Baxter International Inc. (BAX) Q3 2013 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.

Good morning, everyone and welcome to our Q3 2013 Earnings Conference Call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; Bob Hombach, Chief Financial Officer; and Ludwig Hantson, President, 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 details concerning factors that could cause actual results to differ materially. In addition, in today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now I'd like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning. Thanks for calling in. As you all saw on the press release that was issued earlier this morning, Baxter reported solid financial results for the third quarter, which met expectations. Adjusted earnings increased 4% to $1.19 per diluted share, and worldwide sales, excluding currency, increased 9%. Excluding Gambro and foreign currency, Baxter's sales advanced 6%. We've also updated our financial guidance for the full year, which now includes sales growth of approximately 7% on a constant currency basis and adjusted earnings of $4.65 to $4.67 per diluted share. As a reminder, guidance reflects the impact of the Gambro acquisition. While we continue to meet our financial objectives, Baxter's global presence and diversified health-care model, together with the advancement we've made to our business portfolio and new product pipeline, we're focused on driving improved access to care across key franchises in both developed and emerging markets, better outcomes for patients and enhanced value for our shareholders. During the quarter, we announced a number of business development initiatives and achieved an array of new product pipeline milestones. Some recent highlights include finalizing the acquisition of Gambro AB, a privately held global medical technology company and leader in dialysis products, which further enhances Baxter's global renal leadership and provides a comprehensive product and therapies portfolio to meet the needs of patients in the large and growing dialysis market. The acquisition provides a number of long-term growth opportunities for Baxter around the world, as well as significant cost synergies. Second, the company executed an exclusive distribution and license agreement with JW Holdings for parenteral nutrition products containing a novel formulation of Omega 3 lipids. The agreement remains in effect for 10 years following the first product launch, and Baxter has specified rights to certain additional nutritional products that JW Holdings may develop or produce in the future. And third, we announced an exclusive collaboration with Coherus Biosciences to develop and commercialize a biosimilar to etanercept in Europe, Canada, Brazil and other markets. Biosimilars, as you know, are intended to be used in place of existing branded biologics to treat a range of chronic and often life-threatening diseases and have the potential to reduce costs and expand patient access. This collaboration builds on Baxter's ongoing relationship with Momenta, expands Baxter's evolving biosimilar platform focused in the areas of immunology and oncology and may support an accelerated entry for Baxter into this market within the time frame of our long-range plan. From a pipeline perspective, we launched HyQvia in Germany as a replacement therapy for adults with primary and secondary immunodeficiencies. HyQvia offers patients the ability to administer their treatment in a single subcutaneous site every 3 to 4 weeks and combines key benefits of intravenous and subcutaneous administration into one product. Additional EU market launches are scheduled for the coming months. In the U.S., our regulatory activities remain on track, and we expect to complete preclinical testing and file the amendment to our BLA before the end of the year. We've launched RIXUBIS in the U.S., which is the only approved recombinant Factor IX treatment for routine prophylaxis and control of bleeding episodes in adults with hemophilia B. RIXUBIS is also the first new therapy approved in hemophilia B in more than 15 years. In the global market, that's more than $1 billion of revenue annually. In the fourth quarter, Baxter intends to file RIXUBIS for approval in Europe and Japan and for pediatric indications in the United States. Also during the quarter, we continued to expand our parenteral nutrition portfolio with the launch of CLINOMEL in China and OLIMEL in Brazil, and also received FDA approval for CLINOLIPID, an olive oil-based lipid emulsion used in parenteral nutrition, indicated for adults. And finally, we received EMA approval to include PK-guided dosing information in ADVATE's EU label. This information is based on a Phase IV prophylaxis clinical study and offers some patients the option of a dosing schedule of every 3 days. In the study, PK-guided and standard prophylactic dosing regimens were comparably effective in reducing annual bleeding rates. This advancement offers clinicians and patients information that enables them to personalize their treatment regimens, with the goal of fewer infusions per year while effectively reducing bleeds. As you know, promotion of this label, along with ADVATE's strong efficacy and safety profile, has contributed to share gains and accelerated sales growth of our hemophilia franchise over the last 2 years. And given the recent focus on our hemophilia franchise, of course, we're happy to provide further perspectives on this topic during the Q&A this morning. So in closing, while the global macroeconomic environment continues to be quite demanding, we remain focused on operational performance, achieving R&D milestones and executing on a number of initiatives to enhance our growth profile. And while we're certainly not without challenges, Baxter's portfolio remains strong, and we'll continue to benefit from our focus on lifesaving therapies in the 4 growth vectors that we've discussed that support our strategic objectives and enable us to fulfill our mission. We remain confident in our business model, our ability to innovate and the prospects for growth in the future of our company. So with that, I'd now like to ask Bob to review the financial results for the third quarter and also guidance for the remainder of 2013. Bob?

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the third quarter, excluding special items, increased 4% to $1.19 per diluted share, which was in line with our guidance. As we mentioned in the press release, GAAP results include after-tax special items of $111 million, or $0.20 per diluted share, for costs associated with the acquisition of Gambro, increased litigation reserves and payments associated with previously announced collaborations. Now let me briefly walk you through the P&L by line item before turning to our financial outlook for the rest of 2013. Starting with sales, worldwide sales of approximately $3.8 billion advanced 9% on both a reported and constant currency basis. Given the timing of the close of the Gambro transaction later in the third quarter, Gambro revenues for the quarter were $100 million. So excluding Gambro, Baxter's sales rose 6% on both a reported and constant currency basis, in line with our guidance. Organic growth in the base Baxter business improved sequentially by approximately 200 basis points, driven by accelerated growth in emerging markets, as we benefited from certain government collaborations, as well as the timing of tenders, high single-digit growth of hemophilia and U.S. immunoglobulin therapies and strong performance of certain injectable therapies, specifically cyclophosphamide, a generic oncology drug. In terms of individual business performance, global BioScience sales exceeded $1.6 billion and advanced 6% in the third quarter, both on a reported and constant currency basis. Within the product categories, hemophilia sales of $851 million increased 9% on both a reported and constant currency basis. This strong performance was the result of solid global demand for ADVATE, given our label expansion in the U.S. and Europe, and for FEIBA, an inhibitor therapy. This was augmented by a benefit from the timing of certain tenders, as well as shipments to Brazil as part of our ongoing partnership with Hemobras to enhance access to recombinant Factor VIII therapy in the world's third largest hemophilia market. As you may recall, last year, we signed a 10-year agreement with Brazil to be the exclusive provider of recombinant Factor VIII therapy as we work together on a technology transfer to support development of local manufacturing capabilities. We expect peak annual sales related to this partnership to approach $200 million by 2017. In BioTherapeutics, sales of $532 million increased 3% on a reported basis and 2% on a constant currency basis. Growth in the U.S. for immunoglobulin therapies improved sequentially by approximately $35 million, with growth in the quarter in high single digits, driven by improved product availability and accelerated demand for GAMMAGARD LIQUID. This was partially offset by lower sales in international markets as a result of our decisions to exit certain markets due to previous supply constraints. Sales in BioSurgery of $173 million increased 5% on both a reported and constant currency basis. This performance was driven by Synovis and solid growth in international markets, including sales for surgical sealants like TISSEEL and FLOSEAL. Finally, vaccines' revenues totaled $64 million in the quarter and increased 8%. Excluding foreign currency, sales increased 5%, driven primarily by modest milestone payments related to our ongoing collaborations on the development of influenza vaccines and strong performance of our FSME vaccine. In Medical Products, global sales in the third quarter exceeded $2.1 billion and increased 10%. Excluding foreign currency, sales increased 11%. Excluding Gambro revenues, Medical Products sales grew 5%, or 6% on a constant currency basis. Within the product categories, Renal sales totaled $746 million and increased 19%. On a constant currency basis, sales advanced 21%. Excluding Gambro, Renal sales increased 3%, or 5% on a constant currency basis, driven by strong PD patient gains in the U.S. and emerging markets. Sales in the Fluid Systems category of $792 million increased 13% on both a reported and constant currency basis. Performance continued to be driven by solid demand for IV solutions and price improvements for the injectable oncology drug cyclophosphamide, which collectively more than offset lower sales of infusion pumps. Specialty Pharmaceuticals, which includes our inhaled anesthetics and nutritional therapies, posted sales of $372 million, reflecting an increase of 1% on a reported and constant currency basis. Strong global anesthesia growth of 8% offset lower sales in nutritional therapies resulting from supplier shortages of distributed vitamins and lipids. Finally, sales in BioPharma Solutions, which is our pharma partnering business, totaled $244 million and declined 5% on a reported basis or 4% on a constant currency basis. This performance can be attributed to the timing of shipments and our focus on building demand as we've alleviated supply constraints experienced earlier this year. We expect this business to return to growth in the fourth quarter. Turning to the rest of the P&L, gross margin in the quarter of 52.0% was lower than the prior year period by 10 basis points and reflects the impact of Gambro. Excluding Gambro, Baxter's gross margin expanded by 30 basis points versus the prior year gross margin of 52.1% and also improved sequentially by 10 basis points. The gross margin improvement in Baxter's base business was a result of mix and price improvements, which offset a number of headwinds, including foreign currency, incremental pension expense, medical device tax and government austerity measures. SG&A totaled $827 million and increased 11%, with Gambro contributing 4 points of growth. Excluding Gambro, SG&A increased 7%, driven primarily by incremental pension expense and investments we are making in promotional and marketing initiatives, new product launches and within international markets to enhance our global presence. In total, these items more than offset the benefits related to tight expense management of discretionary spending and operational efficiencies derived from our process reengineering efforts. R&D spending in the quarter of $265 million increased 10% versus the prior year and includes 3 points of growth related to Gambro. Excluding Gambro, growth continues to be driven by the investments we are making to advance a number of our programs in our pipeline, including those in our leading hemophilia franchise, our Home HD therapy and as well as earlier-stage programs and key collaborations. The operating margin in the quarter of 23.0% is 80 basis points lower than last year's operating margin of 23.8%. However, excluding Gambro, Baxter's operating margin was modestly higher than Q3 last year. Interest expense was $45 million compared to $25 million last year, due to new debt issuances within the last year to fund both the Covington plasma manufacturing site and the Gambro acquisition. The tax rate was 21.5% for the quarter, generally in line with our full year expectation. And as previously mentioned, adjusted earnings per diluted share of $1.19 increased 4%. Turning to cash flow. For the quarter, cash flow from operations of $966 million improved by more than $200 million versus Q3 last year. On a year-to-date basis, cash flow from operations exceeded $2.1 billion and is lower than the prior year by $46 million, largely due to the timing of U.S. tax payments, a large receivable collection in Spain last year and an outflow related to inventory. DSO ended the quarter at 59.4 days and was higher than the prior year period by 2.4 days. Excluding Gambro, Baxter's DSO was 55.1 days and was lower than the prior year by almost 2 days. Inventory turns of 2.1 are lower than the 2.3 turns in the prior year period. As you know, we have increased inventory levels to support growing demand, particularly in plasma proteins, as we remain on track to benefit from enhanced capacity in the second half of this year. Lastly, on a year-to-date basis, we repurchased approximately 12 million shares for $863 million, or, on a net basis, 4 million shares for $428 million, in line with our full year objective. Finally, let me conclude by comments this morning by confirming our financial outlook for the full year 2013. As you saw on the press release, we confirmed guidance within our previously stated range and now expect earnings of $4.65 to $4.67 per diluted share. This includes the impact of the Gambro acquisition. By line item of the P&L and starting with sales, we now expect sales growth, excluding the impact of foreign currency, of approximately 7%, and this includes a contribution from Gambro revenues of approximately $500 million. At current foreign exchange rates, we expect reported sales growth of approximately 6%. Excluding Gambro, we continue to expect the Baxter sales -- Baxter base sales to grow approximately 4% on a constant currency basis. For the full year, we expect gross margin for the company to be approximately 51.0%. In terms of expenses, we expect SG&A to increase in high single digits and R&D to grow in mid-single digits. Both line items reflect leverage in the Baxter base expense along with the addition of Gambro. We expect interest expense to total approximately $140 million and other income to total approximately $25 million for the full year. We continue to expect a tax rate of approximately 22%, and we expect a full year average share count of approximately 550 million shares, which assumes approximately 400 million in net share repurchases. From a cash flow perspective, our plan remains to generate cash flow from operations of approximately $3.3 billion, which excludes any cash costs associated with the Gambro transaction. We continue to expect capital expenditures totaling approximately $1.7 billion, which includes Gambro and the investments we are making to enhance our plasma manufacturing footprint in Covington, Georgia. Let me move to sales and expand our assumptions for the 2 businesses in the major product categories. Beginning with Medical Products, on a constant currency basis, including the contribution of Gambro, we expect sales growth of approximately 10%. Excluding Gambro, we expect sales for Medical Products to grow 3% to 4%. Specifically, we expect Baxter's Renal sales to grow in low single digits, which will be augmented by the contribution from Gambro revenues totaling approximately $500 million. We continue to expect Fluid Systems sales, which includes IV solutions, infusion pumps and access sets, to grow in mid-single digits. We expect Specialty Pharmaceutical sales, which includes our nutritional therapies and inhaled anesthetics, to grow in low single digits. And we expect our BioPharma Solutions sales to be flat to slightly down for the year. For BioScience, we continue to project sales growth, excluding foreign currency, in the 4% to 5% range. Our outlook includes mid-single-digit growth in our hemophilia franchise, which includes recombinant and plasma-derived Factor VIII and Factor IX therapies and FEIBA, an inhibitor treatment. Growth will continue to be fueled by underlying demand for ADVATE, where we continue to realize benefits associated with the new expanded label, including competitive gains and conversion to prophylaxis treatment. We now expect low-single-digit growth in BioTherapeutics, which includes IG therapies, albumin and Alpha-1 treatments. While our enhanced capacity will support accelerated volume growth in the U.S., we have lowered our guidance to reflect an expected decline in sales of low single digits in the fourth quarter, which is due entirely to the timing of albumin shipments in China. In BioSurgery, we expect mid- to high-single-digit growth. And finally, we now expect our vaccine franchise to grow more than 15%. As mentioned in our press release, for the fourth quarter, we expect earnings per diluted share of $1.24 to $1.26. Including revenues associated with the Gambro acquisition of approximately $400 million, we expect sales growth, excluding the impact of foreign currency, of 14% to 15%, or approximately 12% to 13% including the impact of foreign currency. Excluding Gambro, we expect the base Baxter sales at constant currency rates to grow approximately 3% to 4%. Thanks. And now let me open up the call for 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 the line of David Roman from Goldman Sachs.

I wanted to start with cyclophosphamide, which you called out in your prepared remarks as driving some strength in the quarter. That's also a product that you've called out as potentially facing generic competition on a go-forward basis. So maybe you could just talk to us a little bit about your thinking around the evolution of that product and maybe if you could throw Suprane into the mix there, as that's also another product, I think, that has the potential to face new competition as well.

Okay, David, this is Bob Parkinson. So on cyclophosphamide, just to maybe frame this for everybody, this is a product that has grown significantly. It's approaching an annualized sales rate of about $400 million by the end of this year and, as you might expect, a very high contribution margin. So the issue, obviously, is the prospects of generic competition and, candidly, as we sit here today, it's a question of if we get competition, if so, when, and if so, how many. And those are questions that we don't have specific answers to at this stage. I think it's reasonable to expect that there will be competition to this product, in all likelihood, in early 2014. So in terms of -- and I don't want to get into too much detail in terms of potential impact for next year, like I say, it's a function of if and if so, when and how many competitors. And if there's multiple competitors, as you all know, it's a very different scenario than if there's one, so we just have to see how that goes. But to kind of frame this maybe for everyone, and I know various analysts have taken a stab at quantifying this, we would estimate that if we have, let's say, 2 competitors in the market by midyear 2014, the bottom line impact could be anywhere from $150 million to $200 million. So potentially, it's a very -- that's a very big hit. But again, it's a function of those questions that I raised in terms of if, how many and timing. So on the Suprane one, that's a -- it's a little different issue, and I think even more speculative, it's likely there'll be generic competition in Suprane sometime in 2014. Not likely that there'll be multiple generic competitors, so it's a different scenario in that regard. It's also kind of a longer-term thing, I think, in terms of competitive progress in the accounts because of the issue with the vaporizers and the fact, as you know, we still have the full spectrum of inhalation agents that, in many markets, are on contract with hospitals, where we own the vaporizers that are installed and so on. And so, it's a very different set of dynamics. So the impact of generic Suprane next year, obviously, very, very modest compared to the numbers that I threw out on cyclophosphamide but not insignificant. I don't know that we quantified that or, at this stage, we even want to.

No, we haven't quantified, other than to say that it's $300 million in sales globally, about $200 million in the U.S. on a run rate basis. But again, I think the trajectory, as you pointed out, is going to be quite different...

Yes.

Given the nature of the business.

This is Mary Kay, but I'd also add, Suprane also has a high contribution margin as well.

Okay, understood. And maybe just switching gears to the hemophilia franchise and more specifically, ADVATE, as you obviously called out in the script, it's getting increased focus as we approach the potential for a Biogen launch next year. But maybe you could sort of help us understand what has been the positive impact of some of your additional indications of -- I know you've had the adult prophylaxis in the U.S. for a little over a year now. Obviously, you got an additional indication in Europe. Maybe just talk to us about -- remind us your view on competitive positioning and any steps that you're proactively taking to help build the moat around the FA franchise.

Okay, David, I'm going to turn it over -- Ludwig Hantson, as Mary Kay mentioned at the outset, is with us, and he's obviously closer to this. So, Ludwig, I guess, 2 pieces, which is impact in the market of our expanded label in the product and, clearly, we continue to have good momentum with the brand. And then secondarily, as we anticipate generic competition next year, a number that mentions supply [ph]. So I'll turn it over to you.

Thanks for the question. So the launch of the prophy indication is going well. It's still ongoing. So since the beginning of 2012, we switched the 400 patients to ADVATE prophy, and we've been doing this in different waves. The first wave was the most important one, focusing on efficacy. We're striving for a bleed-free world. We do believe that that's key in the treatment of hemophilia. The second wave, which we started like 8 months later, was focusing on the 3-day PK dosing method and the launch of the 4,000 vial. And now we're working on the third wave, which should reinforce the second wave. The plan is to submit an ADVATE PK device before the year ends, and the device should enable the physician to personalize the dosing towards the factor -- the target factor level on the basis of 2 blood samples. So this should help us to further reinforce the PK dosing piece. With respect to what we're doing, so -- and let me bring the discussion up maybe 1 level. So last year, during the investors conference, we talked about guidance of 3% to 4% sales CAGR for the next 5 years. That has not changed. So we believe in ADVATE, we believe in our team, and we believe that achieving a bleed-free world is key. And with respect to what we've done, the U.S. team is getting ready for the challenge. This team has turned a declining market share into a share growth and has put the bleed-free world concept on the map. So I feel pretty confident about our LRP and our guidance that we gave for the next 5 years for the franchise.

Okay. Maybe I'll just sneak in one more in here while you reference the LRP. One of the things you guys have talked about is an 8% to 10% earnings CAGR over the long-range plan period, lower at the front end and higher at the back end. Is that still a dynamic with which you're comfortable?

I don't want to get into the specific numbers, David, at this point. And obviously, we don't redo our LRP every quarter or every 6 months. We do it annually. I would give maybe just some comments so to help maybe frame our outlook in response to your question. Obviously, franchises like hemophilia and renal, particularly in view of the recent Gambro acquisition, we do continue to focus on the 5-year outlook on kind of an ongoing basis. And just to reiterate Ludwig's point on the hemophilia franchise, 1 year on from our investor conference last year, our long-term outlook for our hemophilia franchise, broadly defined, is very comparable to what we shared with you last year, both in terms of size and rate of growth, as Ludwig commented. I mean, obviously, the -- there's downward pressure as a result of competition, which we anticipated in our rollout last year with -- which we shared with you. There'll continue to be pricing pressure on very expensive therapies. But on the other hand, this still is a largely underdeveloped market globally. We have an emerging pipeline that we're very excited about. The public-private partnership with Hemobras in Brazil, we're hopeful, is not the last one of that nature that we do. So we think the positives are greater than the negatives, which is why we continue to be positive and optimistic about the long-term growth of this franchise. As it relates to the Renal franchise, likewise there. I mean, this is something we'll discuss with you quarterly in terms of Gambro now that we've closed the deal and we're integrating it both in terms of revenue growth and performance synergies. But the base Renal business outside of Gambro, specifically PD, has exhibited the most robust growth this year than it has in years. So our long-term outlook for the Renal business, both the base business and Gambro, and of course, last year when we had the investor conference, we had not closed the Gambro deal, but the base case renal outlook for the next 5 years also continues to be very positive. So as it relates to the rest of the businesses, without getting into too much detail, I think there are some things that have changed both negatively and positively from a year ago. I think admittedly, austerity measures around the world that affect pricing are more pronounced across all of our businesses than we would have anticipated a year ago. I mean, this year, we've continued to experience negative impact of FX headwinds, particularly in emerging developing markets. I don't have a crystal ball. I don't know how that's going to change over the next 5 years, but that's been a significant headwind this year. And I also think, generally, there's been lower growth in acute care hospital settings, certainly in developed markets, and we've all seen the impact of that right here at home in the U.S. So those are some of what I'll call the downward drivers, if you will, from our outlook of our long-term business a year ago. On the other hand, we know pension expense, which has been a drag, is starting to work in our favor. How much and for how long, I think also, like exchange rates, is difficult to speculate on, but that should be a positive versus our outlook last year. Also I think in terms of business development, there continue to be many additional opportunities. Just activities during the last year that were consummated subsequent to our investor conference, obviously, most notably, Gambro, but in licensing deals like rigosertib, which we're excited about, the recent collaboration with etanercept to continue to build on our biosimilar portfolio, these were all things that were contemplated in the last year's LRP. And we fully anticipate that the momentum we've built in business development is going to continue. So that represents a significant upside from the base case LRP that we shared with you last year. Another driver that's a positive, I think, is the opportunity to favorably impact our tax rate going forward as a result of the -- how we structured the Gambro acquisition. So that's just a few highlights, both downward pressure and upward pressure, but in terms of 2 core and critical franchises, hemophilia and our renal franchise, not any fundamental change as we look out over the next number of years from what we messaged to you last year. I'll stop there. It's easy to get into a lot of detail, but hopefully, that provides just a little bit of color, David.

Our next question comes from the line of David Lewis from Morgan Stanley.

Just maybe a few quick questions here. Ludwig, just first on HyQ filing, it's in the script, but it wasn't specific. Can you just give us an update on where we stand on HyQ filing at the end of the year here? And have you received any additional questions from the agency post BioPharma's decision to end their hyaluronidase program?

So we're still on schedule to submit our file before the end of the year, David. We've not gotten any additional questions from the FDA. We expect that the regulatory path forward is well defined, and we expect a potential 6-months review. So that means that we are getting ready for a potential launch of HyQ in the U.S. second half of next year.

Okay, very helpful. Maybe 2 BioSciences questions, maybe, Ludwig, one for you, and then one for Bob Hombach. First off, IVIG supply. I think there's this view that your supply is increasing, but we're really not seeing it translate into the numbers here in 2013. So maybe talk just a little about where we stand on safety stock and sort of what can we think about in terms of the supply and growth perspective in IVIG over the next several quarters. And maybe for Bob Hombach, on albumin, just a clarification there. It's been a very strong market. Is the delay on the contracting or it sounds like that, is that simply a tender that you have very good visibility on or is this in any way related to some of the pharma disruption that we've seen broadly across the universe here in the third quarter?

So I'll start with the IG piece, and as I mentioned before during the earnings call, 2013 is a transition year for IG franchise, and we are now in the position to support 6% to 8% demand growth for our IG business, and this is a result of recent capacity upgrades and expansions, which we will complete in the second quarter. As you have seen in the numbers, we do see strong demand growth in volume in the U.S., so we do see an uptick there, and we were going to continue to build it in the U.S. So that's how we're looking at this. International sales are lower than last year as a result of our strategy to exit select markets outside of the U.S. given our prior supply constraints. This is something that we will have to work on in the next quarters to get the international market back up to the levels similar to the U.S.

But fair to say, increasingly, we're more comfortable with our inventory levels. As you know, we experienced backorders periodically throughout the course of 2013. And as we look forward to the prospect, as Ludwig alluded to, of a second half 2014 U.S. HyQ launch, again, we're going to be thoughtful about what markets we look to reenter as we move forward here and continue with the controlled launch in Europe for HyQ as well, as we have reimbursement in one country and are looking to nail down reimbursements in several other countries before the end of this year.

Talk about albumin now?

And yes, as it relates to albumin, David, so as you may be aware, all biologic products exported to China have to have the license renewed every 5 years, and it just so happens that 2 of Baxter's products in the albumin space have renewals coming due here in the fourth quarter. Given the significant growth in demand in China and some other things going on, the regulatory requirements and approval processes have evolved, and those have resulted in the potential for delays in renewal of our licenses. And so we're continuing to work with the Chinese authorities, and we do expect to get the licenses approved or I should say renewed by the end of this year. However, likely -- highly likely that's going to impact the timing of some shipments, and so we reflected that timing delay in our guidance here for the fourth quarter.

Our next question comes from the line of Lawrence Keusch from Raymond James.

Bob Parkinson, could you talk to us a little bit, now that you've closed the Gambro acquisition, what some of the milestones we should be looking for in terms of integration? And then also remind us, since the deal did close a bit later than anticipated, how you're thinking about the dilution for 2014, which I think you had -- you've, obviously, previously guided to.

All right. Larry, it's Bob Parkinson. Let me make some comments. And then in terms of dilution and some of the financial specifics, I'll turn it over to Bob Hombach. So in terms of milestones that we ought to be looking for, I mean, obviously, there's -- I think there's 2 critical ones, which is as we complete the integration and we move forward, obviously, the pace of growth -- one of the questions when we did the acquisition, of course, was the relative flattish nature of the business in the last couple years, while it was in private equity ownership, compared to our -- the prospects that we saw in terms of being able to grow the -- not only the core business but the acute business and so on. So rate of growth is an obvious milestone that all of us should be looking at. And the second one, of course, is the synergies. A big piece of the financial justification for this was contingent upon meaningful synergies, about $300 million of synergies, and so that -- so those are the 2 milestones. I think it's -- given the fact that we just completed the integration over the early stages, it's premature to take a specific position on either of those this morning, but those are the 2 things that I'm going to be monitoring, Larry, internally. So I think you all should be, too, as well. So, Bob, do you want to handle the other thing?

Yes, as it relates to dilution, no change in our outlook, but let me just kind of reframe how we position this and then talk a little bit about some of the variables that may be additive or further dilution here related to our outlook. So we previously said for 2014 that, including amortization expense, that we would be neutral to modestly accretive in 2014. And assuming about $0.20 of amortization, if we were to back out the amortization, it would be $0.20 to $0.25 accretive. And so as we look forward here and as we approach guidance in January, some of the variables we're going to be looking at that could again impact that outlook, one is we closed the transaction a little later than we expected, as we had hoped to -- originally in the middle of the year to close the transaction, and then it ended up being a bit later due to the regulatory process. So the timing of synergy achievement in the very near term will be a little bit challenged. I don't think anything significant, but it will be a little bit challenged. On the plus side, I think whether it's the financing costs coming in a bit lower than we expected and some of the opportunities that we may have on the tax front that we've talked about, those are opportunities, I think, to potentially offset any leakage we might have from a timing perspective and maybe do a little bit better. But there are a number of variables, particularly on the tax front, that we still need to work through now that we actually own the company and look at some of the tax attributes about -- around loss carryforwards and deductibility of interest in certain markets and so on, but we do think there's opportunity there but not ready to quantify that at the moment. And so -- but I guess the last thing I would mention because this has come up a number of times, as we think about intangible amortization related both to our existing business, as well as now the significant increase we're likely to see with Gambro, as we've mentioned, this is something we've been thinking about, and I think the appropriate time to implement that would be in January, when we provide guidance for 2014. But given the significant impact that that's going to have, and just to reframe that for everyone, today, within our core business, we incur about $100 million a year in intangible amortization related to prior business development activities, which equates to about $0.15 a share. As I just mentioned, we assume that Gambro could be approximately $0.20 of incremental intangible amortization. And so at $0.30 to $0.35 of impact on an annual basis, that actually has about 150-basis-point impact on our gross margin as a non-cash item. And so I would characterize it as very likely that we will move towards excluding intangible amortization from our adjusted earnings projections, but we'll -- given the time frame that it's going to take us several months here to get to a reasonably final number about what the Gambro intangible amortization is actually going to be, because that is done through an independent third-party valuation that's ongoing as we speak, we'll be in a better position in January, I think, to fully quantify it for everyone and make the final call here about making the change on reporting going forward.

Okay, great. That was really helpful. And then just the other question is, Bob, in the context of, again, concerns around the competition from Biogen in the Factor VIII market, I'm just hoping you could give us a bit of an update on Brazil again. You made some mention of it in the prepared remarks, but how much -- can you quantify sort of how much you're beginning to ship there? And are there efforts that you can take to, perhaps, accelerate that $200 million in peak sales in 2017? And I guess, are there opportunities for, now that this relationship has been established, other products that could also go into the Brazilian market?

All right. Well, maybe all of us could comment on pieces of that. Larry, this is Bob Parkinson. So first of all, we're very pleased with how the collaboration with Hemobras in Brazil is evolving. As you might guess, any time you have arrangements like this with governments, they can be a little untidy, and they all take their own shape and form, but we've navigated through a lot of that and continue to be very -- so the long-term outlook of $200 million continues to be a very realistic opportunity, but to say it's going to be greater than that, I'm not prepared to do that at this point, and we'll evolve to that over time. But just to date, I think about 10% of all the patients being treated in Brazil have moved from plasma-derived Factor VIII to our recombinant product, so I think that's an interesting metric or indicating the pace, and we anticipate that that's going to continue to move very quickly. I do think that -- and one of the reasons I called this out at the investor conference last year as 1 of our 4 growth vectors, public-private partnerships, we continue to be very enthusiastic about this. There's no doubt that as a result of this collaboration with Hemobras in Brazil, we've developed a broader -- and, I think, a relationship built on trust and so on with the Health Ministry and the broader government in Brazil, which we believe can lead to other opportunities over time. And certainly, with the -- even with Hemobras on the hemophilia collaboration, that's just on one product. That's really on recombinant Factor VIII. So as we continue to grow our hemophilia pipeline, we certainly would anticipate that we would build on that platform. The last thing I would say is that we continue to have discussions with other governments around the world that can represent meaningful opportunities in this kind of fashion, which is why we called it out as a specific platform or vector of our growth outlook. So I don't know, I've covered a lot there. Ludwig, please go ahead, yes.

Yes, so I just want to add something on the market itself to put things into perspective. So there are about 9,000 hemophilia A patients in Brazil. The diagnosis rate is 70%, and there's no prophy use, so one of the objectives for us is to move from plasma to recombinant, but in addition to that, to move patients from on-demand to prophy. And when you look at the IU per capita, it's about 2, which is about half of Russia and U.K. is around 8. I don't want to commit to a number higher than the $200 million that was quoted, but clearly, if we do our market development right and we work with the treating physicians, there's a lot of work that needs to be done. And as we do with all of our hemophilia products, we're going to strive for a bleed-free world, and Brazil is a long way from a bleed-free world.

And your 200 -- lastly, your $200 million is predicated on IU per capita of what?

We haven't specifically addressed that, Larry, but, again, I would say that we have modest assumptions around prophylaxis, which, by the way, is not only our objective but a stated objective of the Minister of Health in Brazil to expand prophylaxis. So -- but we haven't quoted a specific IU per capita, but it is relatively low, and there is tremendous opportunity to enhance that and improve outcomes for patients.

Our next question comes from the line of Bob Hopkins from Bank of America.

So just I wanted to come back to your -- the confidence that you guys are expressing in the long-range plan relative to hemophilia, and I want to ask the question, is part of your confidence in that long-range plan a view that you really won't lose as much share as the recent surveys are suggesting? You guys gave some pretty specific guidance originally in terms of anticipated share loss, and I just want to make sure that I understand what you're saying here. And so specifically, are you more confident than the Street seems to be relative to share loss?

Well, let me make some high-level comments, and then, Ludwig, maybe you can pick up specifically on the share loss thing. As I said before, we fully contemplated competitive launches when we stood up before you last fall, so no surprises. And despite recent surveys that have been done and so on, there's actually no new facts in the marketplace that have emerged in the last 6 to 9 months, either about competitive products, our own or otherwise. What there have been is perspective study that have been shared and so on. So I'm not going to get into dueling surveys and things like that, but we fully contemplate that we will lose market share to competitive entries, as we shared with you last year. But the longer-term view of this critical franchise for our company is driven by some of these higher-level dynamics that I mentioned before in terms of the underdeveloped global market. Ludwig just took you all through the tremendous opportunity that exists in Brazil, and Brazil's not unique, not to mention our own emerging pipeline with our own longer-acting product, the factor, the RIXUBIS that just got approved and is being launched, the development of our recombinant von Willebrand, our Factor VII, and so on. So that's the basis of our position relative to the long-term outlook. Now -- of this critical franchise. Now, the short-term impact of launches, surveys, our view and so on, like I say, no new facts, a; b, nobody knows, and that doesn't mean that we haven't been busy over the last 12 months, and we're going to continue to be very busy over the next approximately 6 months before the competitive launch. And so we'll see what happens, but obviously, we're very familiar with this franchise, we're very close to the treaters, the patients. And to do a survey, you ask one question that almost assumes that you have a homogenous market. It is a complex market with the composition of very different patient types, and so to answer a question in a survey and then conclude that it applies broadly, I think, can be a little bit misleading. But I'll stop there. Ludwig, if you want to add...

Sure. The -- with respect to your first question on the confidence in the LRP, we believe that the 3% to 4% sales CAGR that I mentioned, and we mentioned last year, is driven by 4 categories. First of all, we potentially have 4 new product launches in the next 2 years: so RIXUBIS is number one; OBI-1, hopefully, by the end of next year; and then we have BAX 855; and our recombinant von Willebrand. In addition to that, we have lifecycle management opportunity of existing products. So we have 5 of prophy, hopefully, by the end of this year, as well as BAXJECT III device for ADVATE sometime next year. As Bob was saying, the geographical expansion with Brazil as a great example, but in addition to that, we've launched ADVATE in China, and the first patients are being treated with ADVATE. And we also plan to launch in Russia next year. And we continue to see a healthy market growth of mid-single digits. So that's the reason why we do believe that we're confident in the numbers that we gave you for the LRP. With respect to the market share loss, our market research suggests that the penetration of an extended half-life product will somewhat be slowed down by clinical -- limited clinical experience, a restricted label, restricted geographies, brand loyalty, frequency of physician visits. And when you think about the competitive pressure that we will have from the extended half-life products, it will be primarily in the U.S. adult prophy market segment, which is about 20% of our global recombinant Factor VIII business. And in that specific segment, we know that about 50% of the patients on ADVATE prophy are on a dose regimen of every 3 days or longer already. So we do feel comfortable with the guidance that we gave you on the LRP for hemophilia, and we're looking forward to a lot of opportunities with our launches.

But just to push a little bit on that, I think you guys specifically said originally, as it relates to ADVATE competition, that you would lose about $100 million a year each year over the course of the long-range plan. You didn't quite say it that specifically. You said you'd lose a point of growth to both generic competition and ADVATE competition, but then you said 2/3 of that would be ADVATE, and pretty simple math suggests that's about $100 million a year. So I just want to make sure that I've got my math right and that that's what you're confident in from a share perspective. Understanding that you got other offsets in terms of new products and market expansion, but specifically around the issue of what market share loss you're assuming in the LRP, I just want to confirm that you're still comfortable suggesting that it's roughly at that $100 million a year per year over the next -- over the 5-year range of the long-range plan.

So, Bob, the -- we gave a 5-year outlook and said it would have a competitive interest and have accumulatively a 100-basis-point impact on our CAGR, which, if you do the math, gets up to about $700 million of run rate impact by 2017. I wouldn't conclude -- and we did say that about 2/3 of that related to Factor VIII competition, but I wouldn't assume that that's ratable over that time frame because the launches happen in different markets at different times. As Ludwig alluded to, the competition will start first in the U.S. We just got news yesterday that one of the competitors we thought was going to be in the U.S. next year isn't going to be in the U.S. next year. And so there's a number of variables here that are going to affect the timing of that. And so, I think in aggregate, you're in the ballpark, but the ratability is going to be a factor of a whole lot of things including, again, when geographic approvals are achieved by competitors in different markets around the world because, as you know, a little bit less than half our sales overall are in the U.S., which means a whole -- quite a bit of it is outside the U.S.

Right. Okay. I just wanted to make sure you weren't changing the guidance as it relates to share in the LRP.

No.

No, there's no change.

No.

Our next question comes from the line of Mike Weinstein from JPMorgan.

Just one quick follow-up to that. So, Ludwig, why is it do you think that a longer-acting product will just be used in the prophy population? There seems to be a lot of interest from the hematologists in using it on demand on a belief that the patients that come in on a bleed may not have to come back for days 2 or 3?

Okay, so let's -- as Bob started the discussion on patient types in the U.S., about what patient types are, maybe I'd like to go a little bit deeper with respect to patient types. It's not going to be a one size fits all, so every patient is going to be different. And at the end of the day, the decision will be taken by the physician or the patients on an individual basis. So patient segmentation is essential. But let me give you some examples of patient types that might be reluctant to switch. First of all, patients with a 0 bleed rate. Those patients, they control their disease very well and will ask that question, should I really switch? I think that will be a natural question. The second type would be there's about 1/3 of the patients that developed an inhibitor early in their life. Those patients were able to overcome the complexity of an inhibitor through an ITI treatment. I'm sure that those patients will ask themselves the question of, in view of what happens, am I going to switch? ADVATE prophy patients, and we estimate that 50% of the ADVATE prophy patients are on an every-3-day-or-longer dose regimen, as I mentioned before. And then you have active patients, and those active patients -- this is not only for hemophilia A but also for hemophilia B, and it applies for RIXUBIS as well. Those patients, they live on the peak. So every time they have an activity, and this could be a daily activity, they infuse themselves right before the activity. You can ask yourself the question, would those patients go for a short-acting versus an extended half-life product? I think the other segment is pediatric patients. So it comes back to the discussion that Bob started that, at the end of the day, it's not going to be a one size fits all, and we can segment as much as we want, but every patient will have its own life story and will have a reason either to switch, and some of those patients will be switching, we know that. And as we said, we will lose some market share, but a lot of those patients will ask the question, should I really switch?

Our next question comes from the line of Kristen Stewart from Deutsche Bank.

I just wanted to go back on just the Medical side -- Products side, with the Fluid Systems sales. I know you gave a little bit of context in the prepared remarks, but I was wondering if you could just dive in a little bit deeper just to help gauge kind of how to think about that business going forward. And then any update you might have on the infusion pumps side with respect to the warning letter?

Yes, Bob?

Yes, I'll jump to the infusion pumps first. No update. We'll continue to look to file by the end of this year and hope to be back in the market in 2014 with our spectrum pump again. This is a 510(k) update, and so, again, hope to -- expect to be back in the market, but no change in time frame there. As it relates to the rest of Fluid Systems, clearly, the key driver here, from a growth perspective, was the cyclophosphamide. And from a sequential standpoint, second quarter to third quarter, some timing and price driving that. Other than that, we continue to see strong demand for IVs, particularly in the U.S. and given some of the other issues that are prevailing in the marketplace, but nothing else, I think, notable within the Fluid Systems segment here going forward.

How do you guys reconcile just the strong demand for IV in the U.S. relative to more the macro comments on pressure with kind of acute hospital stays and admission trends?

Well, again, I think the competitive environment, there's some issues that one of our competitors had has provided us some opportunity there. So I don't think it's a market comment, it's more of a share comment.

And then just turning back to the antibiotic therapies business, what gives you the confidence in modeling out 6% to 8% unit growth for plasma? Do you have any concerns just from a reimbursement standpoint, and some of the use is more off-label, albeit evidence-based? And historically, I remember you guys had thrown out some estimates that you felt that the end market growth rate, from a unit perspective, was more about 5%. So, I guess, how do you get comfortable that it really is 6% to 8%, especially given all the capacity additions that you do have coming online?

So a couple of things, and then, Ludwig, if you want to jump in as well. Our long-term view has not changed, and the 6% to 8% primarily relates to immunoglobulins, from a unit perspective. And really, that, going back 15 years, is a pretty consistent trend we've seen. And in fact, the last several years, it's accelerated for some of the reasons we've previously talked about, including more utilization in the neurological space, where twice as much product is used on a per-patient basis, as well as the growth in SubQ treatments, which, again, use more product, at least the existing ones, on a per-patient basis. Of course, that's one of the benefits we think HyQ will bring to the marketplace. But in any case, demand has been robust, particularly in the U.S. And outside the U.S., we continue to see under-penetrated and under-developed markets that have great opportunities over the long term. So as we continue to expand indications and find additional uses for the product and have the geographic expansion opportunities in front of us, that's really the main source of the 6% to 8%. But, Ludwig, if you want to add anything there specific, but, again, and I think for us, we're confident we're going to be able to support, as Ludwig alluded to, the 6% to 8% unit volume here in the coming years, given the expansions we've already done and with the prospect of a HyQ launch in the U.S. in the back half of next year, again, just further adds to our confidence in the ongoing demand for this product.

And then lastly, just on BAX 855 just in terms of time lines, has anything changed or do you still feel confident in the ability to have that product approved in the U.S. in 2015?

Go ahead, Ludwig.

So, yes, let me take a step back so that everybody is clear. So 855 is an extended half-life ADVATE. So it's a molecule that's proven, and it's the gold standard in hemophilia A. So our recruit -- with your respect to your question, our recruitment is on schedule, and we still plan to file before the end of 2014. So no -- and so far, no inhibitors have been reported, so we're still gearing up for a 2015 potential launch.

And you said file before the end of 2014?

Correct.

Our final question comes from the line of Derrick Sung from Sanford Bernstein.

Just a follow-up, first off, on, Ludwig's -- your comments on hemophilia and the potential pushback to switching to long-acting. Just on your comment about 50% of your ADVATE prophy patients already being on sort of a 3-day-or-longer regimen, as a layperson just thinking about that, wouldn't those also be the patients who would then have the best potential to get to a once-per-week regimen with the long-acting? So am I thinking about that wrong or why -- we would almost see sort of -- perhaps, opposite of maybe what you're saying that these patients might be the ones who might actually more want to switch to long-acting.

Yes, so the numbers that you quoted are correct, so that's what I mentioned. So I think the preference of the ADVATE prophy patients are 3 days or longer, and we have seen this both in the U.S. as well as in Europe. It comes down to what I said before, it's going to be on an individual basis. So if those patients are well controlled, if those patients have 0 bleeds, then they will be people who are going to ask themselves the question, am I going to switch to something that potentially, since there's no registration yet, could have a longer dosing regimen? So I think it's going to happen on an individual basis. And then maybe come back to the question that was asked on what about the on-demand patients? You'll see that a lot of the on-demand patients for hemophilia B, for instance, 90% of those on-demand patients are mild to moderate. And we can ask ourselves the question are those patients going to be the ones that are going to think about a longer-acting product for hemophilia A? This is about half of the patients. So it's a -- again, it's going to happen on a patient-by-patient basis. But I think as ADVATE is proven, since we have 10 years clinical experience, it has shown strong prophy data. And as we said, we strive for a bleed-free world. We believe that 0 bleeds is the way to go, and that should be the focus of treatment.

Okay. And on BAX 855, I mean, I think that's really key to the sustainability of your recombinant factor VIII franchise moving forward. Have you had discussions already with the FDA around whether they might have any additional requirements for approval given that this is a chronic -- this is a product with a PEGylation formulation that will be taken chronically in patients. What's your confidence or what sort of discussions have you had with the FDA around whether or not that might require some additional regulatory requirements under a prior -- or how comfortable is the FDA with the PEGylation formulation?

Yes, so the -- yes, we do have dialogues with the FDA on 855, as you can imagine. With respect to the PEGylation technology, this is nothing new. This is more than 3 decades old. So in more than 10 products with the similar technology have been approved. And when you look at the PEG concentration in 855, it is significantly lower than some approved products, products that are indicated for chronic therapy. So we feel comfortable that the work that we're doing should satisfy the regulatory bodies. Of course, as part of our market developments, we will ensure that the hemophilia community is familiar with the PEGylation technology, and that's clearly a work in progress for us.

Great. And if I could just slip one quick one in, could you give us an update on how you're seeing the HyQ launch go in Germany, what you're seeing on pricing there, and kind of just give us early indications on the controlled launch there?

A little early. We just launched in Germany and a couple of the Northern markets, so it's a little early, I think, to -- it's actually too early to comment on that. I think that's -- we'll update you the next time we get together on the call, we'll have a better frame of reference on that, Derrick, frankly.

Yes, I'd say your characterization is right, though. We're being very thoughtful about how we launch this. It is a change in treatment regimen, and making sure patients and treaters are well educated, and it gets off to a very good start. We started in Germany, and we expect to get reimbursement in several other countries here in the coming months.

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