year, we continue to expect sales, excluding the impact of foreign currency to increase in the 4% to 5% range. At current rates, we would expect currency to contribute approximately three percentage points of growth for the full year. Therefore, full year reported sales growth would approximate 7% to 8%.

Our sales guidance also reflects the impact of BeneFIX and Propofol, as well the transfusion therapy divestiture. As we previously discussed, revenues related to the transition services provided to the transfusion therapies business are expected to total more than $200 million for the year.

Adjusting for foreign currency and transfusion therapies in both years, we continue to expect our full year sales growth to approximately 8%, consistent with what Bob outlined in his opening remarks.

We now expects gross profit as a percentage of sales to improve by approximately 250 basis points and operating margin to improve by more than 200 basis points. We expect interest and other expense, combined to total less than $70 million.

For the full year we expect our tax-rate to be approximately 20% and given our share repurchases to date, we now expect our full year average share count to be approximately 655 million shares.

Lastly, we continue to cash flow from operations to total approximately $2.3 billion and capital expenditures to total approximately $700 million. For the fourth quarter, we expect earnings per diluted share of $0.72 to $0.74 and sales growth, excluding the impact of foreign currency, up 2% to 3%. This equates to the 7% we mentioned in the press release, excluding the transfusion therapy sales.

In summary, we’ve generated very strong revenue growth throughout 2007, consistent with our long range expectations and we are proud of the improved profile of the P&L. The consistency and continuing strength of our financial results further validates the benefits of our diversified healthcare model and stated growth strategies, and reinforces our confidence in our future prospects.

Now, I'd like to turn the call back over to Bob for some closing comments.

Bob Parkinson

Thanks, Robert. Actually just a couple of closing thoughts before we open up the call to q-and-a. Our continuing financial strength has allowed us over the course of the last couple of years obviously to accelerate our investment in R&D. Our new product pipeline, which we presented all of you in some detail during our March, Investors Conference continues to evolve and in fact strengthen.

As our company has transitioned over the past two to three years, we are now spending much more time and effort on those initiatives that will contribute to revenue acceleration over our long range plan. New business development initiatives such as those discussed earlier are important part of this effort.

Finally, as you know, we'll provide financial guidance for 2008 during our Q4 call mid January. Without being specific today, it's fair to say the 2008 is shaping up to be another solid year for Baxter.

We believe there continuous to the opportunity for further margin expansion. We see building momentum in Medication Delivery and our core PD business within renal, augmenting continuing strength in BioScience. And we are gradually accelerating our business development efforts in a disciplined fashion to complement our accelerating internal R&D.

So while we are not without some challenges of course, generally things are moving ahead quite well and very much in accordance with our plans.

So with that we'll now open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 30 days at www.baxter.com. Our first question comes from Michael Weinstein from J.P. Morgan.

Michael Weinstein - J.P. Morgan

Thank you. Good morning.

Rob Davis

Good morning.

Michael Weinstein - J.P. Morgan

A nice job this quarter, once again.

Bob Parkinson

Thanks Mike.

Michael Weinstein - J.P. Morgan

Let me start with a couple of different items. First, when you come out with your 10-Q every quarter, we get a better picture of the margin improvement within the three businesses. With the step up we are seeing here in growth of the Medication Delivery now, once we see the 10-Q, how is that going work? I mean, the question I am getting to is we continue to see this great improvement in margins for the last several quarters within BioSciences, that's been obviously the big margin driver. We'll continue to see obviously the total corporate picture here, this great step up in gross margins again this quarter. How much of that is coming from BioSciences? How much is coming from renal division?

Bob Parkinson

Well, Mike let me comment and than Rob if, you want to maybe pitch in when I am done. Stating the obvious BioScience is driving that, the strength in the plasma business, the associated pricing has been, continues to be and we believe we'll be going forward a significant contributor to continued margin improvement. But, as we point out Mike, continuously I even referenced beginning of my prepared comments this morning.

We think, there are continuously to upside going forward in margin improvement really driven by a number of things beyond the BioScience story. What you'll see in Q3 margin for Medication Delivery is a very nice improvement in overall margins in Medication Delivery, actually, in all the key market segments. And again, this is a combination a factors. First of all, we are starting to get price in the core IV business, which is quite encouraging, that manifest itself across all of the businesses. Some of our higher margin businesses, whether it's our B2B business, our anesthesia business, the nutritional business and so on tend to grow faster than the overall business. And again, those are higher margin product segments, so what you get within Medication Delivery is a positive product or business unit mix effect that we believe will continue to contribute to improving margins in Medication Delivery.

Renal, as we continue our focus on PD and so on, and we accelerate our growth, all be it modestly. Nonetheless, I think it’s a continuous improvement over the last year or two. In the Renal, PD as well is contributing to that, and so, it really is a combination of factors. The other thing I would say is we continue this year despite escalating material cost in many of our businesses to more than offset that with cost reduction programs throughout our global manufacturing footprint.

So, it's easy to say BioScience and more specifically plasma, obviously, that's been a major contributor. But this is more than a one trick pony, and it's why we look forward to '08 and beyond with confidence when we talk about continued leverage in improving our gross margin. Rob, I don't know if you want to add to that.

Bob Parkinson

Yeah, the only thing I would add is, as you know Mike, we have seen margins -- pretax margins, improving BioScience. I think though, if you look at Medication Delivery, over the three quarters in 2007, they have also shown consistent increases, and actually when you see the 10-Q, you'll see the third quarter pretax accelerated faster in Medication Delivery than it did in BioScience.

So, that being said, BioScience still runs about 45% of the total driver on a percentage point basis of our gross margin, but in Medication Delivery, it's vastly approaching that. It's just about 35% with Renal around 18%. So, if you look at it, BioScience still is the main driver, but it is pretty balanced overall across all the businesses.

Michael Weinstein - J.P. Morgan

Let me just follow-up with two items that just might be helpful to people. One, on the second quarter call, I think coming out of that there was confusion as to what your guys were saying about the health and the stability at the Plasma Proteins market and your outlook for pricing there. So maybe you want to take the opportunity just to clarify your views on that. And then second, just to focus on your comments there about Med Delivery business. One of the challenges that I have is trying to walk people through the different mix drivers within these businesses and how mix itself should be driving gross margins. So, if you just focus for a minute on Med Delivery and talk about the growth drivers, and why does the natural mix shift within that business had to --?

Bob Parkinson

Well, let me just kind of reiterate Mike, what I commented on a couple of minutes ago. Yeah Med Delivery is really an amalgamation of a number of distinct business segments, they happened to be interrelated at a high level, but we look at an anesthesia as to franchise very differently as an example. Then we do nutritionals, we look at both of those very differently than we do our BDB operation, where we collaborate with pharma companies. All three of those business segments are significant for us, they all represent higher gross margins than overall medication delivery as a business, and all three of those are growing in a faster rate than medication delivery overall, largely because it's weighted by very low single-digit volume growth in the core IV business, predominantly in the US, and so on.

So, that's really what is contributing primarily to the improved gross margins in Med Delivery. And as we've discussed many times before, and grab those three businesses is an example, anesthesia, nutritionals and our BDB business, our areas of continued investment, promotional focus which is why we believe they are going to continue to grow at a faster rate. So, does that answer your question?

Michael Weinstein - J.P. Morgan

Yeah. That's great.

Bob Parkinson

Yeah.

Rob Davis

Maybe I'll take the former part of that question. To be clear, we continue to see this to be a very stable market, and we are very focused, the plasma markets what I am referring to, and we clearly our aimed at making sure that we drive our supply to match demand, and we'll continue to do so. And in doing that, we believe we are going to see price appreciation, we laid it down in the past, but going forward we do expect to see low to mid single-digit price growth over our long range horizon, combined with mid to high single-digit volume growth driving to about 10% overall growth in that business. So, nothing has changed, and I tried to highlight that in the prepared comments in our outlook on the stability and strength of that business. And I think that's the key message that we continue to be very bullish on this business.

Michael Weinstein - J.P. Morgan

Perfect. Thank you, guys.

Bob Parkinson

Thanks Mike.

Operator

Rick Wise of Bear Sterns is on the line with a question. Please state your question.

Rick Wise - Bear Sterns

Can you hear me?

Bob Parkinson

Yeah, we can Rick. Go ahead.

Rick Wise - Bear Sterns

Okay, good. Sorry about that. Bob, a couple of questions. First, on COLLEAGUE, I mean you are clearly making progress on each of the remediations, the filing, the inspections and so forth. Can you just give us your best impression of, when you think you can get this basically resolved? Is it possible by year end or not possible? Would you hope to get it resolved by the end of the first quarter? Just any thoughts you could give us will be appreciated.

Bob Parkinson

Yeah. I don't think it's reasonable to suggest, we are going to get all of that resolve by year end, so I wouldn't assume that at all, relative to when it will get resolved in 2008. There are still too many moving parts to be specific as to a specific date on that, Rick, which is why I'd mentioned in my comments, stay tuned to the guidance in January. As you all know, there is multiple timelines here. There is the regulatory pathway on the 510(k), on the triple channel. There is the remediation pathway, which is I commented we continue to make very good progress.

And then there is the pathway under the consent decree, which was why what I communicated this morning about Paracel issuing their certification and thereby triggering the inspection by the FDA within 30 days, is really an important milestone on that third pathway. But it's complex, as you know, as we’ve discussed before a lot of moving parts. I’m pleased with the progress we are making. I really am and I believe we'll manage through this.

But relative to the magic question of re-commercialization date in 2008, I just want to little bit more visibility on some of these moving parts before we would specifically communicate anything on that. I think that's the right thing to do, but I’m very confident that we can be much more specific in our call in January. So sorry I can't do any repairs on that.

Mary Kay Ladone

No, just.

Bob Parkinson

It is what it is, okay

Rick Wise - Bear Sterns

Exactly. Turning to two other things, just thinking about new growth drivers, can you just maybe, whatever level you want to update us some of thoughts about some of the wildcards, obviously, IVIG is very much in everybody's mind, but maybe something that whatever you are thinking about that could be impactful for '08, '09 and any updates there? And second, on the acquisition front, again you've been very vocal in suggesting, we could see acquisitions that the piece of acquisition pick up. What expectations should we have there for the next 6 to 12 months as well? Thank you so much Bob.

Bob Parkinson

Okay, thanks Rick. Let me start with the second piece on acquisition, first of all let me reiterate our position. Any deals that we do that our traditional acquisition are in fact going to be smaller in scope as we've characterized previously, adjacencies, built on whatever terms one might want to use. And so, we continue to actively evaluate the number of opportunities there with our business development organizations throughout the company. But again, just to be clear, we don't feel we need to pursue anything of a large scale so that is not in our plans.

The other piece of business development, beyond traditional acquisitions, I think you can see by some of the things we communicated or summarize for the third quarter, the business development wheel is starting to move at a faster rate and we would expect that, virtually every quarter going forward there will be a handful of things that we will be updating you on in terms of new initiative.

So relative to the wildcard question, we introduced that notion, I think at our March, Investor Conference and presented a list of things. All these things continue to remain very active, with six months on I think for the things that have a risk element to them such as these. From a R&D point of view I think it's encouraging to say virtually all these things are on track. We continue to make great progress, not only with our pandemic flu program but our seasonal flue program.

We updated you again this morning on the all timers program, which we commented on, the Halozyme initiative in collaboration, we expanded further in the third quarter with our collaboration on IVIG. And so really in its way I addressed the way I did in my prepared comments. The product pipeline, the new product pipeline that we disclose in some detail with the March Investor Conference is more robust today, six months on and it was six months ago. And there wasn’t' anything that was on the list including on the wildcard was that's really fallen off the table.

So clearly the wildcard things are little longer term or the other one would be the cell therapy program, which we continue to actively enroll patients in Phase II. We continue to be encouraged, very encouraged about it. So generally all the wildcards continue to be in play and again just to reinforce what I think all of you know, is to the degree these things manifest themselves in the coming years with that represents an upside we believe to our base case projected revenue growth over the next five plus years of 7% plus. So, as we aspire to accelerate that top line revenue growth I think we are confident that these wildcards will be a significant contributor to that.

Rick Wise - Bear Sterns

Thanks, guys.

Bob Parkinson

Yeah.

Operator

Larry Keusch of Goldman Sachs is on the line with the question. Please state your question?

Larry Keusch - Goldman Sachs

Yeah. Hi, good morning guys.

Bob Parkinson

Hi Larry.

Larry Keusch - Goldman Sachs

Couple of quick ones. First, in thinking about your mothball manufacturing suite, I think, which is a Thousand Oaks. Is the ADAMTS13 product -- just trying to think of where that's going to be manufactured and again how you are thinking about that use of that suite, which has been written off? That's question one. And then, the other two just are, in your cash flow, which continues to really see very nice improvements. Again, how you are thinking about share repurchase. I know that you said you are going to moderate some of that pace going forward, but do you expect to be a very consistent share purchasing for here than returning cash over the next yea? Then last your timing on the Sub-Q, which I think is really interesting Talecris and CSL, I know are developing their own Sub-Q products?

Bob Parkinson

Larry, let me start with the utilization of the manufacturing footprint. And then Rob address the cash flow and we can decide to address this, it's up to you. The question, yeah, the ADAMTS13 and our Recombinant Von Willebrand's factor which we’ve talked about before, both represent opportunities for further utilization of installed assets, which is great. We have been, at this stage, specifically decided how we are going to deploy that capacity, I think, the important Larry, to note is that we have a couple of things now on the table that could represent opportunities, and frankly we are looking at some other things as well, as part of our business development initiative.

So, I think as we said today, we are reasonably confident, and we are going to figure out a way how to utilize that asset which obviously isn't very encouraging, but specifically how we are going to do that is a little bit early I think. So, Rob, do you want to comment on the cash flow?

Rob Davis

Yeah, good morning Larry.

Bob Parkinson

And share buyback.

Rob Davis

Clearly, part of the driver of our acceleration in the third quarter was, what we saw to be the dip in our stock price, and we felt based on our own confidence in the business, a great buying opportunity, and that's what we did, and that's really what you see reflected in that acceleration. As you look forward, I think to your comment, yes, you should expect that we will continue buying shares in the next year at a pace similar to where we were this year, not the third quarter, but if you look kind of year-to-date. So, we'll be definitely probably at a billion of net repurchases or more next year as well, as we continue to execute on the capital allocation framework that we laid out, that nothing's changed there. And that continues to be an important way for us to return the value to shareholders.

Bob Parkinson

On the Sub-Q, you're referring to the Halozyme collaboration?

Larry Keusch - Goldman Sachs

Correct.

Rob Davis

Larry.

Larry Keusch - Goldman Sachs

Yeah.

Mary Kay Ladone

Hey Larry, it's Mary Kay.

Rob Davis

Mary Kay please comment on that, yes.

Mary Kay Ladone

Yeah, the Sub-Q with Halozyme, we are looking at the end of our LRP period, so, probably in the 2010, 2011 timeframe.

Larry Keusch - Goldman Sachs

Okay, great. And then just on that manufacturing suite, that has been written off, is that correct, so, anything that you bring back into that obviously some economic advantage?

Rob Davis

Yes. That's correct, exactly right.

Larry Keusch - Goldman Sachs

Okay, terrific. Thanks guys.

Bob Parkinson

Thanks.

Operator

Glenn Reicin of Morgan Stanley is online with the question. Please state your question.

David Roman - Morgan Stanley

Good morning. This is David [Roman] filling in for Glenn. Just a couple of questions here. First on cash flow, it looks like operating cash flow guidance for the year did in change although earnings guidance went up. Can you kind of walk us through what's going on there?

Rob Davis

Sure. If you look at it, what we are seeing is and in part of when we looked at what's going on in our inventory levels, because we did have a build in inventory of the COLLEAGUE pump, and really, this is not only completed pumps, but it's also all the spare parts and other tools we need to be able to do remediation. That's, as we look at to the fourth quarter, something that likely will absorb any incremental cash flow benefit we get from operations coming from net income. So that's really the biggest piece of it.

David Roman - Morgan Stanley

Okay. And then, I think this is a first full quarter after all the FX hedges have rolled off, that you entered into in 2002. Can you help us -- was there any impact on the quarter and could you kind of help us understand what its reversal contributed to gross margin improvement?

Rob Davis

Well, to be clear, and if you looking on a year-on-year basis, I guess it would be, but those ended coming into the beginning of this year.

David Roman - Morgan Stanley

Okay.

Rob Davis

And we have signaled about $30 million of benefit flowing into our gross margin year-on-year. I would have to look to see what the split is. They were roughly ratable through the year, so it was probably about a quarter of that where they've hit in this quarter.

David Roman - Morgan Stanley

Okay. And then lastly, you talked a little bit about IVIG and old-timers, and I think we are going to see Phase II top-line data in November, but I think Bob referenced publication early next year. Are we so expecting to see something next month?

Rob Davis

Well, as you know, we are doing this in partnership with Dr. Relkin from Cornell Medical College. He is really controlling the timing of the release of the data. And I think it's safe to say, he is looking for the most visible and prestigious opportunity he can, to bring that forward. There is a conference, actually now, scheduled, I think in February, where he is looking to present that ad. And, I'll leave it to him to give more details, but that really is the driver of a change.

So, we won't be publishing anything next quarter, we are waiting for him. Obviously, when we came out and announced that we were going to initiate the Phase III clinical trials, we did at their time indicate that we did see favorable results with patients on GAMMAGARD versus those on placebo, and felt good about achieving the endpoints in the clinical trial, which is what led us to decide to go ahead with Phase III. So, in that sense nothing's change, it's just the timing of when Dr. Relkin is not in the conference to present the data, all that’s moved here.

David Roman - Morgan Stanley

Okay guys, one last quick one. The tax rate was a little higher than what we thought in the quarter. Are we still looking for the 20% range for the full year?

Bob Parkinson

Yeah. Actually, you are going to see in the fourth quarter the tax rate is probably going to be down closer to 19%. We have seen overall operations in our lower tax jurisdictions outside the US, better than expected.

David Roman - Morgan Stanley

Okay.

Bob Parkinson

And so, you will see an overall rate for the year of 20%, and obviously to get that, that drives about a 19% in the fourth quarter.

David Roman - Morgan Stanley

Got it. Thank you very much.

Mary Kay Ladone

Sean, we have time for one more question?

Operator

And our final question comes from Matthew Dodds of Citigroup. Please go ahead with your question, Mr. Dodds. Could you try pressing your mute button or picking up the handset.

Mary Kay Ladone

Next question Sean.

Operator

I’m not showing any other questions. Ladies and gentlemen this concludes today's conference call with Baxter International. Thank you for participating.

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Source: Baxter Q3 2007 Earnings Call Transcript
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