Baxter International Inc. (BAX) Q4 2013 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.

Thank you, and good morning, everyone, and welcome to our Q4 2013 Earnings Conference Call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; and Bob Hombach, Chief Financial Officer. Before we get started, let me remind you that this presentation, including comments regarding our financial outlook, new product developments and regulatory matters, contain forward-looking statements that involve risks and uncertainties and, of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, in today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now, I'd like to turn the call over to Bob Parkinson.

Thanks, Mary Kay. Good morning. Thank you, all, for calling in. As you saw in the press release that was issued earlier this morning, Baxter reported solid financial results for the fourth quarter and the full year. In the quarter, adjusted earnings of $1.26 per diluted share were consistent with our guidance. On a global basis, sales, excluding currency, advanced 17%. And after adjusting for Gambro and currency, Baxter sales advanced 6%, exceeding our expectations for the quarter. For the year, adjusted earnings increased 3% to $4.67 per diluted share and sales, excluding currency, advanced 8%. After adjusting for both Gambro and currency, sales increased 4%. I'm pleased that we continue to meet our financial objectives while navigating a challenging and complex macro environment, and have consistently generated significant cash flow while maintaining a disciplined capital allocation strategy of returning value to shareholders through both increased dividends and share repurchases. Before I turn the call over to Bob Hombach for additional commentary regarding the financial results and also the full year 2014 outlook, I'd like to take a moment to reflect on the progress that our company has made, particularly in 2013, to improve our operational and commercial execution, advance the pipeline and position Baxter for future growth and success. First, Baxter continues to improve operational and commercial effectiveness, and derive significant benefits by taking full advantage of existing opportunities to bring products and therapies to various markets more effectively. This includes geographic expansion, particularly in emerging markets where Baxter's 2013 annual sales exceeded $3.2 billion, advancing more than 10% for the year. We capitalized on the innovative partnership with Hemobras in Brazil with the commencement of shipments to enhance access to Baxter's recombinant factor VIII therapy for the treatment of hemophilia. Baxter will be the exclusive provider of Brazil's…

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the fourth quarter, excluding special items, were $1.26 per diluted share, in line with our previously issued guidance. As we mentioned in the press release, GAAP results include after-tax special items of $366 million, primarily associated with cost related to the Gambro acquisition, previously announced collaborations and business optimization initiatives. The business optimization initiatives include the elimination of a number of positions as we continue to streamline operations, rationalize our manufacturing footprint and optimize general and administrative functions. It also includes costs related to the decision to explore strategic options for our vaccines and cell therapies R&D programs. Annual savings are expected to total approximately $0.17 per share when fully implemented in 2015, which includes savings of approximately $0.13 for 2014, a portion of which is expected to be reinvested in promotional and marketing activities to support ongoing new product launches on a global basis. Now, let me briefly walk you through the P&L by line item before turning to our financial outlook for 2014. Starting with sales, worldwide sales of approximately $4.4 billion advanced 16%. On a constant currency basis, sales rose 17%. Excluding Gambro revenues of $413 million, Baxter's sales rose 5% and on a constant currency basis, sales increased 6%, which exceeded our guidance range primarily due to strong demand for ADVATE and FEIBA, particularly in the U.S. and Europe. Sales in the base Baxter business improved sequentially, driven by accelerated growth in emerging markets, as we benefited from certain government collaborations, as well as strong performance across the hemophilia franchise and Medical Products. For the full year, worldwide sales of $15.3 billion advanced 8% on both a reported and constant currency basis, but excluding Gambro revenues, which contributed $513 million in 2013,…

[Operator Instructions] I would like to remind participants that this call is being recorded and a digital replay will be available on Baxter International's website for 30 days at www.baxter.com. Our first question comes from the line of David Lewis from Morgan Stanley.

Bob, you talked a little bit about the BioTherapeutics business, specifically albumin. Can you just sort of update us on sort of the timeline and what's changed? It sounds like there was going to be a fourth quarter registration issue with China. It sounds like it's delayed maybe a couple of quarters. So maybe walk us through in sort of when you think the resolution could be. And then related to IVIG, is most of the issue really tied to albumin or are there still some lingering capacity issues on IVIG?

Yes. So first off, no capacity issues on IVIG. We've exited 2013 running at the levels that we expect, and as we've said, we'll be able to support at least 6% to 8% volume growth for '14 and '15 out of our existing network. As it relates to albumin in China, yes, we expect here in the fourth quarter -- excuse me, in the first quarter to hear on the second license. We've already gotten approval for the first license renewal. And so -- but given the timing of when that approval comes and the manufacturing cycle for the product, it's likely that we wouldn't be able to get product into China for the second product until late this year. So that will impact from a timing perspective. And given the price points in China relative to other markets, we will have some mix impact there, but we will be able to redeploy the albumin into other markets during the course of the year.

Okay. Very helpful, Bob. And I appreciate all the detail you gave on the headwinds and tailwinds here for 2014. I guess, the dynamic we'd love to get more visibility on is, we know all these tailwinds are -- certain headwinds are out there. We obviously don't know the timing of some of those headwinds, so your guidance sort of assumes those headwinds. But could you help us understand specific knowledge in cyclo and Suprane, where do you think the competitive launches sit? And what specifically is sort of incorporated in the guidance in terms of when you expect to see that pressure? I also wondered if you could update us on the timelines for rigosertib, HyQ and 855?

So in terms of the competitive timing, we don't have a lot more insight than we've had in the past. We know there are a number of folks on the cyclo side who have applied for approval. But visibility to having gotten approval and ready to launch is not great at this point. So, again, our assumption is approximately by midyear, we have 2 competitors in the market, and if so, that creates a $150 million to $200 million bottom line exposure for the company. So that's effectively what's baked into our guidance. We have widened the range some, what we would normally do to account for the fact that competitors may come in a little earlier, may come in a little bit later, it may be 1, may be 2, or maybe more this year. There isn't a lot more visibility to that on the cyclo side than what we've talked about up to this point. And as it relates to Suprane, the competitor has the ability to enter the U.S. market as of January 1 of this year. We've not seen them do that yet, but again, I'm not sure why that is and so we really can't comment on that. But we do expect, for the majority of this year, that we do face some competition. I would say on Suprane, though, we've always viewed that as more of an evolutionary impact and not that significant in 2014.

And do the new products market.

Yes, David, you were asking about rigosertib, HyQ and was there a third?

855, Mary Kay.

855. So I'll start with 855. As you know, we're completely enrolled in the Phase III clinical trial and we expect to complete the trial sometime in Q3 and have data then and file before the end of the year for 855. So things are going fairly well there. On HyQ, really no change. We submitted the amended BLA and we expect a 6-month review, so we should hear sometime around midyear on the approval of HyQ for the U.S. Rigosertib, we are currently awaiting the data on the high-risk MDS trial. We expect that here sometime in the first quarter.

Our next question comes from the line of David Roman from Goldman Sachs.

One financial follow-up question and then one broader strategic question. First, just on the financial piece. Bob, maybe you could go into a little bit more detail. If you look at the gross margin line in 2014, 150-basis point decline on an adjusted basis. Is there a way to tease out how much of that is isolated to 2014 in terms of competition and changes in business mix or austerity, et cetera, versus what is sort of a structural change in the profitability of your business when you include Gambro?

Yes, absolutely. And so of that 150-basis point change in gross margin, I think about it in 3 buckets that are roughly equal impact. One is Gambro, and that's almost purely from a mix standpoint, they are, at the moment, a lower-margin business than Baxter. But, structurally, over time, we do expect, as we talked about, to drive the majority of the overall $300 million in cost synergies, we expect to drive those in the margin line. So over time, we expect that to improve. But for 2014, the mix impact of bringing Gambro in for a full year into Baxter results is about 50 basis points on the gross margin. Cyclo also contributes about a 50-basis point impact to the gross margin, given the high contribution margin of that and the magnitude of the impact. Again, we expect numerous entrants to come in, in '14 and '15, so I view this as more of a '14, '15 issue. We think by the end of '15, given the normal trajectory of a generic situation, the vast majority of what's in our base today for cyclo will be out the company results by then. And then the third bucket, which is, again, about 40 to 50 basis points, is foreign exchange. And that's a combination of both emerging market FX -- as you know, since May of last year emerging market currencies have really deteriorated pretty significantly against the U.S. dollar, pretty much across the board, and as we've talked about before, we have a $900 million to $1 billion profit pool in those emerging markets that's largely unhedged. And so that creates an issue. The second aspect of FX is the Japanese yen. We do hedge the yen and we had a very good rate. In 2013, we hedged about…

Okay. That's helpful. Maybe just from a bigger picture standpoint, you had offered a Long-Range Plan in 2012, which you updated at the time of the Gambro transaction. In December, obviously, there have been some changes with respect to austerity and the macroeconomic conditions since that plan was issued. But is it still fair to look at 2014 as a trough year for organic growth and earnings progression as it relates to the Long-Range Plan? I mean, any perspective you could provide on how you're doing relative to your internal expectations and we should think about the long-term picture here.

Yes, David. Bob Parkinson here. Let me tackle that, and then I'll maybe ask Bob Hombach to augment my comments if I miss anything. First of all, kind of starting at a high-level, I mean, clearly, our long-term outlook for Baxter continues to be very positive for a lot of different reasons. When you contrast it with our last investor conference, clearly, there are headwinds that have emerged that are more pronounced than what we had anticipated at the time. I think we continued to talk about global austerity measures and so on as payers around the world struggle with financing access to healthcare and their own budgets and so on, and so not only is that going to continue, it's realistic to think that, that very well could intensify as time moves on. So that's more of a pronounced headwind than I think we anticipated in the fall of '12 when we had our last investor conference. The other thing, and Bob just commented on it earlier, specifically, as it relates to the yen. But currencies in emerging markets are a more pronounced negative. Certainly now, we anticipate that continuing for the foreseeable future. So those are a couple of big changes. Of course, the other operating dynamic that we deal with in '14, you mentioned the trough that is going to continue to be a challenge as we move into '15 is the cyclophosphamide generic, which is a bigger product, significantly so than what it was a couple of years ago. So we're going to have to continue to ride that down. Now on the upside, I would say, when -- at our last investor conference, when we projected long-term top line growth, we did not reflect any new business development beyond that point in time, and subsequent…

That gives a lot more context, thank you.

Our next question comes from the line of Matt Miksic from Piper Jaffray.

Bob, I think you mentioned, when you chalked up some of the growth in the quarter on hemophilia and how you're looking at 2014, in addition to new products, there's a fair amount of international demand and penetration with the new label. We talked a little bit about this last year in the U.S., prophy and convenience dosing. Can you talk about what may be regionally in terms of health system or clinicians or researchers, looking at the data that put you together for ADVATE in prophy, what the effect has been outside the U.S.? And then I have one follow-up.

Yes, I would say, Matt, that particularly in Western Europe, I think the benefits of prophy have been well-understood and there are some kind of top-tier benchmarks in like countries like Sweden that have some of the highest utilization rates as well. But there are other markets where it is under-penetrated, and so the additional approval for ADVATE prophylaxis in Europe allows us to more actively promote that. And so we are seeing benefits both in Europe and, certainly, in the U.S., you've seen the performance be very strong in the U.S. for us here. So there continues to be opportunity to drive that, create greater awareness and increase penetration, because we think at the end of the day, it does improve patient outcomes and quality of life over time. Certainly, having the gold standard product has helped us in a number of markets and, again, we're very pleased with the progress we see in Brazil. And one of the stated objectives of the Brazilian government is to improve access to care and quality of care, which prophylaxis is one of the target aspects of that, that we're working with them very closely on. So again, we think there is much more mileage to be gained here on prophylaxis on a global basis as we go forward.

And then on the SG&A line. In terms of the addition of Gambro and then some of the synergies over time around that acquisition, can you give us a sense of when and -- or are we already seeing that line sort of start to show some of the synergies across the acquisition, maybe what the progression, as a percentage of revenues, would look like this year as you get through the integration and synergies.

Yes, I would -- well, first off, I would say, as we talked about, there definitely is leverage in the base Baxter business, excluding Gambro and FX. In fact, SG&A year-over-year is flat, excluding Gambro and FX, for Baxter, and that includes absorbing more than $40 million of incremental spend focused on important new product launches, both in 2014 here and in preparation for 2015. So I think we've done a very responsible job in the face of generic competition to drive down our base spending as much as possible while continuing to invest for future growth. Clearly, in the short term, Gambro is adding but, again, at a leveraged rate. We do have a meaningful amount of synergies already baked into our 2014 expectations. As we've talked about, we expect, on a run-rate basis, by the end of 2015 to achieve about 80% of our overall $300 million cost synergies that we expect to have. So we're well down the path and we've baked into our 2014 assumptions here that we make meaningful progress in the first year of synergies, both in SG&A and in margin.

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

I wanted to turn back to the IVIG markets, and a couple of questions there. Could you give us an update on how the HyQvia launch in Germany is going? Are you able to get the price premium, kind of what you're seeing in the early days there? And then also on HyQ, talk about your ability to supply the market in the U.S., if and when you kind of get the launch there. And then maybe if you could also then comment on IVIG market dynamics as well in terms of pricing and volumes?

Yes. So a couple of things, Derrick. So first, I think the HyQvia launch in Europe is going very well. As we've talked about, we've been very targeted about the markets that we've launched in and have done a very controlled launch to ensure that we get this off to the right start with both patients and treaters, and so the initial feedback has been very good and patient experience has been very good, which is very important to us for the long-term positioning of this product. We are pleased with our ability to, I think, get the innovation we've brought to the market recognized in the price point that we've been able to achieve in some of the markets in Europe, and so we do have a meaningful price premium in those markets today and we expect, as we hope to get approval here by midyear 2014, that we'll be able to do the same in the U.S. In terms of our ability to supply the market, as I mentioned earlier, given our assumption around overall demand growth of about 6% to 8% on a global basis within our existing footprint, we will be able to provide volume unit growth in the 6% to 8% range, both for 2014 and 2015. As you saw though, we have selectively -- given our product constraints, we've selectively targeted which markets we want to participate in for the long run, and so while that's depressed our sales a little bit in the short term, in terms of some of the markets we've exited in Europe as an example, it does position us well to continue to participate in the strong growth in the U.S. market, and certainly, we think HyQvia would provide a significant differentiation for us in the U.S. So we're excited about that opportunity. And we'll be in good position, as our inventory levels have improved in the U.S., to support strong demand going forward for that product. And in terms of overall market dynamics, I don't want to talk about too much here in specifics. But I would say that no real change, strong demand, and again, our ability to supply at-market growth rates is much enhanced here. So we feel good about where we're at for 2014.

Okay. And maybe just a quick follow-up on Gambro. You talked about the rationale at the start of the -- when you announced the acquisition, around revenue synergies. And I was wondering if you could maybe give us an update on when you expect to see those revenue synergies. How they're looking now that you're completing that -- you're in the maintenance of the acquisition and then -- or integration, rather. And then also if you could talk to the sort of the dialyzer constraint issue and sort of where we are on that with respect to Gambro.

Yes, well, as we've talked about this, it took a little bit longer for us to close the transaction as we worked through the regulatory processes. So in the meantime, the business, as you've probably seen, underperformed market growth throughout 2013. But we continue to believe in the long-term opportunity that this represents and the key drivers where we think we will be able to enhance growth going forward, that would be in the dialyzer space, in the acute care CRT space where we have very strong hospital presence on a global basis, as well as stabilizing the in-center monitor business and getting back to more market growth rates in the low-single digits. So in 2013, overall, I'd characterize Gambro's sales growth as, I'd say, a slightly negative low-single digits, if you will. We're expecting to accelerate that in 2014 into low-to-mid single digits within Baxter, as well as enhance our overall PD growth as well because we do think there are synergies on both the Baxter base business as well as the Gambro business as we bring these 2 together, particularly in emerging and developing markets. And so -- sorry...

And on dialyzers, Derrick, things are going well there. We did bring up a new line in 2013 to enhance our dialyzer capacity in 2013. Additional capacity will come in -- be coming in '14. We expect about a 50% increase in capacity by the time we get to the end of 2015.

Yes. So I would say early days on generating commercial synergies, but we definitely see the opportunity and have baked some of that into our assumptions here. And we expect that to ramp-up throughout the course of '14 and accelerate beyond that.

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

I'll try and limit it here to just a couple of questions. So first on Gambro, the $300 million in synergies that you've targeted, it looks like you're actually ahead of our estimates on what you achieve in 2014 with your SG&A mid-single digit guidance and the R&D low-single digit guidance was both lower than we were expecting. So maybe try and just tie the 2. So the $300 million, what do you think that is for 2014?

I would characterize it as slightly more than $100 million and recognize that, as we've said, a meaningful portion of that comes through the cost of goods sold line. It will take a little bit longer with some of the actions that we need to take there, but a little bit more than half of that, up slightly more than $100 million, coming through margin and the rest coming primarily through SG&A. But I would also say, as you saw through the business optimization activities that we've done as well, we've taken actions on the Baxter side on the expense base as well, again, to get to flat to drive some leverage given the approximately 2% sales outlook that we've got for the base business.

Okay. And then on cyclophosphamide, can you give us what the 2013 revenue contribution was? And can you make an estimate of what you think the EPS contribution was in '13 so we can kind of think about what that looks like with it out of model once we get into '15?

Yes. I'd say approximately $400 million, Mike, at very high contribution margins, so a meaningful contribution on...

Okay. So depending on the timing of events here in '14, if we just ignore '14 for a second, view it as a transition for cyclo, the total contribution is somewhere in the $0.45 range?

Yes. It might be a little higher than that. And again, we're thinking about, with multiple entrants coming in over the next 2 years and the normal flow of a generic situation like this, by the end of '15, on a run-rate basis, we expect roughly 85% to 90% of this to be out of our base by then.

Our next question comes from the line of Glenn Novarro from RBC Capital Markets.

So I wanted to ask about what you guys are doing behind the scenes in front of the Biogen launch. We've all done street surveys, have talked to docs and patients about uptake, and there's a great deal of awareness and desire to switch to longer-acting agents. So in front of the Biogen launch, I'm sure you guys are being very active in talking to your distributors and patients about the benefits of ADVATE and what you have going on in the pipeline, so I just wanted to give you guys the opportunity to talk about what you're doing in the background ahead of this Biogen launch.

Yes, let me -- Glenn, Bob Parkinson. I'm just going to handle that at a high level, but you can rest assured that we're doing a lot of things. I'm not sure I want to specify specifically what those are, so I'm not going to give you any satisfaction in that regard. I would say that we have more time to do those things than what we had anticipated a few months ago, given Biogen's announcement that their launch was going to be delayed. So I think the important thing to recognize is we have more time. We're not sparing any expense or focus to appropriately, first and foremost, promote the merits of ADVATE and -- but beyond that, I don't think it's constructive to get into specific aspects of our marketing program for a number of reasons.

Just 2 follow-ups. In the past, you've talked about ADVATE and the new label and the percentage of adoption or sales. Is that continuing to increase?

Yes. Glenn, we're seeing both conversions to prophylaxis in general, and then conversions to extending the dosing regimen to every 3 days versus every 2 days. And as we've talked about, hemophilia treatment is very much a person, patient -- personal, patient-by-patient approach here. And we've done some surveys of our own and have shown that a majority of our patients are already doing an alternate regimen from kind of the standard of care of every 2-day dosing for prophylaxis. So a meaningful portion of our patient base is already doing something 3 days or longer from a dosing interval. And so we're going to continue to highlight the strong track record of ADVATE, the very low bleed rates, the very, very low inhibitor rates and continue to enhance our offering from a convenience standpoint in terms of the administration process, as well as continuing to work with patients and treaters to develop tools that allow them to even further personalize. We've talked about a PK dosing tool that we have in development that we are excited about and we think will, again, further enhance our leadership position. So a number of things we're doing here to leverage a very strong label for ADVATE.

And then just lastly, do you have -- can you share with us your assumption as to potential market share loss in 2014 or 2015 or switching rates that you anticipate? And then I'll jump back into queue.

Yes, no. I don't think it's appropriate for us to get into that. I mean, we've assumed in our guidance basically what's been said publicly, which is roughly a midyear launch. As we've said all along, we think this is a market that will take its time to understand any new product offerings and a very well-educated patient population that's going to understand the treatment trade-offs that they're going to have to consider and so on. We've baked that into our expectation, as Bob mentioned, over the next several years, and over the long run, our long-term view of how this evolve really hasn't changed.

And Glenn, I would add, I think in our prepared remarks, we did talk about the fact that although we expect the increased competition, we do have a significant amount of sales related to FEIBA prophylaxis treatment, RIXUBIS, OBI-1, all coming a lot in the back half that'll offset some of the competitive impact that we expect.

Our next question comes from the line of Rick Wise from Stifel.

Two things, I guess. One, product specific and one, a bigger picture. Bob, you talked about VIVIA recently receiving the CE Mark. Maybe just give us a little more detail on the launch plans and market penetration expectations. Just, I mean, you're launching in one country, multiple companies, and the broader 2015 launch, is that throughout Europe? And maybe talk to us a little bit about the slow ramp and just your thinking behind all that. And then I'll ask my other question.

Rick, the thinking behind the slower launch is this is a new product and it is a new system and it is a new electromechanical device. It is sophisticated. It is complex. And as a result, we feel that it's prudent to be very controlled and disciplined on the roll out. Our excitement about the long-term potential of this product is every bit as high as it's ever been. The prospects of allowing patients to do hemodialysis in the home nocturnally, significantly increasing the number of hours on therapy, and our belief that advancing important clinical outcomes as a result will be demonstrated over time. So the long-term potential for this product is, we think, tremendously exciting. Having said that, there's no percentage in getting ahead of ourselves on this, and so the comments that I made in my prepared statement about the limited launch in '14 is really about that. It's about being controlled and disciplined and this is kind of a long-term journey but the opportunity is every bit as significant as we've ever felt.

And just any granularity on what countries and what kind of institutions that you're going to be launching in the next 6, 12 months?

No. I don't want to get into the specifics of that. It's actually -- it's more of on a center-by-center basis. So it will be multiple countries. But obviously, centers that exhibit an interest that we believe can be good partners. There's a big service component to this as well, over and above the product. And so it's really important to select partners in terms of centers that we feel lay the groundwork for, again, kind of a controlled and successful launch.

All right. Just a follow-up on operating margins. I appreciate there are a ton of moving pieces. Can you help us at all with sort of directional targets the next couple of years? I mean, you've had a sort of a 23-ish percent operating margin for much of the recent history. How long does it take to get back to that level given all the moving pieces? Is it a couple of years? Is this going to be more in the 3- to 5-year kind of timeframe? Any sort of color would be welcome.

Sure, and I'll speak to kind of the new way we're going to be reporting here, because, obviously, we've provided historical information on what Baxter looks like, excluding intangible amortization, which, again, was all booking to gross margin and having about 120-basis point impact or so on gross margins historically. So when you wash that through and restate the base and look at our operating margin expectations for 2014, they're not that different from where we've been historically, though they'll be a bit below 23% at this point. I would definitely view Q1 -- excuse me, Q4 2013 operating margin as a -- not representative of where we're going. We clearly had some very specific factors impacting Q4 of 2013. Again, just pulling amortization out in and of itself moves it 120 basis points or so. So I would say going forward, if you back out FX at this point, our 2014 operating margin expectation is basically flat to 2013. Despite the fact that we're absorbing cyclo and a number of other headwinds, we'll again have a cyclo headwind next year, but we're going to continue to drive leverage in the business, launch new products with higher margins, drive Gambro synergies and so on, and as we projected in our long-range outlook, that over the next several years, we would expect to generate 200 to 300 additional points of operating margin leverage going forward. That's still our expectation. Again, I think 2015 will be somewhat clouded by cyclo, but beyond that, all those factors I mentioned are going to come into play here and provide leverage for us going forward.

Our final question comes from the line of Matthew Dodds from Citigroup.

Bob, on the gross margin for the fourth quarter, you definitely had a positive mix from cyclophosphamide in terms of mix price. And recombinant factor VIII, you highlighted Gambro. But to drop 150 basis points x Gambro, of the things that you highlighted, foreign exchange, pension, austerity, LA frac, was any outsized this quarter?

Yes. I would highlight the LA-related costs are really non-recurring. So this is really the realization of the downtime and ramp-up back in the second quarter of this year as we were bringing the old LA facility up. As we talked about, that was about a $25-million cost that we thought, and really, a lot of that is impacting the fourth quarter here. And so that's in the neighborhood of 50 basis points or so in and of itself. And there were a couple of small inventory reserves we topped off and FX certainly was a driver there as well.

And then just one additional quick question. For Brazil, with the Hemobras deal, you said $70 million in 2013?

That was the incremental, yes.

Did you have any sales in 2012 as a...

Well yes, we do want to recognize the fact that we had some modest plasma-derived sales. I would say less than $20 million, in that neighborhood. And so obviously, they're converting the market from plasma to recombinant, so we're losing plasma sales and getting recombinant. But we've netted those 2 out in the $70 million incremental.

But there -- in 2012, there was no recombinant sales to Brazil?

Right. Correct.

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