Baxter International Inc. (BAX) Q3 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Baxter International's Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Mary Kay Ladone, Corporate Vice President, Investor Relations at Baxter International. Ms. Ladone, you may begin.

Thanks, Sean, and good morning, everyone, and welcome to our third quarter 2012 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; Bob Hombach, Chief Financial Officer; and Dr. Norbert Riedel, Chief Science and Innovation Officer. Before we get started, let me remind you that this presentation, including comments regarding our financial outlook, new product developments 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 detail concerning factors that could cause actual results to differ materially. In addition, in today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now I'd like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning. Thanks for calling in. We're pleased today to announce our financial results for the third quarter and also provide you with an update on Baxter's full year 2012 outlook. As you saw in the press release that was issued earlier this morning, third quarter sales, after adjusting for FX, increased 5%. EPS of $1.14 per diluted share increased 5% versus the prior year and was in line with the guidance that we previously provided. As we discussed with you all last week at the Investor Conference, we continue to focus on enhancing growth by optimizing our core business portfolio, advancing the company's new product pipeline, pursuing and accelerating the pace of business development initiatives and capitalizing on the opportunity to develop new business models, which includes public and private partnerships and at improving the quality of and access to care in both developed and emerging markets. Recent achievements reflect these priorities and were highlighted in this morning's press release. As many of these topics were also covered thoroughly last week, I won't take too much time to review these in depth, but I'd like to take a moment to highlight just a few key points. First, we continue to be very pleased with the success of our new ADVATE prophylaxis label in the U.S. market as evidenced by our strong sales performance in the quarter. And we remain committed to meeting patient needs by enhancing our plasma manufacturing footprint with both internal capacity expansions and external collaborations. Second, we continue to successfully advance our pipeline. For example, during the quarter, we submitted our regulatory file in the U.S. for BAX 326, a recombinant Factor IX protein, which if approved, will be the only Factor IX product indicated for prophylaxis treatment in the U.S., where most hemophilia B patients today are treated with an on-demand regimen. We also recently completed enrollment in our first home hemodialysis clinical trial, evaluating the performance and safety of our new device. This study was conducted at 2 centers in the U.S. with 24 patients who collectively received more than 700 dialysis treatments. As you know, this data will support our European CE marking in 2013. On the business development front, we entered into a collaboration with Onconova for European commercialization rights of rigosertib, a novel targeted anticancer compound. It's currently in a Phase III study for the treatment of MDS, a rare hematological malignancy, and is also in Phase II for an oral formulation for this indication. If approved, this will be an exciting addition to our portfolio, where we can leverage our legacy of treating critical diseases, our existing leadership position in hematology and our sales channel. While hematology is our primary focus for this drug candidate, rigosertib is also in Phase II clinical trials for pancreatic cancer. In addition, under the terms of our agreement with Momenta Pharmaceuticals, we recently selected a third biosimilar for development, a monoclonal antibody for oncology designated as M511. This is in addition to the selection of M923 and M834 targeted for the treatment of autoimmune and other inflammatory disorders. As you know, Baxter and Momenta had the opportunity to develop up to 6 biosimilars through our partnership. And finally, as we mentioned at our conference last week, the Brazilian government announced the award of an exclusive recombinant Factor VIII hemophilia partnership in Brazil, the third-largest hemophilia market in the world. While this agreement has not yet been finalized, we're working closely with the authorities there to enhance access to treatment and provide recombinant therapies to patients, and we look forward to updating you on the significance of this award in the coming weeks. In summary, our core portfolio remains strong, and we continue to benefit from our focus on life-saving therapies, which drives demand, moderates economic headwinds and gives us a platform for geographic expansion. Our pipeline, as we discussed last week, is robust, addressing key high-potential areas of unmet medical need. We've accelerated the pace of business development. We remain disciplined to ensure these opportunities align with our core strength. And we're committed to working with payers by establishing public and private partnerships, as we're very well-positioned to provide solutions to their increasing challenges. These are the vectors that will support our growth and they'll enable us to serve the interests of patients and reward our shareholders well into the future. As always, I'd be happy to address any questions on these or other topics during the Q&A this morning. And with that, I'd like to ask Bob to review our third quarter financial results and guidance for the remainder of the year. Bob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the third quarter, excluding special items, increased 5% to $1.14 per diluted share, which was at the high end of the guidance range we previously provided of $1.12 to $1.14 per diluted share. As mentioned in the press release, our GAAP results included an after-tax special charge of $45 million or $0.08 per diluted share related to the recently announced European licensing agreement with Onconova. Now let me briefly walk you through the P&L by line item for the quarter before turning to our financial outlook for the remainder of the year. Starting with sales, worldwide sales totaled approximately $3.5 billion in the third quarter and were comparable to last year. On a constant-currency basis, revenues increased 5%, in line with our guidance, with notable double-digit sales growth of ADVATE and GAMMAGARD LIQUID in the U.S. and solid double-digit growth across many emerging markets. Collectively, this strength offset continued softness across mature markets in Western Europe. Third quarter sales also included a benefit from the integration of the Synovis and Baxa acquisitions with combined sales of $65 million. In terms of individual business performance, Global BioScience sales of $1.5 billion were flat to last year. And excluding foreign currency, sales increased 5%. Within the product categories, recombinant sales increased 1% and totaled $555 million. On a constant-currency basis, sales increased 5%, as double-digit growth of 11% in the U.S. was partially offset by the impact of the Australian tender. Excluding the impact of this tender, global recombinant sales advanced 8%. As Bob mentioned earlier, we continue to be very pleased with the strength of our U.S. business, where we continue to realize benefits associated with the new expanded label of ADVATE, drive conversion from plasma-derived therapies and competitive offerings and enhance penetration of prophylactic treatment. Moving on to plasma proteins. Sales in the quarter were $337 million and were down 9%. On a constant-currency basis, sales declined 4%, as strong mid-teens growth in the U.S. was more than offset by lower tender sales of FEIBA and plasma-derived Factor VIII, primarily in Brazil. Excluding this impact, plasma proteins sales increased 9% on a constant-currency basis, with key products like FEIBA, albumin and ARALAST registering double-digit gains. In antibody therapy, sales of $404 million increased 6%. Excluding currency, sales accelerated 9%, driven by unit volume growth in mid-single digits and positive price benefits resulting from favorable shifts in our geographic mix as we optimize our global supply in light of the L.A. facility shutdown, which is currently under way. Also, as I mentioned earlier, we are very pleased with our performance in the U.S., where antibody therapy sales advanced 12%, driven by robust demand for GAMMAGARD LIQUID as we continue to promote awareness and diagnosis of primary immune deficiency and drive enhanced penetration of SubQ therapy, given our favorable tolerability profile and low infusion site reaction rate. As a reminder, global sales related to the Octapharma absence in the third quarter of 2011 were approximately $20 million. After adjusting for this, antibody therapy revenues advanced more than 15%. In the third quarter, sales in regenerative medicine advanced 15%, to $165 million. On a constant-currency basis, sales rose 20%, driven by growth of TISSEEL and FLOSEAL and the incremental benefit from Synovis acquisition of approximately $20 million. Finally, revenues in the other category totaled $61 million in the quarter and declined 13%. Excluding foreign currency, sales were flat, as lower third-party plasma sales were offset by growth of vaccines, including the ongoing revenues related to our influenza collaboration in Japan with Takeda. In Medical Products, global sales in the third quarter of approximately $2 billion were comparable to last year. Sales increased 4% on a constant-currency basis. Within the product categories, renal sales totaled $629 million and declined 3%. Excluding currency, sales increased 2%, as global PD growth, supported by solid patient gains, was offset by lower HD revenues. Sales in the Global Injectables category of $509 million increased 3%. And on a constant-currency basis, sales increased 7%. Performance continues to be driven by significant growth in our international pharma-partnering and compounding businesses; growth of certain injectable therapeutics like cyclophosphamide, a generic oncology drug; and the incremental benefit of the Baxa acquisition, with sales of approximately $10 million. IV Therapies sales advanced 6%, to $479 million. Excluding currency, sales increased 12%, driven by higher demand for IV and nutritional therapies and sales of $35 million related to the Baxa acquisition. Infusion system sales totaled $186 million and were lower than the prior year by 16%. On a constant-currency basis, sales declined 14% due to lower access set revenues and the difficult comparison presented by the completed transition to the spectrum pump in the U.S. Finally, our anesthesia franchise posted sales of $135 million, reflecting an increase of 5%. Excluding currency, sales advanced 9%, driven by solid gains in Sevoflurane and Suprane, particularly in international markets. Turning to the rest of the P&L. Gross margin for the company improved to 52.1%, reflecting sequential expansion and an improvement of 120 basis points versus the prior year. This was a result of underlying operational expansion, driven primarily by positive mix, and a benefit from foreign currency. These factors more than offset a number of headwinds, including pension, amortization of intangible assets related to recent business development activities and austerity measures. SG&A totaled $743 million and increased 5%, with 3 points of growth associated with the integration of recent acquisitions. We also continue to invest in promotional and marketing initiatives and in international markets to enhance our global presence. These items, along with incremental pension expense, more than offset the benefit from foreign currency, aggressive management of discretionary spending and the operational efficiencies derived from our PowerUp reengineering initiatives. As expected, R&D spending moderated in the third quarter and totaled $240 million. Growth on a constant-currency basis was in high-single digits, as we continue to advance a number of programs, including those in our leading hemophilia franchise, the Alzheimer's programs and Phase III adult stem cell trial. The operating margin in the quarter was 23.8%, an improvement of almost 200 basis points sequentially and slightly higher than the margin in the third quarter of last year. Interest expense was $25 million and compared to $14 million last year. This increase is due to incremental expense associated with recent debt issuances and lower interest income. Other income totaled $14 million in the quarter compared to expense of $6 million last year, primarily a result of favorable foreign exchange impact on balance sheet positions, which total approximately $10 million. The tax rate was 23% for the quarter, higher than projected due to earnings mix, which brings the year-to-date rate to 22%. And finally, as previously mentioned, adjusted EPS was $1.14 per diluted share, an increase of 5%. Turning to cash flow. Cash flow from operations in the quarter totaled $747 million, and on a year-to-date basis, cash flow from operations of $2.2 billion advanced 12%. Capital expenditures of $259 million in the third quarter compares to spending of $235 million in 2011. DSO ended the quarter at 57 days compared to a DSO of 54.5 days last year. This increase can be attributed to growth in both the U.S. and international receivables. Inventory turns of 2.3 are lower than turns of 2.5 last year due to the impact of recent acquisitions and increased inventory levels to support late-stage clinical trials and growing demand. Lastly, on a year-to-date basis, we repurchased 19 million shares for $1.9 billion or on a net basis, approximately 13 million shares for $772 million, and we remain on track to achieve our full year objective of net share repurchases totaling approximately 1 billion. Finally, let me conclude my comments this morning by providing our financial outlook for the third quarter and full year 2012. First, for the full year, we now expect earnings of $4.51 to $4.54 per diluted share. By line item of the P&L and starting with sales, we continue to project full year sales growth, excluding foreign currency, of 4% to 5%. Given our current outlook for foreign exchange rates, we expect currency to have a negative impact on the top line of approximately 3 percentage points. Therefore, we expect reported sales growth, which includes the impact of foreign currency, to be approximately 2%. We now expect full year gross margin rate for the company to expand modestly versus last year's rate of 51.4%. We expect SG&A to grow in mid-single digits, and now we expect R&D to grow in high-single digits. We now expect interest expense to total approximately $90 million and other, including noncontrolling interests, to be an income item of approximately $50 million, driven primarily by benefit of currency and a benefit in the first half related to minority interest income. Given the interest -- excuse me, given the year-to-date changes in our earnings mix, we now expect a tax rate of approximately 22% with a full year average share count of approximately 555 million shares, which assumes 1 billion in net share repurchases. From a cash flow perspective, we plan to generate cash flow from operations of more than $3 billion. Now to expand on the full year sales assumptions for each of the businesses. First, on a constant-currency basis, we continue to expect Medical Products sales to grow in the mid-single digits. This includes IV therapy sales growth of approximately 10%; anesthesia sales growth in mid-single digits; global injectable sales growth in mid-single digits; lower infusion system sales, which are expected to decline approximately 5% to 10%; and lastly, renal sales are expected to grow in low-single digits. For BioScience, we continue to project sales growth, excluding foreign currency, in the mid-single digits. Our outlook includes: recombinant sales growth in low- to mid-single digits, reflecting the strong year-to-date growth in the U.S.; plasma protein sales growth in low-single digits; antibody therapy sales growth in mid-single digits; regenerative medicine sales growth approaching 20%; and finally, we expect the other category to grow approximately 5%, which includes an anticipated milestone payment in the fourth quarter related to our U.S. influenza vaccine program. As mentioned in our press release, for the fourth quarter, we expect earnings per diluted share of $1.24 to $1.27 and sales growth, excluding the impact of foreign currency, of 5% to 6%. Based on our outlook for foreign exchange rates, we expect currency to impact sales by approximately 2 percentage points. Therefore, we expect reported sales growth of approximately 3% to 4%. Thanks, and now we'll open up the call for Q&A.

[Operator Instructions] I would like to remind participants 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 Larry Keusch of Raymond James.

Bob, I know that it's obviously early here, and you haven't given a specific guidance for 2013. But would you mind just sharing some thoughts on just how you're thinking about the environment as we sort of head into next year?

Sure, Larry. Let me -- I'll make some comments and then maybe turn it over to Bob Hombach. I mean, hopefully you all got a good context of this last week, and you're right, we're not going to get into specifics for 2013 this morning. I mean, clearly, we anticipate that the environment is going to continue to be very challenging. That's one of the assumptions that Bob Hombach had on one of his early slides in the presentation last week, going to continue to be very demanding. Obviously, as we move into '13, we do have a couple of issues that we're going to need to deal with, which are unique to next year. The device tax, which you're all familiar with, which is not insignificant in its impact. We're going to continue to be constrained on plasma capacity through the year in 2014, of course, with the Sanquin deal that we recently announced that will put us in a much better position. Interest rates remain very low. So in terms of pension exposure and so on, that might be a bit of a headwind as well. But you got a sense of the long-term guidance last week that Bob provided. The environment's going to continue to be challenging. But as I commented in my prepared comments this morning, the underlying drivers of our business continue to be very solid, and we're making I think great progress on a lot of fronts. So I'll stop there. I don't know, Bob, if you want to add anything to that. I probably covered most of the things that you would comment on but there may be, you or Mary Kay.

Yes, yes, I would just reiterate a lot of what Bob said but also just highlight a few of the key factors that we talked about last week. Certainly, our expectation around the environment, as it relates to Western Europe in particular, is that we don't see any significant improvement. We started out this year with an expectation that Western Europe was going to be, call it, flattish in 2012, and that held up pretty well through the first half of the year, but we certainly saw incremental softness in the third quarter and now expect for the full year that Western Europe, from a top line perspective, will be down slightly. And as we go into next year, that's something we'll definitely be factoring into our thinking. But the dynamics of the business, as we talked about yesterday, we still see opportunities to drive incremental leverage, whether it's in gross margin or in SG&A over time, modest but incremental through some of our reengineering initiatives, to the positive business mix that we expect to continue to see in the business, even withstanding some of the headwinds that Bob mentioned that we've already talked about for 2013. And putting it all together is why we directionally indicated last week that our long-range outlook is 7% to 9% for EPS growth but that 2013 would be at the low end of that.

Okay, perfect. And then just one other quick one, you mentioned infusion, and I understand the comps. Can you just talk a little bit about the dynamics in the set business and the ability to now start to perhaps raise price on pumps now that the COLLEAGUE recall has been completed?

Yes, this is Bob Parkinson, Larry. We're not going to comment specifically on pricing strategies for reasons I'm sure you understand. We completed the COLLEAGUE activity in terms of all the pumps out of the market. So we continue to manage through what I'll call kind of a stabilizing time in the market. We had, as Bob mentioned, some tough comps because a year ago was when we were pretty significantly expanding our SIGMA placements. So I think this, the set business, the access set business, it's starting to settle out. I would tell you I don't see a robust turnaround in that at all in the coming couple of quarters. I think we're still going to go through what I'll just -- as I characterized kind of a settling out period here. Mary Kay, or...

Yes.

Yes, I would agree, Larry. We're not expecting the set revenue growth to change dramatically for the next several quarters, due to the comps, as now we've replaced all the COLLEAGUEs with the SPECTRUM, but we are seeing now the share loss that we've experienced impact our disposable set sales.

Mike Weinstein of JP Morgan is on the line with a question. Our next question comes from Rajeev Jashnani with UBS.

Just on recombinants. I think, obviously, the U.S. market looks like it continues to be pretty strong here. And I know you had talked about stocking in the first half and I was just wondering if you could just give us some perspective on whether the growth you're seeing now is really representative of what you think is the underlying growth rate in the market. And then maybe also, if you could, any level of quantification on where you think penetration is in terms of adult prophylaxis now versus say, 1 year ago?

Okay. Bob and Mary Kay, you guys want to...

Yes. Rajeev, we certainly have seen strong results here in the first 3 quarters. As we talked about in the first half of the year, with the new ADVATE prophy label, we did expect that some of that was stocking. As we go into the fourth quarter, our expectation would be to grow more in line with the market, maybe slightly faster but certainly not the double digits that we've been posting here. I would say though that we are in the early days of really benefiting from the PK dosing, the every 3-day dosing opportunity that we have within the U.S. As Ludwig Hantson mentioned last week, with the August approval for the 4,000 IU for ADVATE, that really puts us in a great position to go out and work with patients and treaters, to convert them to every 3-day dosing, because that allows them to use a single vial to do the increased dosing required to do every 3 days. So we're very early days in that as well. We are very excited about the opportunity, but I would expect in the fourth quarter, we'd see a moderation here from the growth rate that we've seen in the first 3 quarters, but still strong.

Yes, Rajeev, I would add, I don't have a year-over-year perspective I can give you on adult prophylaxis. But today, our projection is that about 15% of all the patients that are in the U.S., that 15% are adults on prophy. So there's a large opportunity to continue to convert, especially in light of our ADVATE label.

And I did have one follow-up on IVIG, I think you mentioned volume growth was up mid-singles. And I was wondering if you could comment on whether that's sort of a sustainable level of volume growth that we can expect over the next few quarters until the capacity constraints ease a little bit. And I guess secondly, just on the geographic transition, how much more of that is left, given where the geographic mix currently stands?

Yes. I'd say we're pretty far along with the geographic shift that we are looking to accomplish here. Really started in the second quarter and I think accelerated to a level in the third quarter we'll be at on a run-rate basis going forward here. As it relates to volume, I do believe that mid-single digit unit volume growth is a sustainable level for us as we go forward. As we mentioned last week, we are now in the process of working through the modest refurbishments that we need to do to the older facility in L.A. We've built up enough pace in advance of that to support a mid-single digit unit volume as we go forward. As we mentioned also, we recently received approval in the third quarter in Rieti for the capacity expansion we had coming along -- coming online there, so that will be ramping up. We continue to work to expand capacity utilization in new L.A. So there's a number of factors here that will play into that, but we do think as we go into 2013, mid-single digit volume growth is a sustainable level for us. And as we get into 2014, certainly, with Rieti being a more ramped up with new L.A. reaching hopefully full potential, with old L.A. being back online and the Sanquin deal, then our volume situation becomes significantly better in 2014.

Our next question, David Roman of Goldman Sachs is on the line with a question.

I was hoping -- on the o U.S. plasma protein trends, is there any connection there between either the country destocking ahead of picking up recombinants or are the 2 at all connected?

I don't think so.

No, David. If you're referring to Brazil. No, the answer is they're disconnected. I think I mentioned actually on the third quarter call, that we are likely going to have some timing differences between tender shipments between the third and fourth quarter, and that certainly has played out even a bit more than we expected. So the fourth quarter timing around tenders is not related to anything over that. Now there is the opportunity to the extent we conclude an agreement to have some participation in recombinant Factor VIII in Brazil in the fourth quarter, and part of our guidance range, I would characterize the year end this year as a bit more uncertain than we would normally see, whether it's mature markets like Western Europe, where governments are under significant budget constraints, and whether there's activity to slow down utilization in the fourth quarter or not is something that we're keeping a close eye on, but also just volatility around emerging markets and year-end shipments. Those are some of the reasons why we've gone with the $0.03 range in the fourth quarter trying to accommodate some of that potential variability, but not related to anything in terms of the Brazil per se.

And, David, I would add, the majority of the tender timing is really related to FEIBA and not PD Factor VIII, although that was a piece of it. And the total impact in the quarter on sales was about $45 million.

Okay. That's helpful. And then maybe for Bob Parkinson, a sort of a strategic question. As you look at this quarter's growth rate, 8% in the United States is probably one of the better growth rates we've seen across all of health care in the U.S. And then, Bob just mentioned pressures in Europe and anything about emerging markets. When you look at your investment priorities, how do you sort of tier them, emerging markets versus the U.S. versus Western Europe? Is it fair to say Western Europe is being deemphasized for those other 2 regions? How do you sort of think about your...

No, not at all. I mean, despite the challenging environment in Western Europe, the reality is I think we have opportunities to do better, and we're still making selective investments where there are, what I'll just call, promotional pressure points throughout all of our businesses. I mean, that's necessary to do. The strength in the U.S., both in the quarter and year-to-date, has been encouraging, not sure how sustainable it is quite at that level going forward, as Jean-Luc Butel featured last week at the Investor Conference. Clearly, emerging developing markets continues to be a priority. These are markets that are still commanding a significant piece of our incremental investment, both in infrastructure, frankly, but also promotional focus. And I think these are markets that we have to do better in and I think we will do better going forward. So -- but no, don't assume that because of the challenging macro environment in Western Europe, that we're abdicating that or giving up on that in any way. I mean, it continues to be, as you know, a big piece of our business. And as I said, I think there continue to be opportunities to invest in those markets as well.

That's helpful. And one more on cash flow. Bob, the $3 billion cash flow this year, you've talked a little in the past about headwinds affecting the income statement. That $3 billion, that I think still includes some COLLEAGUE-related costs. How should we think about that going forward?

Yes. We've incurred more than $200 million each of the last 2 years. So I think if you adjust for COLLEAGUE, it would be north of $3.2 billion that we'd be shooting for here in 2012 and certainly we won't have that headwind going into 2013. So cash flow from operations growth, as we talked about in the Investor Conference last week, should be roughly in line with earnings growth. So you should think about growing it off of a slightly higher base than the $3 billion that we're projecting this year.

David Lewis of Morgan Stanley is on the line with a question.

Two quick ones here. I guess the first thing is for Bob Hombach, just looking at the P&L. The gross margins this quarter were obviously very strong, but I guess they're actually the strongest they've been in 3 years. So maybe help us understand, Bob, the underlying factors that are kind of driving you back to where you were 3 years ago and sort of how sustainable you see those trends heading into next year.

Certainly. Some elements, I think, are sustainable. Some I think were specific to the third quarter. The sustainable piece is strong U.S. demand in our hemophilia business, both for recombinant Factor VIII for ADVATE but also for FEIBA, which is one of our higher-margin plasma-derived proteins. And so FEIBA growth in the U.S. was strong as well. And we think, given the focus that we have both on the ADVATE prophylaxis label and PK dosing but also as Ludwig Hantson mentioned last week, we're very excited about the opportunities that FEIBA prophylaxis could present for us as well. So I think those dynamics continue. The thing that also impacted the third quarter positively for us really is the dynamic related to FX. So as you know, Europe is one of our larger markets and certainly our euro sales are pretty substantial. So the fact that the euro was pretty weak, particularly through much of the third quarter, depressed the sales line. But as you know, we're largely hedged, either naturally hedged or financially hedged, as it relates to the euro, so we're able to preserve the margin dollars even though the reported sales number comes down. So the margin calculation itself is actually benefited, as a result of that, we saw a pretty significant dynamic there. Now just within the last several weeks, you've seen the euro go from the low 120s up to 130, so we don't expect that margin FX benefit in the fourth quarter like we saw it in the third quarter. And it was more than 50 basis points in the quarter from an impact standpoint. We'll see some of that in the fourth quarter, but not anything quite that substantial. So I think those 2 factors, strengthened U.S. hemophilia and the FX dynamic trickling around the euro, are what drove this significant margin.

Great, that's very helpful. And then, yes, I know you've got questions you talked about the Brazil PD Factor VIII business. But if you think about the European antibody business this quarter, it was down more sharply than we would have expected. I guess, you talked a little bit about tenders, I believe, in the release. But help us understand how much of that is tenders, how much of that could be pending austerity, which we had not seen in the past? And how much of that is just prioritization of global pricing if you have stronger demand in U.S. or other regions?

I don't think it's an austerity effect.

No, David, it's almost entirely the latter that you just mentioned. As we've talked about, we are constrained on a global basis in trying to optimize the limited supply that we have, recognizing that some of our competitors, like Octapharma, have historically had more strength in Europe and wanted to participate in more price-sensitive markets. So we've been actively shifting volume from Europe to the U.S., as I mentioned, starting in the second quarter but really reaching a peak here in the third quarter and reaching what I think will be largely a run rate as we go forward here. So that, really, I think, is the dynamic. There's nothing else significant going on that I'm aware of. We continue to participate in markets where we think it makes sense in Western Europe, where we have a long established position and we think an appropriate price point, and that will be something we'll support going forward. So I think we've largely done the shift that we're going to do.

Okay, that was a deliberate Baxter strategy, not end market?

Absolutely.

Matt Miksic of Piper Jaffray is on the line with a question.

So one follow-up here on BioScience. You've upped your expectations for recombinants in IVIG. On the recombinants, Bob, you mentioned, I think, you threw in this competitive convergence comment, I'd love to hear you elaborate on that in addition to conversion to prophy. And on the IVIG side, I guess I would just say help us understand how you're driving some above -- I guess, better than expected growth, improving growth there, against the backdrop of the manufacturing constraints and facilities maintenance you've talked about, and I have one follow-up.

Sure. Bob, why don't you handle this?

Yes, sure. So on the conversion front, I think as Ludwig highlighted last week, we had a 2-pronged strategy when we got the label expansion in December of last year. The first was immediately to focus on the improvement in outcomes for patients and reducing bleeds to, on average, less than 1, but overall for up to 40% of the patients or more, no bleeds at all. So we started immediately with that and started to see some conversion from competitive products even in the beginning of this year. And now with the opportunity to more actively market the PK dosing for every 3 day dosing, we continue to be confident we're going to have opportunities there to be very competitive and potentially take some additional share as we go forward. So we're very familiar with this community. We literally know it patient by patient, so we have very good tracking mechanism to understand as patients come on to prophy, are they switching from on-demand from a Baxter product or on-demand from a competitive product or competitive prophy to prophy. So we've got reasonably good visibility there. On the IG front, it's a combination of 2 things, Matt. One is we're running at very, very low levels of safety stock, uncomfortably low, I would say, but the demand has been so strong, we're doing everything we can to meet market demand. And so that has put us in a situation of being on back order on a pretty consistent basis. So we've maybe stretched the volume side of this a bit here in 2012 from our original expectation but the demand has been so strong. But also, this dynamic as we mentioned in the prepared comments and I just mentioned to on other question, the shift from Europe to the U.S., there is a fairly meaningful price differential, from 20% to 30% in some cases, and so that provides some benefit to the sales line from a mix perspective as well. So it's a combination of really doing everything we can on the volume side and getting mix benefit as well, along with the very modest price increase that we talked about previously that we took in the U.S.

Just to look back to the -- on the recombinant question, I think it's fair to say that the volume strength is primarily attributed to the uptake really on prophylaxis, which is different than a share shift dynamic. The clinical data on the low bleed rate has been pretty effective in a competitive context, but I think the prophylaxis label has really been the primary driver of the strength today. And as Mary Kay commented in one of the earlier questions, we're still in the early stages of, I think, penetrating the opportunity that exists here. So as we commented, we're quite encouraged about that.

Very helpful. And then a follow-up on Brazil, you talked about a predominantly FEIBA impact in the quarter, tender-related impact. If you could maybe, it'd be helpful to frame out sort of the bigger picture of the opportunity in Brazil. You talked a lot, Bob, last week, about the strategic public-private partnership there that's still pending. But is there an opportunity for these to -- I mean, do you have an opportunity to do something across hemophilia broadly that would include FEIBA and PD and ADVATE? Or should we think about these tender and partnership opportunities along sort of therapies and product lines?

Yes. Well, again, I'm somewhat limited until we finalize the agreement. And as I commented at the conference last week, really, the only reason that I even commented on this is, there has been a local publication on the award that was given, the exclusive award that was given to Baxter. And given that it's in the public domain, I did want to comment on it. The fact that the contract is not finalized, I think we're somewhat limited to offer too many more specifics, Matt, than what we shared last week. But just to reiterate a few things that we did comment on last week, just if there's some callers this morning that didn't follow that, it is an exclusive award, specifically as it relates to recombinant Factor VIII, okay? We think the opportunity is significant. We commented Brazil is the third-largest hemophilia market in the world, with more than, I think, it's about 10,000 individuals, is that right, Mary Kay, that have hemophilia A in Brazil. The intent of the Brazilian government, and this is one of the largest plasma-derived markets in the world is to, in as a short an order as possible, fundamentally convert all those plasma-derived patients to recombinant. So this is a material opportunity. And given the exclusive nature of it, clearly puts us in a position where we're able to establish, I think, the relationship with both the treaters and the patients that should benefit us on other hemophilia-related products over time that are not part and parcel to the specific collaboration. So you mentioned FEIBA, that would be an example. But certainly, future products like Factor VII, Factor IX, von Willebrand's, longer acting and so on, are not really part of the agreement, but would allow us to build on this foundation going forward. So at this point, I think I'm going to stop so I don't share any more than I should. But like I say, when the contract gets finalized, which hopefully will be within the next several weeks, then we'll be very specific. But I think you can conclude this is a material opportunity. And as I commented last week, it's a model, an example of what I referred to as public-private partnerships that support the vector for growth of government collaborations, and I think it can be an example of some things that we're going to try to do elsewhere. In fact, as I commented last week, we actually have active discussions on other businesses with other countries. So stay tuned on that.

Mike Weinstein of JPMorgan is on the line with a question.

First off, I apologize. I was caught between 2 calls at the same time earlier so...

No, I'm impressed of how quickly you got back in the queue, Mike. All right, go ahead.

Well, I don't really have that much on the quarter. I do, Bob, want to spend a minute on just M&A strategy, particularly in the Medication Delivery side of the business. Could you just talk a little bit about how you think -- you commented on this in a couple of ways at the analyst meeting, but could you just comment a little bit about how you think leveraging certain assets in the Med Delivery portfolio going forward. If the goal is you've got certain strengths, whether it's manufacturing certain types of products, delivery within the hospital, we could go on, how do you think about building that business through M&A over the next 3 to 5 years?

Well, I would just say I think the Baxa deal that we did earlier in the year probably is a good example of the kinds of things we're going to continue to look at. It's about -- we talk about adjacencies, bolt-ons, we used a lot of terms like that. But any deals that we do have to have what I call, well, I've coined the term, no kidding around synergies. When you do acquisitions, it's easy to position them as strategically compelling and all these words that get thrown around, but there have to be legitimate synergies. The Baxa deal clearly leveraged our channel and relationship with the hospital pharmacy. It became an extension of our strength with premixes to expand in formulated products within the hospital pharmacy. And so whether it's channel, whether it's technology, when you do deals, you have to be convinced that 1 plus 1 is greater than 2. And so I think, in many ways, the Baxa deal, as I said, I think, incorporates a number of the characteristics of the kinds of deals within Medical Products that we're going to continue to target. As I commented last week, I don't see us doing deals really outside of the framework of the businesses that we're in today. In other words, fundamentally new areas of health care, because I think there's enough opportunities in business development and acquisitions to leverage strength that we have in our core businesses, and that includes BioScience, not just in Medical Products, that that's where we want to focus. That's where the value really gets created and the risk gets managed. And there's always risk when you do acquisitions, but that's one of the ways you create a buffer for any risk that's encountered, is that there is a compelling synergy that is deliverable. So I'll stop there, I don't know, Bob or Mary Kay, if you want to add to that. Does that answer your question, Mike? Is that helpful?

Yes, I think it does. There's been some additional commentary in the press in the last 24 hours as well talking about potential targets for you guys. So let me switch gears though. On pipeline news over the next few months, could you just talk a little bit about how you think you'll update the Street, number one, on your HyQ discussions with the FDA as you gain greater clarity there on the preclinical path, will that just come on the fourth quarter call? And then second, just to be clear on your thoughts on how you'll disclose on Alzheimer's?

I'm not sure we're going to have anything on that before the fourth quarter call in January.

Yes, on HyQ.

Norbert, why don't you -- Dr. Riedel, this is Mike, Norbert, why don't you may be address this and then Bob or Mary Kay can add.

So, Mike, we touched on it last week at the conference. On HyQ, we are still planning to request a meeting with the agency by year end to discuss what we have done in the area of additional preclinical data, what else they are looking for. Until we have had that meeting and discussion, it'll be difficult to predict when we will resubmit and actually move towards a review. On other news that you should be expecting this year, I believe...

And by the way, Norbert, I was talking about after you've had that meeting, what type of disclosure we would expect or whether that would just wait for the -- wait for the 4Q call?

I think, Mike, it'll depend on the timing and what opportunities we have to communicate and what type of information we have to communicate. So I don't know that we have an answer today for your question.

And on the hemophilia pipeline, I think, as we move forward with our BAX 855, our longer-acting Factor VIII, we plan to have an IND submitted by year end as we mentioned and we will report out on the Phase I data. Typically -- although we haven't done final decisions, typically large symposia like the Hemophilia Meeting would be a forum where we talk about those data. And so it'll be within the format of what we typically do. On VIIa, the same, we will go into Phase III by year end and make those announcements as we actually get the okay from the regulators to proceed.

Mike, and I'd add on Alzheimer's, I think it's similar to the HyQ situation. It all depend on what type of information, the timing of information and what we have to disclose. So we've made no decisions at this point.

Jonathan Palmer of CLSA is on the line with a question. Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division For Bob Parkinson, I just want to follow up on a strategic topic from last week's meeting and you touched a little bit on this with Matt's question. One of the growth vectors you discussed last week was this public and private partnerships and we spent a little more time on the Brazilian recombinant deal this morning. My question for you is, how do you institutionalize this objective across the organization and really leverage the portfolio? And is there a formal group responsible for pushing this initiative?

Yes, that's a great question, Jonathan. Well, one of the areas that we've really focused on this year is broadening our engagement and really the global resources focused on what we call market access, which is beyond the traditional go-to-market model of feeling the sales force and detailing the health care professionals. I mean, we've always had gap organizations in place that have established relationships with the government. But locally in the country, but rolled up through the regions as well as in the U.S., we've increasingly, I think, formalized the process that we are becoming increasingly attuned to what the priorities are of the governments who at the end of the day are the payers for most of health care, and then identifying those areas in which we think we can be a viable partner. As an example, and I won't say which government it is, but we had representatives from the Health Ministry here in Deerfield a couple of weeks ago talking about several different issues of priority for them. One of which is a common theme almost around the world that governments are challenged by is how do they manage the escalating costs of treating end-stage renal disease. And increasingly, there's an open-mindedness and a recognition that treating patients in the home not only is more convenient for the patient, oftentimes can lead to enhanced clinical outcomes, but clearly, care can be delivered at a lower cost than a traditional in-center type of environment. So we have, and we will continue to expand our resources, refine our competencies in an untraditional way starting with attempting to understand and empathize with the position of the governments and the payers on what their priorities are and then doing a crossmatch with the therapies that we're in, whether it's end-stage renal disease, whether it's in plasma therapeutics or whatever it may be, where our leadership position, we believe, objectively we present ourselves as a viable partner, and challenge them to open their minds to a different way of collaboration. One of the things that I feel very strongly about is I think, I used this expression last week, necessity is the mother of invention. And I think they need is becoming so intense for governments and payers, it's forcing them to say we have to think about unconventional and different ways to partner with industry if we're fundamentally going to get at these cost drivers that historically, everyone's been frustrated at their inability to deal with. And the traditional vendor-customer relationship where price on the product is the only variable, clearly, we understand why people are focused on that, to try to attempt to drive cost down, but we're reaching floors in that. And so we're really perceiving, in developed markets, an open-mindedness to collaborate in ways that heretofore they haven't. Conversely, in emerging markets, who have the challenge of providing access at what we call the base of the pyramid, which is as much of their population as possible to therapies, they too are looking for ways to finance access more broadly to care. And again, the traditional, what I call Western models of go-to-market, I think have to be challenged and kind of turned on end as it relates to emerging markets. So I'll stop there. I touched on several different elements, but there's a reason we broke this out as a fourth growth vector. We used the examples of the recent Sanquin collaboration, Jean-Luc took the group last week through the collaboration on what's referred to as the PD First program in Thailand. We hope to share more specifics with you shortly on the collaboration in Brazil, but I think these are just the first of what's now going to be a continuing stream over time of collaborations that are going to be significant contributors to our growth.

Our next question comes from Matt Taylor of Barclays.

I just had a question on prophy. Clearly, that's been a great driver for you in recombinants. I wanted to understand, in terms of units, when patients convert from on-demand to prophy. How much of a benefit is that for you in terms of total volume?

It's significant. Mary Kay, you want to...

Yes. I mean, moving from on-demand therapy, which could be 44 bleeds a year, to prophylaxis where you're taking it, depending on whether you're doing it PK or through standard prophylaxis, either 2x or 3x a week, you're probably talking volume increase of about 2x to 3x the volume.

Okay. Great. I read papers that go -- states from 2x to 6x, so 2x to 3x is helpful.

This is weight-based. I wouldn't -- I'd say 6 sounds a little high, Matt, but it is weight-based, so it does depend. It's customized to the patient.

Appreciate that in a difficult market, you guys delivered a decent quarter here. And you talked last week about your long-range plan goals. The growth here was a little bit lower than your goals, and I know you said that it's going to be back-end loaded. Can you help us with sort of the shape of the curve there over the 5 years in terms of how you think the growth is going to be this year and next year and in the out years?

Yes, actually, what I mentioned was during the conference, that it actually won't be that dramatic on either side, about approximately 5. And the dynamics are in the outer years, we'll have more new products contributing to top line and bottom line growth, but we'll also have increased competition, whether it's in the hemophilia space or Factor VIII or in Suprane and cyclophosphamide on the Med Products side. And in the near term, as we start ramping up capacity, particularly in 2014, that will help the plasma situation. But in '13, we're still constrained. So to think about the dynamics around the approximately 5, I don't see a big swing over the 5 years plus or minus around that range going forward.

Our last question, we have Glenn Novarro of RBC Capital on the line.

This is Brandon on for Glenn. First, can you just give us an update on what you're seeing in terms of Octapharma regaining footing in the U.S.? Are you still seeing -- still not really seeing Octa in the U.S.? And then also can you give us your expectations for U.S. IVIG pricing as the contracts are renegotiated for 2013?

Given the strength of the demand in the U.S., the Octa return has effectively been a nonfactor for Baxter, given our product constraints, even though we've shifted a fair amount of product to the U.S. to try to meet this very strong demand. They are still operating with a suboptimal offering of a 5% concentration versus the 10% everybody else has. And despite being one of the lower-priced players in the market, they really haven't, I think, had much of an impact. But again, I think this really is about the strength of demand in the U.S. kind of overwhelming any of these other factors. So it really hasn't hit our radar screen.

And we would not comment, Brandon, on IVIG pricing and contracts going into the contracting season.

Okay. And also, are there any large BioScience tender that we need to be keeping an eye out for?

Well, the one that is still pending in the recombinant space is the Canadian tender. And so we have been informed that we have been awarded a portion of that tender that's pretty consistent with our current position in the marketplace. The CBS has asked us not to be specific about the details, but I would tell you that the pricing is pretty consistent what we see in other major tender markets. And so as we go into 2013, that will be a modest headwind. But given all the other factors we talked about, the ADVATE prophy in the U.S., the potential opportunity in Brazil, our opportunity to continue to penetrate other emerging markets like China with approval now and eventually Russia by 2013 with ADVATE as well, we don't think that's going to be a net headwind for the year overall for the recombinant franchise. But other than that, there's no major tenders pending.

Right. And I would say Brandon, too, that this is the fourth and last of the national tenders that have played out over the last several years. So we'll be soon approaching a time where we may be participating in these tenders when they're renewed over the next coming -- the coming years, which again, is not included in our long-range guidance.

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