Baxter International Inc. (BAX) Q4 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Baxter International's Fourth 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.

Good morning, and welcome to our fourth quarter 2012 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; Bob Hombach, Chief Financial Officer; and Ludwig Hantson, President of Baxter BioScience. 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. Thank you for calling in. We're pleased today to announce financial results for the fourth quarter and full year 2012 and also provide you with our financial guidance for 2013. As you saw in the press release that was issued earlier this morning, adjusted EPS in the fourth quarter increased 8% to $1.26 per diluted share. And for the full year, adjusted EPS increased 5% to $4.53 per diluted share. On a reported basis, worldwide sales in the fourth quarter increased 4%. And for the full year, sales increased 2%. After adjusting for foreign currency, Baxter's global sales increased 5% for both the quarter and full year 2012. Importantly, we continue to generate significant cash flow, which exceeded $3.1 billion for the year, a record level, while maintaining a disciplined capital allocation strategy of returning value to shareholders, through both dividend increases and share repurchases. Even in the face of a challenging macroeconomic environment, Baxter expanded access and increased standards of care around the world, invested to enhance its competitive position, innovated and advanced the new product pipeline and delivered solid financial results while providing an attractive return for shareholders. And in 2013 and beyond, we'll focus on the 4 growth vectors that support our objectives and enable us to serve the interest of patients, providers and other key stakeholders. As we've previously discussed, these 4 vectors include: enhancing growth by optimizing our core business portfolio; advancing the company's new product pipeline; capitalizing on the opportunity to develop new business models, which include public and private partnerships; and pursuing business development initiatives that deliver enhanced returns in the near and long term. With this in mind, Baxter will fulfill our mission of improving quality and access to care as we save and sustain lives globally. Many achievements throughout 2012 reflect these priorities and were highlighted in this morning's press release, so I won't take too much time to review them in-depth. But let me take just a moment to underscore just a few key accomplishments. First, within the base business, we continue to derive significant benefits by taking full advantage of existing opportunities to bring our products and therapies to various markets more effectively. This includes geographic expansion, particularly in emerging markets where 2012 sales totaled approximately $3 billion and growth is approaching double-digits. For example, we penetrated new markets with our inhaled anesthetics portfolio; introduced OLIMEL and NUMETA triple-chamber nutritional therapies in more than a dozen new countries; and received approval for ADVATE in China, where more than 50,000 people are living with hemophilia A. We're also very pleased with the continued success of ADVATE and the momentum that we're gaining from the new prophylaxis label in the United States, as evidenced by the acceleration in sales growth to double-digits this year. And we remain committed to meeting patient needs by augmenting our plasma manufacturing footprint with both internal capacity expansions and external collaborations, such as the agreement with Sanquin, which was announced later this year. Second, throughout 2012, we meaningfully advanced our new product pipeline. We received approval of new indications for lifesaving therapies, including GAMMAGARD LIQUID for the treatment of multifocal motor neuropathy and TISSEEL for general hemostasis in surgery. We further advanced clinical programs into late stage development with the initiation of several Phase III trials, including the stem cell trial for myocardial ischemia; a trial for BAX 855, a full-length, longer-acting recombinant factor VIII therapy; and a second confirmatory Phase III trial evaluating GAMMAGARD LIQUID as a potential treatment for Alzheimer's disease. And we also completed a number of clinical trials in 2012. For instance, we've recently concluded the clinical phase of our first Phase III Alzheimer's trial and expect to announce results in the second quarter of 2013. We completed the pivotal trial of BAX 326, a recombinant factor IX protein and filed for U.S. regulatory approval in the third quarter of 2012. And recently, patients completed treatment in the first trial in the United States evaluating the performance and safety of our new home hemodialysis system, which will support European CE Mark in 2013. Third, we introduced the concept of developing public-private partnerships. While we have several of these partnerships already in place, in October, we disclosed an important long-term agreement with the Brazilian government for an exclusive recombinant factor VIII hemophilia partnership to expand access and provide recombinant therapies to patients in Brazil, the third largest hemophilia market in the world. And lastly, we accelerated the pace of business development. We successfully integrated the Baxa, Synovis and SIGMA acquisitions. We entered into a collaboration with Onconova Therapeutics for European commercialization rights of rigosertib, a novel targeted anticancer compound. This will be an exciting addition to the portfolio, where we can leverage Baxter's legacy of treating critical diseases, existing leadership position in hematology and sales channel. And we continued to advance our partnership with Momenta Pharmaceuticals during the year, as we've now selected 3 biosimilars targeted for the treatment of oncology, autoimmune and other inflammatory disorders. And finally, we announced a definitive agreement to acquire Gambro, a global innovator in hemodialysis and acute renal technologies. This acquisition enhances Baxter's competitive position by creating a global renal therapies business with a comprehensive product offering for both chronic and acute dialysis patients. This transaction also positions us to capitalize on the attractive fundamentals of the large and growing global dialysis products market and provides true strategic financial and operational synergies at attractive returns well in excess of our cost of capital. In summary, Baxter's portfolio remains strong, and we continue to benefit from our focus on lifesaving therapies. The increased level of R&D investment over the years has transformed the new product pipeline into a robust portfolio of products and therapies that improve the quality of care and address key high potential areas of unmet medical need. We're committed to working with payors by establishing public and private partnerships, as we're well positioned to provide solutions to their increasing challenges. And we've executed on a number of business development opportunities that align with our core strengths and position Baxter for future success and accelerated growth. As always, I'd be happy to address any questions on these or other topics during the Q&A. So with that, I'd like to ask Bob to review the fourth quarter financial results and guidance for 2013, and then I'll briefly come back to provide some additional perspectives. Bob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share on the fourth quarter, excluding special items increased 8% to $1.26 per diluted share, which is at the higher end of our guidance range of $1.24 to $1.27 per diluted share. As we mentioned in the press release, GAAP results include after-tax special items of $206 million or $0.37 per diluted share. Approximately 65% of this charge is noncash. The special items primarily include noncash cost associated with the settlement of certain pension obligations in the U.S. and business optimization initiatives pertaining to certain manufacturing and business operations around the world. These actions include the elimination of a number of positions as we continue to streamline our operations, rationalize our manufacturing footprint and optimize our general and administrative infrastructure. Annual savings are expected to total approximately $0.17 per share when fully implemented in 2015. However, for 2013, savings will equate to approximately $0.08 per diluted share, which is in addition to an incremental $0.05 of savings related to our actions implemented throughout 2012. And we expect to reinvest a portion of these savings in promotional and marketing activities to support recent label expansions and upcoming new product launches on a global basis. Now let me briefly walk you through the P&L by line item for the fourth quarter and full year 2012 before turning to our financial outlook for 2013. Starting with sales, worldwide sales totaled approximately $3.8 billion in the fourth quarter and increased 4%. On a constant currency basis, revenues were in line with our guidance and increased 5%, driven primarily by strong growth in emerging markets and BioScience, which exhibited robust growth across all 3 key product categories, particularly in the U.S. For the full year, worldwide sales increased 2% to $14.2 billion. And after adjusting for foreign currency, sales advanced 5%. In terms of individual business performance, global BioScience sales improved 7% to $1.7 billion in the fourth quarter. And on a constant currency basis, sales advanced 9%, representing the strongest quarterly growth this year. For the full year, global BioScience sales increased 3% to $6.2 billion. And after adjusting for foreign currency, sales rose 6%. Within the product categories, recombinant sales increased 1% to $581 million. On a constant currency basis, sales increased 3%, as strong performance in the U.S. with growth of 9% more than offset a decline in international sales, primarily resulting from the planned impact of the Australian tender. Excluding the impact of tenders, global recombinant sales advanced 7% in the quarter. As Bob mentioned earlier, throughout 2012, we realized benefits associated with the new differentiated label of ADVATE as we continued to drive conversion from plasma-derived therapies and competitive offerings and drive enhanced penetration of prophylactic treatment. This resulted in U.S. recombinant growth of 10% for the full year, an accelerated level from what we've experienced in the last several years. In antibody therapy, sales of $425 million increased 5% on both a reported and constant currency basis. This performance is a result of strong demand for GAMMAGARD LIQUID in the U.S., as we continue to promote awareness and diagnosis of primary immunodeficiency and drive enhanced penetration of our subcu therapy, given its favorable tolerability profile and low infusion site reaction rate. For the full year, antibody therapy sales advanced 5% on a constant currency basis. And excluding the benefit last year of approximately $100 million related to the absence of Octapharma, antibody therapy revenues advanced 12%. Moving on to plasma proteins. Sales in the quarter were $447 million and increased 13% on both a reported and constant currency basis. This was due to strong double-digit growth of FEIBA and albumin, which offset lower plasma-derived factor VIII sales in the U.S. In the fourth quarter, sales in regenerative medicine advanced 20% to $180 million. After adjusting for foreign currency, sales rose 21%, driven by growth of TISSEEL and a benefit from the Synovis acquisition of approximately $25 million. Finally, revenues in the other category totaled $54 million in the quarter and increased 23%. Excluding foreign currency, sales increased 30% driven primarily by milestone payments totaling approximately $20 million related to our ongoing collaborations with governments on the development of influenza vaccines. In Medical Products, global sales in the fourth quarter totaled approximately $2.1 billion and increased 2%. On a constant currency basis, sales grew 3%. For the full year, Medical Products sales increased 1% to approximately $8 billion. And after adjusting for foreign currency, sales increased 4%. Within the product categories, renal sales totaled $675 million and increased 2% on both a reported and constant currency basis. This was the result of ongoing PD penetration in emerging markets and accelerated patient gains in the U.S., as well as some onetime purchases by third parties totaling approximately $10 million. Sales in the global injectables category of $522 million increased 7% and on a constant currency basis, sales increased 8%. Performance continues to be driven by significant growth of certain injectable drugs in oncolytics, like cyclophosphamide, and growth in our international compounding business. IV therapy sales advanced 7% to $500 million. And after adjusting for foreign currency, sales rose 8%. This was due to increased demand for IV and nutritional therapies and incremental sales related to the Baxa acquisition of approximately $15 million. Infusion system sales totaled $210 million and were lower than the prior year by 11% on both a reported and constant currency basis. This was primarily due to the difficult comparison presented by the completed transition to the SPECTRUM pump in the U.S. market. Finally, anesthesia posted sales of $140 million, reflecting a decline of 5% on both the reported and constant currency basis. Double-digit growth across international markets was more than offset by lower sales in the U.S., which reflected fluctuations in purchasing patterns of U.S. wholesalers. For the full year, anesthesia sales increased 3% on a constant currency basis. Turning to the rest of the P&L. Gross margin in the quarter of 52.4% improved sequentially by 30 basis points and reflects margin expansion of 60 basis points versus the prior year margin of 51.8%. This was a result of underlying operational expansion driven primarily by the benefit of positive mix. This performance more than offset a number of headwinds, including pension, amortization of intangible assets related to recent business development initiatives and government austerity measures. For the full year, gross margin was 51.8%, which was 40 basis points higher than the 2011 gross margin of 51.4% and favorable to our full year guidance. SG&A totaled $810 million and increased 8% with 2 points of growth related to the inclusion of acquisitions. The remainder of the growth in the quarter is attributable to the impact of incremental pension expense and investments we are making in promotional and marketing initiatives and in international markets to enhance our global presence. In total, these items more than offset a benefit from foreign currency, aggressive management of discretionary spending and operational efficiencies derived from our process reengineering efforts. For the full year, SG&A increased 5%. Excluding expenses associated with acquisitions, which totaled approximately $80 million for the year, SG&A increased 2%. R&D spending in the fourth quarter increased 4% and totaled $263 million. Growth on a constant currency basis was in mid-single-digits, reflecting the progress we are making in advancing a number of programs in our pipeline, including those in our leading hemophilia franchise, the Alzheimer's programs and our Phase III adult stem cell trial. R&D for the full year exceeded $1 billion, a record level for the company. The operating margin in the quarter was 23.8%. And for the full year, the operating margin was 22.9%. Interest expense was $22 million compared to $15 million last year. This increase is due to incremental expense associated with the debt issuances earlier this year and lower interest income. Other income totaled $22 million in the quarter and is primarily attributable to a favorable foreign exchange impact on balance sheet positions. The tax rate was 21.7% for the quarter, which resulted in a year-to-date tax rate of 21.9%, in line with our guidance. And finally, as previously mentioned, adjusted EPS was $1.26 per diluted share, an increase of 8%. And adjusted EPS for the full year was $4.53, reflecting a 5% increase. Turning to cash flow. Cash flow from operations in the quarter totaled $945 million. And on a year-to-date basis, cash flow from operations exceeded $3.1 billion, an improvement of 10% year-over-year. Capital expenditures in 2012 totaled $1.2 billion, resulting in free cash flow of $1.9 billion. DSO ended the quarter at 53.3 days, comparable to last year and reflecting a 4-day improvement versus last quarter. Inventory turns of 2.5 improved versus the third quarter but are lower than turns of 2.7 last year due to the impact of recent acquisitions and increased inventory levels to support late-stage clinical trials and growing demand. Lastly, for 2012, we repurchased 25 million shares for $1.5 billion, or on a net basis, 15 million shares for approximately $1 billion, in line with our full year objective. Finally, let me conclude my comments this morning by providing our financial outlook for the full year 2013. As you saw in the press release, we expect earnings of $4.60 to $4.70 per diluted share. This includes the impact of the Gambro acquisition, which is projected to close at the end of the second quarter with estimated dilution of $0.10 to $0.15 per diluted share. Dilution is primarily related to noncash amortization of intangible assets, which will be finalized upon closing. By line item of the P&L and starting with sales, we expect sales growth, excluding the impact of foreign currency of approximately 10%, and this includes a half year sales contribution from Gambro of approximately $830 million. Excluding Gambro, Baxter sales growth on a constant currency basis is expected to be approximately 4%. Given our current outlook for foreign exchange rates, we do not expect foreign currency to materially impact sales growth. For the full year, we expect gross margin for the company to be 100 to 120 basis points lower than the gross margin in 2012 of 51.8%. While we expect margin expansion of approximately 100 basis points in the base Baxter business as a result of positive mix benefits, we expect this to be more than offset by intangible asset amortization related to Gambro, incremental pension expense, government austerity measures, the Medical Device Tax and foreign currency. In terms of expenses, we expect SG&A to increase approximately 10% and R&D to grow in mid-single-digits, both reflecting the addition of Gambro. We expect interest expense to total approximately $170 million, reflecting the impact of a new $3 billion debt issuance related to the acquisition, and we expect other to be an expense of approximately $20 million to $30 million. Although over the long-range plan we expect the tax rate to drift upwards to approximately 23%, in 2013, we expect a tax rate of approximately 22% and we also expect a full year average share count of approximately 550 million shares, which assumes approximately 300 million in net share repurchases. From a cash flow perspective, we plan to generate cash flow from operations of approximately $3.3 billion and expect capital expenditures to total approximately $1.7 billion, which includes Gambro and the investments we are making to enhance our plasma manufacturing footprint in Covington, Georgia. Moving to sales and our assumptions for Medical Products and BioScience in the major product categories. Recall that in 2013, we're moving to a new franchise reporting structure, and therefore, providing guidance in the new format this morning. For your convenience, we've posted the historical restated sales, including 2012 by quarter, to the Investor Relations section of our website. Now beginning with Medical Products. On a constant currency basis, including the half year contribution related to Gambro, we expect sales growth in the low-teens. Excluding Gambro, we expect sales for Medical Products to grow 3% to 4%. Specifically, we expect Baxter renal sales, which totaled $2.5 billion in 2012 to grow in low single-digits, driven by mid-single-digit growth in PD and lower HD revenues. As mentioned earlier, the base business sales will be augmented by Gambro and a half year sales contribution totaling approximately $830 million. We expect fluid system sales, which includes IV solutions, infusion pumps and access sets to grow in mid-single-digits. 2012 sales for this category were $2.9 billion. We expect specialty pharma sales, which includes our nutritional therapies and inhaled anesthetics, to also grow in mid-single-digits. 2012 sales for this category were $1.5 billion. And we expect our BioPharma Solutions business to record comparable sales to 2012 of approximately $1 billion. For BioScience, we currently project sales growth on a constant currency basis in the 4% to 5% range. Our outlook includes low to mid-single-digit growth in our hemophilia franchise, which includes recombinant and plasma-derived factor VIII and factor IX therapies and FEIBA and inhibitor therapy. This franchise posted sales of $3.2 billion in 2012. We expect mid- to high single-digit growth in BioTherapeutics, where sales totaled more than $2.1 billion in 2012. This growth will be driven primarily by strong demand for immunoglobulin therapies, including GAMMAGARD LIQUID and subcu therapies, as well as growth in albumin and our treatment for Alpha-1 deficiency. In BioSurgery, we expect high single-digit growth. Sales in this category totaled $673 million in 2012. And finally, we expect our vaccine franchise, which recorded sales of $254 million in 2012, to grow in mid-single-digits. As mentioned in our press release, for the first quarter, we expect earnings per diluted share of $1.03 to $1.05 and sales growth, excluding the impact of foreign currency, of 2% to 3%. Based on our outlook for foreign exchange rates, we do not expect foreign currency to meaningfully impact sales growth in the first quarter. Thanks. And now let me turn the call back over to Bob.

Thanks, Bob. In closing, I'm very pleased with the progress that we made in 2012 financially, operationally and strategically. We achieved sales and adjusted earnings per diluted share growth of 5% as we continued to respond to an evolving and demanding environment. We generated strong sustainable cash flow of more than $3.1 billion, increased our dividend by 34% and returned significant value to our shareholders. We strengthened our core portfolio, meaningfully advanced our new product pipeline that's as strong today as at any time in our history, and we executed on a number of collaborations and business development initiatives that complement our current businesses, leverage our capabilities and provide enhanced growth in the future. I remain very confident in the long-term growth prospects for our company, which we laid out in detail late last year at our investor conference in Chicago. Our entire management team remains committed to enhancing shareholder value in the coming years, as we implement our strategies, deliver on our commitments, and more importantly, meet the needs of the patients and customers that utilize our products to save and sustain lives. Thank you. And with that, let's open up the call to Q&A.

[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 David Lewis of Morgan Stanley.

Bob, obviously, there's a lot of reclassification with the new reporting structure. I wonder just can you give [ph] a high-level commentary, year-over-year core Baxter is slowing incrementally just a little bit into '13. I mean, just maybe give us some high-level commentary on some of the significant headwinds and tailwinds to growth. And obviously, there's incrementally more headwinds in '13 and sort of what some of those are.

Yes, sure, David. So a couple things. I would say in 2012, we benefited from the acquisitions of Synovis and Baxa, which are now fully in our base. And as you rightly point out, we are facing some headwinds here as we go into 2013, starting with government austerity measures, which we project to total approximately $90 million, which includes approximately $30 million for the U.S. Medical Device Tax, which we are putting through sales and margins. The other $60 million relates to a combination of austerity measures in Europe but also in Asia Pacific, particularly in China as well. So an even larger austerity impact this year than what we've seen in the last couple of years. I would also just remind everyone, we will remain constrained for plasma production here in 2013, as we work through bringing the old L.A. facility back online and ramp up our new L.A. and Rieti facilities. But that is definitely on-track. We should have increasing product availability throughout the course of the year. And so the other thing I would mention is we are going to anniversary some of the recombinant factor VIII tender impact related to Australia, but that doesn't really happen until the middle of the year. So in particular, as you look at our guidance for the first quarter, the plasma product constraints are most acute for us in the first quarter. We have increasingly robust supplies to move throughout the year. As I mentioned, we don't anniversary the Australia tender impact until the middle of the year. The austerity measures that I've mentioned will be -- are impacted immediately, as we begin the year. And what's going to accelerate growth from the 2% to 3% that we've got in the first quarter, as we move towards approximately 4% for the full year, relates to a couple of things, one of which is the timing of tenders, particularly in plasma-derived products, such as FEIBA and plasma-derived factor VIII. Those are more concentrated in the second and third quarter than they've been in prior years. We do expect to begin to start shipping to Brazil related to recombinant factor VIII in the second quarter as well. And as I mentioned, increased product availability throughout the course of the year on the plasma-derived side will also help us drive accelerated growth beyond the first quarter.

Okay, very helpful. And maybe just a follow-up on some of the key growth drivers we saw in '12 and then maybe continuation to '13. So the first, obviously, is the recombinant franchise in the U.S., I think, actually accelerated again in the fourth quarter on a comp adjusted basis. So when you think about the prophy label, for either Bob, prophy label plus the higher dosing, what do you think the trend line is for U.S. recombinants heading into '13? And then the IVIG business, obviously stronger U.S., weaker o US as you've been prioritizing in 2012. When do you see that sort of basing out in '13? And is there any evidence that the reduced supply in Europe is beginning to have an impact on pricing in Europe for IVIG?

Yes, I'll handle the IVIG one first. I would say we've largely made the move that we're going to make in terms of product shift by the end of 2012 here. So 2013, we're going to be operating at a similar level to what we're exiting 2012 at. That does imply a little bit of benefit year-over-year in the first quarter or 2, but that's largely played out in terms of the shift. In terms of pricing, the markets that we continue to participate in, in Western Europe, I would say that we haven't seen any significant impact one way or the other on price at this point. And then as it relates to recombinant factor VIII...

Yes. David, Ludwig Hantson is with us this morning. Ludwig, why don't you just take a minute and maybe update the callers on what's going on with the whole uptake on prophylaxis in the U.S.? Because obviously, we're experiencing some very encouraging results.

Yes. So thanks, Bob, and thanks for the question. So yes, this is a success. We got the label about a year ago. So we are 1 year into the launch for ADVATE prophy. It's a success from a -- I would say, from a -- first of all, from a patient perspective. Unmet medical need is still high. We still have a lot of patients who are on demand [ph], so we're switching over. When you look at the number of patients that were switched over to a prophy regimen, we're talking about more than 200 patients. We are looking at continuing that trend into 2013. So clearly, we are moving into 2013 with a strong momentum. Having said that, we're also aware of the fact that we might get competition by the end of 2013 into this space, which might slow us down a little bit. But overall, we believe that we will continue to grow ADVATE in 2013 and then moving forward. Then maybe bridging also to FEIBA, since it is in the same space, you might have seen the fact that we got prophy results for FEIBA. We are moving towards a BLA submission first quarter of 2013 in the U.S. We already have the indication in Europe in the majority of the countries. So you will see that by the end of this year, when we get the approval in the U.S., an increased focus on moving our FEIBA patients to a prophy regimen.

Is that helpful, David?

Perfect.

Larry Keusch of Morgan Keegan is on the line with a question.

Whoops, wrong firm. Just a couple of quick ones. Bob, you've obviously done a bunch on the development side in 2012. Just wanted to gain a little sense of your appetite for M&A. As you go forward, does the integration of Gambro hold you back a little bit? Or how do you think about that?

Well, obviously, given the magnitude of the Gambro deal, Larry, yes, it's going to limit us a little bit for a while. But I would say as opportunities arise, the smaller kind of bolt-on things that we've done more of over the last couple years, we're certainly in a position to continue to do that. I mean, I actually couldn't be more pleased with the progress and the momentum on the BD front over the last 2 years in the company. I think we've done a lot of good stuff. The smaller deals we've done have, I think, helped us develop competencies in terms of how you integrate and so on. So I think we're very well positioned once we manage through the antitrust process and close the Gambro deal to move ahead and integrate Gambro. But no, we continue to be very open-minded and receptive to BD things that emerge, one of which actually we just announced this morning. I don't know if you had a chance to see it. It came across the wire, which was to require some hemophilia assets from Ipsen Pharma. And so that's representative of the kind of thing we're going to continue to do.

Yes. Larry, I would just add that given how we're financing the Gambro acquisition and the structure of that and the use of offshore cash, while it is a significant acquisition, it is going to allow us to position ourselves and maintain some strategic flexibility going forward here as well.

Okay, terrific. And then just a quick one, just because I wanted to revisit it. How should we -- with the approval of ADVATE in China -- and I know this is going to be sort of a longer-term process. But how should we think about what steps need to occur before that becomes a meaningful driver of revenues for you guys? Because it would certainly seem to be a big opportunity.

Well, it is, Larry. But obviously, given the different market dynamics, the adoption on that is going to be somewhat slow. But we're excited about the longer-term opportunity. I think we have to be realistic in terms of the adoption curve. And we look for ways to leverage our other hemophilia assets as well in China. And as we've talked before, this is a very large market, largely untreated and undiagnosed. And besides launching ADVATE more broadly, this is about leveraging our emerging broader portfolio, from plasma-derived to RECOMBINATE to ADVATE to the other products that are being approved, because it's critical for us to establish a leadership position and maintain that in China for the long-term benefit. I don't know, Ludwig, if there's anything to add to it?

Yes. Maybe I'd like to add the following. So if you look at the BRIC countries, you're talking about more than 1 million activity units. And when you bring it down, most of these patients are being treated with plasma-derived products. So there is a great opportunity in each of these countries to convert from plasma to RECOMBINATE but also increase the diagnosis rate. And I would say the bigger ones are clearly Russia and Brazil. So you're aware of the fact that we have an agreement with the Ministry of Health and Hemobrás in Brazil, and Bob mentioned that we will start shipping products. Our plan is to start shipping product to Brazil second quarter of this year. We also have a regulatory strategy to penetrate Russia, which we're also working towards approval this year. And then China is the third one. So clearly, it's bigger than China, so we have growth opportunities in this business that clearly will continue to help us move ADVATE and hemophilia forward.

And Larry, it's Mary Kay. And I would just add that while we have approval in China, we haven't received reimbursement approval, so we actually haven't launched. We will launch in 2013.

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

Could you spend a minute on the agreement this morning to acquire the Inspiration assets and maybe just walk through where you think that program fits in relative to FEIBA and maybe just give us your thoughts as well as in terms of the clinical profile of that product relative to FEIBA?

So Mike, I'm going to ask Ludwig to address specific clinical application of the product, where they fit more broadly in our hemophilia strategy. And then maybe Bob Hombach can briefly comment on some of the financial aspects, although I think it was pretty clearly detailed in our press release. So Ludwig, in response to...

So maybe first thing is we are excited about this opportunity. We believe this is a great fit with our current portfolio and with our pipeline. It is a late stage. It's a Phase III asset in an unmet medical -- for an unmet medical need. So the asset itself, so OBI-1, this is a recombinant porcine factor VIII, which is being investigated for the treatment of acquired hemophilia A and hemophilia A with inhibitors. And the profile of the molecule may help unmet needs that persist in the treatment of hemophilia, and specifically, in the management of bleeding from patients who have acquired hemophilia A. So this is different than what we have with FEIBA. FEIBA -- so OBI-1 versus FEIBA, those 2 products have unique product profiles and potential applications. And when you look at the difference between those 2 indications, from a patient perspective, clearly, acquired hemophilia A is very rare though a potentially life-threatening bleeding disorder. It's estimated that 1.5 cases per 1 million lives annually. It is caused by the development of inhibitors. And different from congenital hemophilia, acquired hemophilia is typically a disorder of older adults and occurs equally in both males and females. So clearly, different from the space that we're in with ADVATE and with FEIBA. Now when you look at the pattern of bleeding, it is also different. Those people come into the hospital, they typically bleed in the skin, the muscles, the soft tissue as opposed to bleeding into the joints. So I think my message is that the patient segmentation is different, the market segmentation is different. The strategy is complementary to what we have with FEIBA and ADVATE. And we're looking at this as a great addition to our portfolio. And with respect to the financials, Bob?

Yes. I would just say that we've structured this deal, as we have many other deals, in that we're paying primarily for success here. And so that the milestones are tied to approval, and then additional milestones, assuming we achieve certain sales levels going forward here. So we're pleased with how the structure is set up. And from a sales contribution standpoint, while this is late stage, it does have orphan drug designation and fast-track status. It will take a bit of time to ramp up sales. So I would say over our LRP here, it would be a modest contributor to the top line. But beyond our LRP and over time, this -- assuming we get multiple indications here, could be more than a $200 million product for us.

So the time line, so we're looking at a potential submission later this year. FDA will decide how fast they want to move. But this is orphan drug and got fast track. So difficult to comment on the launch, but the impact will be more in 2015 than in 2014.

Okay. Mike, is that helpful?

Yes, that was helpful. So let me switch to just another pipeline after -- the partnership with Onconova, could you just spend a minute on the MDS trial design and just the expectations for when that would reach its crossover point in that Phase III trial and when we would see a readout from that?

Okay. Ludwig?

Great. So we're also excited about this one. So you see there's a lot of stuff going on in 2013. And so they have 3 programs -- or we have 3 programs. One is an IV program in high-risk MDS patients. The second program is an oral program in low-risk MDS patients. And then there's a program in pancreatic cancer patients. The readout for those studies -- first of all, the high-risk MDS readouts, we will know top line data by fourth quarter of this year. Remember, this is an overall survival study. And this is -- as far as the trial design, this is versus standard of care. Now the longer patients will live, the better I assume it will be for the patient but also for the outcome of the study here. But we expect fourth quarter 2013 to have the top line data for the high-risk. As far as the low-risk oral program, there will be response data by second quarter of this year. And then the time lines for the pancreatic study, we will have interim survival data first quarter of 2014. As far as design is concerned, so the sample, for the high-risk, it's 270 patients. The enrollment is on target. And I think we're close to 220 patients out of 270. The low-risk is 60 patients. We're more than halfway in the enrollment. And the pancreatic is 150, and we've passed the 110 patients enrollment. I hope for the next...

So Mike, this is European, right? So Ludwig, just expand a bit, give your comment on a couple things. One, the magnitude of the opportunity. But before that, maybe why this is so complementary with our channel presence, particularly in Europe.

Yes, so as far as the opportunity financially, if we hit on all 3, we believe this could become a $1 billion opportunity. When you look at our rights, we have EU territory, so we have Europe, so we have 33 countries. From a patient perspective, this could be big because those patients, at least in the high-risk, don't have any treatment options available. So we would be able to make a significant impact in the lives of those patients. And then from a channel perspective, I do believe this is a very strong bolt-on and add-on to our hemophilia franchise. MDS is right in the middle between hematology and oncology. And at the end of the day, we're market leaders in the hemophilia. When you look at the channel in Europe, we're talking about centers of excellence, these are very specialized centers focusing on MDS, both low-risk and high-risk. We believe that we are in an excellent position to have a great partnership. And when the data -- if and when the data is positive and we launch, that we can make a significant impact here.

Good. And just one follow-up. So the IV high-risk, once you have that readout and you submit that is orphan drug. So if that goes well, you could be looking at an EU approval late 2014. Is that fair, Ludwig?

Well, if U.S. -- and U.S. regulatory strategies and time lines are different. We have Europe. For Europe, we will be looking in 2015 because Europe doesn't have the same accelerated time lines as the FDA in U.S.

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

I wanted just to come back to the antibody therapy business for a second, please. I think if I take your comments about successful demand creation through the SG&A line, conversion of subcu, but then square that against some of the capacity constraints that you've talked about, you're still getting a lot of growth out of that franchise in terms of dollars. Could you maybe help fit all the moving parts together, maybe it's mix or price, just to help us understand how [indiscernible] numbers were in the context of a tough comp and the supply constraints?

Yes. So we are operating under supply constraints, and none of that have changed. But as we've talked about, as we've had to look at global allocation of a constrained product here, U.S. demand has been particularly strong. Prices tend to be higher in the U.S. than most other markets. So as we've shifted product, we do get a mix benefit from that, and that certainly has aided the top line growth profile there. No, nothing new on the pricing front. We've talked about an expectation of a modest price increase, and that's what we expect to see here in 2013, as we saw in 2012. So I think, David, it's primarily the mix impact. And as I mentioned earlier, we've largely done the shift that we're going to do. And so as we move into 2013, there'll be less of that. From an impact, we will have a little bit of a year-over-year benefit in the first half of the year. But again by the third or fourth quarter this year, we've largely made the shift we expected to make.

The other thing I would just add to that, to what Bob said, is obviously we continue the conversion to subcu, which uses a higher volume, so that drives volume growth. We continue to operate primarily within the PI indication in an underdiagnosed and an underdeveloped market, even in the U.S. So we continue our focus on developing those markets, and we continue to see expanded use in the whole neurology space, which as a general rule also uses volumes of drug at a higher level. So you have all kinds of upward arrows. If we want to drive an underlying demand, we'll just look forward to moving into a position, where our capacity expands and the long-term outlook for this business is very robust.

Yes, David, one last thing to point out. That also, then the stronger fourth quarter plays in a little bit to some of the tightness and somewhat lower expectation for sales in Q1 of this year. As I mentioned, as we move throughout the course of this year, as we bring old L.A. back up, and so we'll have a better supply. But overall, we're still looking at approximately mid-single-digit volume increase in 2013.

Sure, that makes sense. And maybe just a follow-up on the P&L, more on the cash flow side. You grew operating cash flow 10% this year. You're guiding to a similar type number in 2013. Obviously, you have a step-up in CapEx associated with Georgia and the Gambro transaction. But is that type of cash generation, just cash flow generation versus earnings growth, sustainable over a long period of time? And then how does that factor into your thinking on financial flexibility? The question came back -- up earlier about can you do deals despite Gambro. But if this type of cash flow is sustainable and continues, I would assume that there's plenty of flexibility for more business development or further return of cash to shareholders.

David, I would agree with that. And let me kind of walk you through that. So the guidance we've given is about 7% increase in cash flow in 2013 versus 2012. It was a bit higher in 2012 versus '11 because we had a pension contribution in '11, didn't have one in '12. But that 7% cash flow growth is very consistent with what we talked about in our long-range plan outlook for the business to grow cash flow to approximately $4.5 billion by the end of the long-range plan. And yes, we do believe that is definitely achievable. Now one thing to point out, one of the headwinds we've got here is pension expense, year-over-year, another $0.10 headwind here as we go into 2013. More than 70% of that increase is related to noncash amortization of actuarial losses on the balance sheet. And so over the last 3 years, we've actually incurred $175 million cumulatively of additional pension expense or $0.25 a share. And again, about 75% of that is noncash. So increasingly, you're going to see a divergence between earnings growth and cash flow growth because of the impact of this noncash amortization on the P&L that we don't see in the cash flow statement. So it does mask the strength of the underlying operating performance, and we do feel good about our ability to continue to generate cash flow in that roughly 7% or in line with earnings as we go forward. And that will, again with the structure of the Gambro financing and use of offshore cash, leave us in a position of having strategic flexibility, continue to look at M&A and asset and capital allocation going forward here, including a strong and growing dividend at approximately a 40% payout ratio.

And then maybe just one quick follow-up on that. I mean, if you look at the long-range plan, I mean, obviously, there have been these sort of headwinds every year on pension and things of that nature. I mean, how should we be thinking about those on a go-forward basis? And I don't mean for this to come off cynically, but do those go away at some point, whereby you do realize that long-range plan growth rate? Or is cash flow a more appropriate way to look at things?

Well, I would say as it relates to pension, we've done a lot in the last 5 or 6 years to try to mitigate risk. We've closed the U.S. plant, the new entrants [ph]. That's 2/3 of our overall footprint in terms of the liability. We've lowered our expected return on assets. We've changed the investment allocation mix to be 40% fixed income. We've bought treasuries of a hedge in the pension fund since 2008. But despite all of that, we continue to see these headwinds. We did take an additional action here in the fourth quarter to offer lump sums to the terminated vested portion of our pension population, which is about 28% of the liability. That actually saved $0.05 per share. So in other words, our pension headwind would have been $0.15 per share in 2013 had we not taken that action. Despite all of that, again we have this $0.10 headwind. However, given that most of this expense increase is this amortization and that this actuarial loss was heavily driven by the 2008 stock market performance, that usually amortizes over a 5- to 7-year period. So going forward here, even if interest rates don't go up, we will see an improving pension situation and potentially a material tailwind here over the next several years. But at the moment, for 2013, given where we're at, it remains a headwind. So I think that one is one I feel increasingly comfortable it's going to stop being a headwind and potentially become a tailwind. As it relates to austerity measures, which is really the other one, that's a harder one to gauge. But as you know, in our LRP outlook, we did assume some ongoing austerity measures going forward.

Bob, would you comment on -- because I'm not sure everyone understands this, why this whole pension thing is disproportionately greater for Baxter as a result of some legacy positions that were taken, okay? Could you just expand on that for a minute?

Sure. So as Bob mentioned, when the Allegiance spinoff was done in 1996 and the Edwards Lifescience spinoff was done in 1999, management at the time decided to retain the assets and liabilities associated with those 2 spinoffs. As I mentioned, that ended up accounting for almost 30% of overall pension liability today. That may have been a great decision back in the '90s when stock markets were performing well and interest rates were high. But in the 2000s and where we're at today with record low interest rates here, that has created an amplified effect on our P&L profile here more than you might otherwise expect. So again, we took some action here in the fourth quarter to try to offer lump sums to lower that exposure to that population and were successful and saved $0.05 a share. But that's one of the issues we've been dealing with here over the last several years.

Bob Hopkins of Bank of America is on line with a question.

So just to follow up on the theme of pipeline updates. Two quick ones for me, one on HyQ and one on Alzheimer's. First, on HyQ, I know you made some comments a couple of weeks ago. But can you just update us on when you expect to meet with FDA and be able to communicate to us sort of go-forward details on the clinical trial requirements and new pathway for that?

Okay. One of the reasons Ludwig's with us this morning. It took us 5 questions to get there. But anyway, go ahead.

This is good, so thanks for the question. So first of all, from a European perspective, we continue the European regulatory process. And we expect a decision -- we're talking about HyQ. Both HyQ and then Alzheimer's. Thank you. So we're continuing the European regulatory process, and we expect a decision first half of this year for Europe. Then with respect to the FDA for the U.S., we have confirmed a meeting with the FDA in the second quarter of this year, where we will be discussing interim data from preclinical studies that we are conducting. So we started those preclinical animal studies together with Halozyme in 2 animal models, the rabbits and the rat. And we expect to complete these studies by year end. So interim data will be discussed with the FDA second quarter of this year. So then the regulatory path forward, of course, will depend on the outcome of our meeting. So that's on the short version on the HyQ. As far as...

Before you go to that, Bob, any follow-on, on the HyQ piece before Ludwig moves to Alzheimer's?

No, I think that's pretty straightforward.

Okay, good. Please go ahead now.

Yes, and then Alzheimer's, your question is overall status of where we are with the program?

Yes. So just wondering if the time lines that you laid out a couple weeks ago are still good, if there's any update there. You said previously that you would soon unlock the data and begin the analysis, and I'm just wondering has the data been unlocked and has the analysis begun? And should we still anticipate a Q2 data release?

So yes, you should expect a data release second quarter of this year. As I mentioned, we have different assessments. We have clinical assessments. We have assessments at the brain level, as well as CSF, as well as our plasma assessments. These assessments are done -- some of them are done by the investigators. These are the clinical assessments. But others are done by, I would say, a centralized lab, which takes a little bit longer. We are planning to close the database by the end of this quarter. And that's why you will see the data second quarter of this year.

And then what's a best-case regulatory outlook for Alzheimer's just in terms of what the requirements will be for approval? And assuming you do have good data, obviously, you probably expect some incremental demand on IVIG, even though approval will take a while. So I guess, just as last question, what's the best-case regulatory outlook for the approval pathway? And then how do you deal with the extra demand that you'll probably have for that product, knowing that it'll be off-label if you do have positive data?

Sure. Well, first of all, the robustness of the data will define our regulatory strategy, plus the FDA and the European authorities will define our strategy moving forward. So it's difficult to speculate what the outcome will be of the study. So you know that we did a futility analysis. And we know that on the basis of the futility analysis, the probability of success for achieving statistical significance in one or both of our primary endpoints is greater than 20%. So that's the only information that we know at this moment. So robustness, what I mean by that, is you have a clinical assessment. These are primary endpoints. You have a brain assessment, you have a plasma and you have a CSF. So that will define our discussion with the regulatory authorities and will define our regulatory pathway forward. So for me, at this point, it's very difficult to speculate how this is going to look like. It's too early. And to bridge back to your question on data, so I mentioned you will have the data second quarter of this year. This will be the top line data that we will be releasing. We will -- we are planning to show all the details of all the different assessments at a major Alzheimer congress in July. These are our time lines. And then with respect to demand, I think it's fair to say that we're not going to detail or promote the indication until we get the indication. The timing for that will be related to, of course, our regulatory strategy. And then Bob already mentioned the fact that we -- 2013 is a little bit of a transition period or a transition year as far as IVIG volume is concerned, since we are upgrading L.A. 1, old L.A. And so that will accelerate. We have new L.A. that's still accelerating. We have next year. We have the Sanquin agreement that will come on board by the next of the year. Plus longer-term, we have also the Covington opportunity, plus we have Rieti. So 2013 being a transition year, picking up by the end of this year, and then new opportunities as of next year to further accelerate the volume.

But the fact is if, ultimately, the data is extremely compelling, a; and b, there's no other emerging therapies, the reality is even with our expansion efforts, which were just detailed by Ludwig, we would not be able to meet the demand for this. So it does require, I guess, what I would describe as a different paradigm, a different approach. I think this whole notion of public-private partnerships, collaborations with governments, ultimately is something that may have to be considered. Now obviously, it's too early to jump in the middle of that. Right now, we can control what we can control. There's a reason when we scoped the Covington plant out, we did it with a broader vision beyond the 3 million liter capacity that we're initially putting in. So if the data emerges in a positive way, we can accelerate the ramp-up longer-term. So we continue to evaluate a variety of options in this regard, Bob. But suffice it to say, given the plasma-derived nature of the therapy and the number of patients conceivably that would need to be treated, it will require fundamentally different approaches, a number of which we're obviously evaluating right now.

Our next question comes from Rajeev Jashnani with UBS.

I had a few questions, one on -- a couple maybe. The hemophilia franchise, the guidance, I think, was low to mid-singles. And I guess, we don't have kind of the comparable number for 2012. I was wondering if you could kind of help frame that in terms of what -- if you rolled up FEIBA plasma-derived recombinants, what that growth rate would've been. It seems like -- or at least I would've thought, given the momentum in U.S. recombinants, that perhaps that would've been a little bit stronger than that or perhaps there's just some conservatism baked in there. And then maybe, one for Ludwig. And we kind of touched on this at the analyst meeting. You discussed the ease of use for ADVATE, the time for infusion or the simplicity of that. And you had mentioned at that time the potential to further ease that process. And I was wondering if at this point, you'd be comfortable providing some more color around what some of those activities maybe.

Bob, you take the first part, and then Ludwig...

Yes, so Rajeev, a couple of things on hemophilia growth in '13 versus '12. In 2012, we saw a very robust growth for FEIBA, particularly in the U.S., off a less strong 2011. So we're growing off a much stronger base. And while we're excited about the prophylaxis label potential for FEIBA, that's still -- it's in submission phase here, so we can't actively promote that. So we have more modest FEIBA growth assumptions in the U.S. in 2013 versus '12. And then as it relates to recombinant factor VIII, we've talked about in prior quarters, particularly in the first part of 2013 as there were some shifts going on within the specialty pharma -- pharmacy distribution channel within the U.S. in terms of payor relationships and so on. We did see some inventory build. I think we gauged it at 2% to 3% of the roughly 10% growth we were seeing in the first half of the year. So we need to work a little bit of that off as we go into 2013 as well. And as Ludwig mentioned earlier and as we mentioned at the investor conference, we do expect some competition in recombinant factor VIII in the U.S. later this year, could be multiple players depending on time line for approval of Novo and for Biogen Idec's longer-acting. And so we baked that into our assumptions as well.

So Rajeev, as far as the infusion experience is concerned, the total infusion experience takes about 5 minutes. The infusion itself takes 30 seconds to 1 minute. Of course, it depends on the experience. It depends on the volume and so on. But you also know that we changed the diluent, the volume of our vials a while ago. And we are now the lowest volume of 2 ml. So we're talking about very limited volumes in -- which of course, shortens the infusion time. We also have plans -- as I mentioned at the investors conference in October, we also have plans to upgrade our BAXJECT II to our BAXJECT III device. We have not disclosed how it looks like. But again, it will be an upgrade. It will be a great experience for the patient. And we're planning to launch the device before the end of this year.

If I could sneak in one more and maybe for Bob. Could you just talk about -- you talked about the clinical aspects with Alzheimer's and some of the regulatory assets. Could you touch on the commercial end for Alzheimer's IVIG and what level of bandwidth that's receiving internally? Or is that something you wait till you see the data and then that -- step up the activity from that point forward?

Yes. There's virtually no activity on that aspect, Rajeev, to be very candid.

Our final question comes from Matt Miksic with Piper Jaffray.

Just a couple of follow-ups. I think you had talked a little bit about the conversion. It sounded like maybe you added a point or so, or maybe more...

Conversion of?

Conversion of on-demand to prophy based on the new label. Yes, and I wanted to get a sense of -- you dialed in a certain amount of competitive pressure you talked about in the U.S. I'd love to understand maybe what kind of share you feel like you're gaining laterally, not just in terms of converting patients, and what kind of uptake you've seen from a couple of the convenience aspects that you've rolled out in hemophilia, namely, twice-a-week dosing and the larger vial, the prophy vial. And then I have one follow-up.

Yes, I don't think that we're in a position to quantify at this stage the share impact. I would just -- suffice it to say, Matt, that as Ludwig mentioned earlier, I mean, we're encouraged with the uptake and the response to the prophy. We're looking forward to some of the others, such as the BAXJECT III launch later in the year. I would just say our momentum right now, particularly in the U.S. in hemophilia is the strongest it's been in at least a couple years, if not longer. Obviously, we're going to do everything to not only maintain that and enhance that, but to quantify that in terms of share is probably a little bit premature, okay?

And then just to be clear. I guess, I'm trying to understand the one benefit is getting on-demand patients to go to prophy with the label. The other is getting prophy patients to go to twice a week. Any sense of the uptake there?

Ludwig, why don't you comment on each of those then?

Yes. It's difficult to give you numbers here. But the way that we look at this for us, and this is also how we rolled out the launch of this new indication is that, for us, the efficacy and the safety message is first before the convenience. When you talk to patients, when you talk to physicians, it's about controlling their bleeds. And our vision for the organization is to strive towards a bleed-free world. And that's what counts much more than moving patients from every 2 days to every 3 days. So our launch was staggered. We started with the efficacy message beginning of 2012. And only after 6 to 9 months into the year, we started working on the moving towards every 3-day dosing regimen because clearly, we heard our patients and our physicians that it's the efficacy controlling the bleeds that counts.

Yes. And Matt, I would just add in. We really started to promote that with the 4,000 IU approval that we received late in the second quarter or third quarter of last year. And in the fourth quarter, frankly, we saw good uptake of the 4,000 IU, which is probably a good indication of conversion that we're seeing to 2-day dosing with our units being about 10% of our total units in the fourth quarter of the 4,000 IU. So we are seeing uptake there.

Great. One follow-up just on plasma and FEIBA. Just to be clear, I wasn't sure if you had mentioned this. But have you started firing up those plants again? Or are you just on-track to do it here early in the year? And then on FEIBA, sort of a background question. I'm not sure if -- is FEIBA caught up in any of the supply issues related to your fractionation facility maintenance? Or is that just you have plenty of supply there?

We have sufficient supply in FEIBA. Bob, why don't you comment on the plant situation?

Yes. So we took the older L.A. facility down in the September time frame and we've completed all of the work that we expected to do. So we're in the process of preparing to start the plant up for production in the back half of February, so everything's on schedule. And we'll have product available to the market in the third quarter is the time frame. No changes there.

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