Baxter International Inc. (BAX) Q4 2010 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Baxter International's Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Mary Kay Ladone, Corporate Vice President, Investor Relations at Baxter International. Ms. Ladone, you may begin.

Thanks, Sean, and good morning, everyone. Welcome to our Fourth Quarter 2010 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 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. And thanks for calling in this morning. As you all know, 2010 was an unusually challenging year for Baxter that presented some unique obstacles in an evolving macro environment. The global economic landscape continued to exert intense pressure, U.S. Health Care Reform Legislation added additional complexity and further impacted our business performance, and healthcare austerity measures continued to be implemented around the world, as emphasis remains on providing increased access to care at a lower cost. Finally, and specific to Baxter's, market dynamics in the Plasma Protein business had an adverse effect on our financial performance for the year. However, we're seeing encouraging signs that our competitive position is strengthening, and we continue to be optimistic about the growth prospects for this business over time. Despite these challenges, there were an array of Baxter successes that I'd like to highlight this morning. First, while we were disappointed that we lowered our guidance in the first quarter of 2010, our financial performance was in line with our revised expectations for the remainder of the year. Earlier this morning, we reported our fourth quarter financial results with adjusted EPS that increased 8% to $1.11 per diluted share. For the full year, adjusted EPS was $3.98 per diluted share, at the high end of our revised guidance range of $3.92 to $4 per share. On a reported basis, worldwide sales in the fourth quarter increased 1% and after adjusting for currency, sales growth was 3% and compares favorably to the guidance we provided of 1% to 2%. For the full year 2010, worldwide sales increased 4%, or 3%, after adjusting for foreign exchange. Now we're particularly pleased with our sustained ability to generate significant cash flow, which exceeded $3 billion for the year, a new record level for our company, while continuing with our disciplined capital allocation strategy of returning value to our shareholders through increased dividends and share repurchases. Over the year, we focused on enhancing our organizational, commercial and operational effectiveness. As you know, from an organizational perspective, we combined our Medication Delivery and Renal businesses to form a new business, Medical Products. This new organization aligns common areas of capability within Baxter, while creating increased capacity to pursue new growth opportunities. Both the new Medical Products business and our Bioscience business also feature new leadership to help accelerate growth, with Ludwig Hantson now heading up Bioscience and Rob Davis leading Medical Products. Commercially, we implemented new strategies in Bioscience to address issues and strengthen our competitive position in the Plasma Proteins business. I'm encouraged with the progress that we're making and remain confident that the Plasma business will be an attractive growth vehicle in the coming years. This is due to the under-diagnosis of primary immune deficiency globally, Baxter's introduction of new and proprietary administration technologies and the expansion of new indications, including the potentially significant opportunity related to the treatment of Alzheimer's. And Renal, CMS began reimbursing clinicians for providing pre-dialysis education to patients with chronic kidney disease and a new bundle payment system became effective just a few weeks ago. These reimbursement changes in the U.S. are intended to promote growth of home dialysis, and momentum continues to build in this regard. We also continue to expand geographically and increase perineal dialysis penetration particularly in developing markets as more countries recognize the potential cost, clinical and quality-of-life benefits of this therapy. And in Medication Delivery, we signed a new five-year contract with Novation. This new agreement provides hospitals access to Baxter's broad portfolio of products including IV solutions, drug delivery and perennial and nutritional products, large volume infusion pumps and IV administration suction components, resulting in share gains in core products across the portfolio. From an operational perspective, we finalized the consent order with the FDA related to the COLLEAGUE infusion pump, and are in the process of offering the SIGMA Spectrum pump as an alternative to our customers. We continue to work with SIGMA to significantly ramp manufacturing capacity. And today, SIGMA has been successful, positioning us well to meet the anticipated customer demand. I'm very pleased that over the last couple of months, we've seen accelerated demand for Spectrum with a record number of orders and minimal loss of the current COLLEAGUE customers. This is a result of our attractive offer to customers coupled with the cost effectiveness and clinical benefits of our standard set technology, allowing us to protect a significant portion of our installed base of infusion devices. Throughout 2010, we continue to broaden our presence by introducing a number of new products and expanding geographically. For example, we launched ADVATE in Brazil; PREFLUCEL, our seasonal influenza vaccine in select European markets; TachoSil, an absorbable Fibrin Sealant patch for use in cardiovascular surgery in the U.S., and we introduced the first and only 30-gram dose vial for GAMMAGARD LIQUID in KIOVIG in Europe and Canada. This new dosage form is the most frequently prescribed dose for primary immune deficiency patients and enhances user convenience. I'm also pleased that we continue to fund all of our key late-stage R&D programs. Our new product pipeline includes 14 programs in Phase III clinical trials, and we've advanced a number of other programs aimed at a variety of chronic diseases like Alzheimer's, immune deficiency, hemophilia and end-stage renal disease. Just a few key highlights from 2010 include the following: We extended our leadership position in hemophilia and recombinant proteins with the initiation of a global Phase I/II clinical trial of BAX 817, a recombinant Factor VIIa therapy, and started a Phase I/III clinical for BAX 326, our recombinant Factor IX for hemophilia B. In addition, we completed our Phase I recombinant von Willebrand factor clinical trial, and we expect to begin at Phase III trial in 2011. This treatment is the only recombinant therapy under development. And we recently received Orphan Drug Designation in both the U.S. and Europe. We continued our development of a longer-acting Factor VIII. We expect considerable time designing the right scientific approach after screening more than 100 candidate molecules. And we'll move forward into a Phase I trial with our lead PEGylated candidate later this year. We also have a number of ongoing trials evaluating GAMMAGARD LIQUID for enhanced delivery of therapy to patients with primary immune deficiency and for treating various neurological disorders. We recently completed the Phase III clinical trial of HyQ, an immunoglobulin therapy facilitated subcutaneously by recombinant human hyaluronidase. Interim analysis shows that participants with primary immune deficiency were able to facilitate infusion under the skin, using a single injection site, add infusion volumes, intervals and rates equivalent to their previous IV administration. As you know, we expect to file for approval later this year. We completed enrollment in a Phase III clinical trial of GAMMAGARD LIQUID in KIOVIG for the treatment of multifocal motor neuropathy, or MMN, a neurological disease that attacks the peripheral nerves resulting in progressive limb weakness. We expect to complete this trial in 2011. And we continue to advance our Phase III GAMMAGARD LIQUID trial for Alzheimer's. To date, we randomized over 285 patients and are on track to complete enrollment by mid-2011. With an 18-month follow-up period, we currently expect to complete the trial by the end of 2012. And in addition, we plan to initiate a second confirmatory trial before the end of this year. In our Regenerative Medicine business, we completed a Phase III study evaluating TISSEEL Fibrin Sealant as a hemostatic agent in vascular surgery, and filed for regulatory approval of our TISSEEL Fibrin Sealant for use in facial surgery in the U.S. And lastly, we recently received FDA approval of our IDE application for our home hemodialysis clinical trial, which we plan to start in the U.S. by mid-2011. These achievements depict just a handful of the programs in our pipeline that will present great opportunities for Baxter in the years to come. Finally in 2010, we entered into a number of new business partnerships aimed at enhancing our product portfolio and scientific capabilities. Some examples include: the acquisition of ApaTech, an orthobiologics company in the U.K. ApaTech's lead product, Actifuse, is a synthetic bone graft material that enables Baxter to enter the emerging bone fusion market. We announced a manufacturing supply and distribution agreement with Kamada for GLASSIA, the first and only liquid alpha1-proteinase inhibitor for the treatment of alpha1 antitrypsin deficiency, and we acquired the exclusive commercial rights of the product for the U.S., Australia, New Zealand and Canada. We finalized a collaboration with Takeda for the development, production and supply of cell culture-based influenza vaccines, both pandemic and seasonal, for the Japanese market. And lastly, we recently acquired the hemophilia-related assets of a privately held biopharmaceutical company, Archimex. The lead product associated with this transaction is ARC19499, a synthetic subcutaneously administered hemophilia therapy currently in a Phase I clinical trial in the U.K. This program is an important addition to other Baxter development programs focusing on non-intravenous therapy for the treatment of hemophilia. Through ongoing focus on innovation, investment and collaboration, we remain committed to advancing new therapies improving the safety and cost effectiveness of treatments, expanding access to care and most importantly, providing life-saving and life-sustaining therapies to patients around the world. Before turning the call over to Bob, I'd like to update you on two items: first, last week, we informed the European Medicines Agency of the continued presence of impurities in PD solutions from a production line at our Castlebar, Ireland manufacturing facility. We're focused on increasing supply of these products for multiple facilities around the world while continuing our investigation on isolating our root cause. To our continued collaboration with the EMA, we remain committed to ensuring that there's minimal disruption in delivering PD therapy to patients. While it maybe a few months before this is completely resolved and the production line is fully back in service, financially, we believe this issue is manageable. On another note, and in the spirit of being proactive with all of you in our communications, we wanted to disclose that following routine inspections in Baxter's Guayama and Jayuya, Puerto Rico facilities, we received a warning letter from the San Juan District Office, focused on certain GMP violations including the post-marketing reports. The warning letter pertains to several amino acid products, critical care products and Suprane. We currently are evaluating the warning letter, which primarily pertains to how we investigate issues and report relevant information to the FDA. There were no reported patient adverse events associated with the events described in the letter and no interruption to our operations. We implemented improvements immediately following the FDA inspections, and we'll present our plans to the agency in the coming weeks as we work to resolve these issues. And as always, I'd be happy to address any questions on these or other topics during the Q&A at the end of the presentation. So with that, I'd like to ask Bob to review our fourth quarter financial results, our guidance for 2011 in more detail, and then I'll come to provide some additional perspectives at the end. Bob, if you would?

Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share in the quarter, excluding special items, increased 8% to $1.11 per diluted share, which was at the high end of our guidance range of $1.09 to $1.11 per share. As we mentioned in our press release, our GAAP results included after-tax special charges totaling $227 million, or $0.39 per diluted share. Approximately 20% of the total charge is non-cash. The specific items are detailed in our press release and included charge for increased litigation reserves, in-process R&D associated with recent transactions and actions we are taking associated with the ongoing optimization of certain manufacturing and business operations around the world, which primarily include severance and contract terminations and fixed asset impairments. These actions include the elimination of a number of positions, principally related to streamlining our international operations, rationalizing our manufacturing footprint and enhancing our general and administrative infrastructure. Annual savings are expected to total approximately $0.15 per share when fully implemented in 2012. Now let me briefly walk you through the P&L by line item for the quarter before turning to our financial outlook for 2011. Starting with sales, worldwide sales totaled $3.5 billion in the fourth quarter and increased 1%. Excluding foreign currency, sales increased 3%, which compares favorably to our guidance and is attributable to better-than-expected medication delivery and antibody therapy sales. And as you know, there were a number of factors negatively affecting sales in the quarter, which collectively totaled $80 million, or two percentage points of growth. These items include the impact of healthcare reform, the U.K. recombinant Factor VIII tender loss and a difficult comparison in vaccines related to pandemic revenues reported in the fourth quarter of 2009. For the full year, sales increased 4% to $13.1 billion. And excluding foreign currency, sales growth was 3%, in line with our guidance. In terms of the individual businesses and beginning with BioScience, in the fourth quarter, global BioScience sales of $1.5 billion increased 1%. Excluding foreign currency, BioScience sales increased 4%, reflecting accelerated growth versus the prior three quarters. As previously mentioned, BioScience sales were adversely impacted by five percentage points due to the impact of healthcare reform, the U.K. tender loss and the difficult vaccine comparison. Excluding these items, BioScience sales advanced 9% on a constant-currency basis. For the full year, global BioScience sales exceeded $5.6 billion and increased 1% on both a reported basis and after adjusting for foreign currency. Within the product categories, recombinant sales of $534 million declined 5% as expected. Excluding foreign currency, sales declined 3%, primarily due to the U.K. tender and a reduction of inventory levels in the U.S. channel. Recombinant sales for the full year of approximately $2.1 billion increased 2% on both a reported basis and after adjusting for foreign currency. We continue to be very pleased with the conversion and performance of ADVATE, with global annual sales now approaching $1.8 billion and representing more than 80% of our total recombinant revenues. In fact, excluding the factors previously mentioned, global ADVATE sales advanced 9% in 2010 versus 2009. Moving on to Plasma Proteins. Sales in the quarter were $416 million and increased 9%. Excluding the impact of foreign currency, sales increased 13%, our highest quarterly growth for this category this year. Declining revenues in the U.S. were offset by strong double-digit growth of ARALAST and various plasma proteins outside the U.S. including FEIBA, albumin and plasma-derived Factor VIII. For the full year, Plasma Protein sales were approximately $1.4 billion and increased 2% on both a reported basis and adjusting for foreign currency. In antibody therapy, sales of $386 million increased 10%. And excluding foreign currency, sales increased 13%, reflecting the success we've had with our commercial strategies and benefit related to meeting demand previously served by Octopharma. U.S. sales were $257 million and increased 8% versus the prior year. Strong volume in the quarter was partially offset by the impact of our pricing touchups and a nine percentage point impact from healthcare reform and the termination of the WinRho distribution agreements. Outside the U.S., antibody therapy sales of $129 million increased 13%, or 21% excluding foreign currency, as we continue to see strong growth in volume across the regions. For the full year, Antibody Therapy sales were approximately $1.4 billion and declined 1% on a reported basis. Excluding foreign currency, sales were comparable to the prior year. This was a result of double-digit growth in volume globally, which was offset by modestly lower prices and a five percentage point impact from healthcare reform and the termination of the WinRho agreement. Sales and regenerative medicine, which includes our BioSurgery products, totaled $145 million and increased 16%. Sales excluding foreign currency grew 18% and included approximately $15 million in incremental sales related to the ApaTech acquisition completed earlier in the year. For the full year, sales totaled $527 million, an increase of 19% on both a reported basis and excluding foreign currency. Excluding the incremental benefit related to ApaTech, sales growth for the category was in high single digits, reflecting some softness in surgical procedure growth. Finally, revenues in the other category within BioScience were down 47% to $52 million, due primarily to the difficult comparison related to pandemic revenues which were approximately $40 million in the fourth quarter of 2009. As you know, vaccine sales can be volatile. As a result, full-year revenues in this category totaled $296 million which were approximately $70 million below 2009. Medication Delivery sales in the fourth quarter totaled $1.3 billion, an increase of 1% on a reported basis. And excluding foreign currency, Medication Delivery sales grew 3%. For the full year, Medication Delivery sales of $5 billion increased 7%. And excluding foreign currency, sales increased 5%. Turning to the product categories. IV therapy sales totaled $452 million in the quarter and rose 3%. Excluding foreign currency, sales were up 5%. Double-digit growth in the U.S. was the result of improved IV pricing, increased demand for a variety of nutritional products, and greater customer adoption of CLINIMIX, our proprietary dual chamber parenteral nutrition therapy. Sales in the global injectables category, which includes our Contract Manufacturing and Compounding businesses, as well as enhanced and generic injectables, advanced 4% to $499 million. Excluding foreign currency, sales grew 5%. Contributing to this performance was strong growth of many banks and select multi-source generics, a business we expect to divest in the first quarter of 2011. Infusion Systems sales totaled $230 million and declined 7% on both a reported basis and after adjusting for foreign currency. Lower COLLEAGUE and access set revenues were partially offset by a continued growth of Spectrum. And finally, Anesthesia sales totaled $141 million in the fourth quarter and increased 1% on a reported basis, or 2% after adjusting for foreign currency. I've mentioned that while we see some quarterly sales growth volatility throughout 2010 in this category, full year sales of $525 million increased 6%, driven by growth of both SUPRANE and Sevoflurane globally despite softness in surgical procedures. Moving on to Renal. Renal sales in the fourth quarter totaled $626 million, which were comparable to the prior year period. Excluding foreign currency, Renal sales increased 1% as strong PD growth in the U.S. was offset by slower PD growth in Europe and lower HD revenues. Sales for the full year in Renal were $2.4 billion and increased 5%. Excluding foreign currency, sales increased 2%. Global PD sales totaled $514 million and increased 1% on both a reported basis and after adjusting for foreign currency. This performance can be attributed to continued momentum in PD patient gains in the U.S., resulting in 5% growth in U.S. PD revenues. And lastly, hemodialysis sales of $111 million declined 3%. Excluding foreign currency, HD sales declined 2%, as CRRT sales, our Hemofiltration business, offset lower sales of dialyzers in the U.S. Turning to the rest of the P&L. Gross margin for the company was 50.0% in the fourth quarter, which is 180 basis points below last year's gross margin of 51.8%. The year-over-year decline is largely a result of healthcare reform, new contracting strategies and cost inefficiencies in the Plasma business and a difficult comparison to last year, associated with high margin pandemic revenues. These items more than offset improved mix across other parts of the portfolio and a benefit related to foreign currency. I'd also mention that gross margin was somewhat lower than our expectations for the quarter, largely due to unplanned cost associated with the Castlebar, Ireland PD solution manufacturing issue which Bob mentioned earlier. For the full year, gross margin was 51.1%, down 130 basis points from the 2009 gross margin of 52.4%. As expected, we successfully leveraged SG&A, which totaled $708 million in the quarter, and declined 4% versus the prior-year period. SG&A as a percent of sales was 20.2%, the lowest level in several years, reflecting sequential improvement of 60 basis points and a year-over-year improvement of 110 basis points. As previously discussed, we continue to aggressively manage general, administrative and discretionary spending across the company, while selectively investing in several key promotional activities aimed at demand creation, new product launches and driving future growth of our higher-margin products. I'd also mention that SG&A included unplanned legal expenses of approximately $20 million. For the full year, SG&A increased 3%. And as a percent of sales, the SG&A ratio declined by 30 basis points versus 2009. R&D spending of $228 million declined 7% in the fourth quarter, which can be attributed to the impact from foreign exchange, completed clinical work on several programs and lower milestone payments to partners. R&D for the full year totaled $881 million and declined 4% versus 2009. As Bob mentioned earlier, we're fully investing in all key R&D programs across the product pipeline. The operating margin in the fourth quarter was 23.3%, 10 basis points lower than the prior year, as the unplanned SG&A expense and write-off related to Castlebar collectively totaled approximately $30 million, adversely impacted operating margin by 70 basis points. For the full year, operating margin was 23.3% and declined 40 basis points year-over-year. Interest expense was $19 million compared to $25 million last year, primarily as a result of higher interest income. And Other was $25 million of income as a result of favorable foreign exchange impacts from balance sheet positions compared to $7 million of income in 2009. The tax rate was 20.4% in the quarter, similar to last year, and for the full year was 20.1%, 100 basis points higher than 2009, primarily due to a change in earnings mix between higher tax and lower tax jurisdictions. And finally, as previously mentioned, adjusted EPS was $1.11 per diluted share, an increase of 8%. For the full year, adjusted EPS was $3.98, reflecting a 5% increase. Turning to cash flow. Cash flow from operations was strong in the quarter and totaled $935 million. On a full year basis, cash flow from operations exceeded $3 billion, a new record level for our company. This includes pension contributions totaling $350 million for the year versus $100 million contribution in 2009. Excluding these pension contributions from both years, cash flow from operations improved by $350 million year-over-year. This represents an 11% increase in cash flow versus 2009. Capital expenditures of $963 million were $50 million lower than the prior-year period, resulting in free cash flow excluding pensions of approximately $2.4 billion. Excluding pension contributions in both years, free cash flow advanced 20% versus 2009. DSO entered the quarter at 52.5 days, which is higher than last year by one day. This is largely due to our international country mix, as DSO in the U.S. remains at less than 30 days. Inventory turns improved significantly versus last year at 3.0 turns. This was primarily driven by improvement in BioScience, with a reduction of Plasma inventories and better turns in both Medication Delivery and Renal. And lastly, during 2010, we repurchased approximately 30 million shares of common stock for almost $1.5 billion, or on a net basis, 21 million shares for over $1.1 billion, in line with our objectives. Finally, let me conclude my comments this morning by providing our financial outlook for the first quarter and full year 2011 before turning the call back to Bob. First, for the full year 2010, we expect earnings per diluted share of $4.15 to $4.25. By line item of the P&L and starting with sales, we expect full year sales growth on both a reported basis and after adjusting for foreign currency of 2% to 3%. This reflects the divestiture of the $200 million Generic Injectables business that we expect to close during the first quarter. Excluding the impact of the divestiture, sales growth is expected to be in the 4% to 5% range. For the full year, we expect gross margin to be approximately flat to the gross margin rate in 2010 of 51.1%. We expect SG&A and R&D to grow modestly in low-single digits for the year as we continue to intensify our focus on managing cost throughout the organization. We expect operating margins to improve modestly as savings related to the optimization charge taken in the fourth quarter and select mixed benefits more than offset cost inefficiencies in the Plasma business, increased pension expense and the incremental impact of healthcare reform from the implementation of the pharmaceutical drug tax. We expect interest expense of approximately $95 million and Other expense to total approximately $25 million. Given our mix of earnings, we expect our tax rate to approximate 21%. And finally, we expect the full year average share count of approximately 575 million shares, which assumes approximately $1 billion in net share repurchases. From a cash flow perspective, we expect to generate cash flow from operations for approximately $2.8 billion. This includes a 2011 pension contribution of $150 million and an outflow of approximately $300 million related to the execution of the COLLEAGUE consent order. Now to expand on the full year sales assumptions for each of the businesses. First, on a constant-currency basis, we expect low single-digit sales growth for Medication Delivery. Excluding the proposed divestiture of the Generic Injectables business, sales growth is expected to be in mid-single digits, consistent with the growth realized in 2010. Within the product categories, we expect IV therapy and anesthesia sales to grow in mid-single digits; infusion system sales to be flat to down 2%; and global injectable sales to decline 1% to 3%. Excluding the divestiture, we expect sales in this category to increase 7% to 9%. For Renal, we expect sales growth, excluding foreign currency, to be in low-single digits as lower HD revenues modestly offset low-single digit growth in PD. And for BioScience, we expect sales, excluding foreign currency, to grow in the 3% to 5% range, an acceleration from the growth posted in 2010. For the Recombinant business, we expect growth for the full year to be in low- to mid-single digits, which includes the annualized impact of the U.K. tender. Second, we expect Plasma Protein sales to also increase in low- to mid-single digits, and antibody therapy sales to grow in the 6% to 8% range, reflecting improving demand and a benefit related to Octopharma. Third, we expect regenerative medicine sales to grow in low- to mid-teens. And finally, we expect the Other category within BioScience to decline approximately 20%, reflecting a difficult comparison in the first quarter from pandemic revenues recorded in 2010. For the first quarter, as we mentioned in our press release, we expect earnings per diluted share of $0.92 to $0.94; and sales growth, excluding the impact of foreign currency, of 2% to 3%. Based on current foreign exchange rates, we expect reported sales to be approximately flat to the prior year. I point out that we expect gross margins in the first quarter and the first half of 2011 to be slightly below 51%, with improving margins in the back half of the year. As always, I'd be happy to take any questions on our financial performance and guidance during the Q&A. But now, let me turn the call back over to Bob for his closing comments.

Thanks, Bob. Despite the unusually challenging year that we encountered in 2010, given the global economic environment, the impact of not only U.S. healthcare reform but healthcare around the world and of course, the Plasma Protein market dynamics, we accomplished the following during the year: we achieved organic sales growth of 3% and adjusted earnings per diluted share, it increased by 5%; we set a record level of cash flow of more than $3 billion, and as Bob mentioned, when adjusting for the pension contributions in both years, an 11% increase over 2009, a 20% increase in free cash flow, 2010 versus 2009; we returned significant value to our shareholders with share buybacks and dividend increases; importantly, we meaningfully advanced our pipeline on numerous fronts, and our organization, I think, responded to an evolving and demanding environment with new strategies and important organization changes aimed at enhancing our commercial, operational and scientific effectiveness. As a result, in 2010, we strengthened our foundation, and we remain very confident in the long-term growth prospects of the company. So with that, why don't we open the call to Q&A?

[Operator Instructions] Our first question comes from Mike Weinstein of JPMorgan.

Bob, let me start with just kind of the big picture view of this -- 2010 was a tough year, 2011 is also going to be a tough year for the company, bit of a transition year. And I want to get your view as you kind of go from these years of sub-par, or below what you historically viewed as adequate revenue growth and single-digit type DTS growth, to a higher outlook as you go forward. And maybe just walk us through -- I guess, what I'm asking is maybe just walk us through your view on how do you go from this historically sub-par performance for Baxter to a higher level of revenue and earnings growth? And what drives that acceleration as you look out to '12 and '13?

Well, there's several pieces. Let me start, and then I'll ask Bob Hombach, maybe, to support my comments. Obviously, as we move through 2012, we will have absorbed in the base, the vast majority of all the impacts from healthcare reform. So fundamentally, amounting to a rebasing, if you will, of the business as we move forward. The second high leverage impact, of course, is the significant change year-to-year on the dynamics of the Plasma Protein business, really the biggest negative year-to-year impact on the topline 2010 versus 2009. And with the encouraging signs we're seeing in stabilization of our share, I think the successful execution of our contracting strategies and so on, and then of course, looking forward through new administration modalities, expanded label indications and so on, even as we closed out 2010, this business is fundamentally rebased. And of course, that's independent from whatever benefit we may derive from one of our competitors, challenges, as you know. So there's a number of other factors. But without getting too granular, I think just reflecting healthcare reform impact almost fully in our base. We do have the device piece, as you know, going forward, but it's relatively modest compared to what we will have absorbed. And then the turnaround of the Plasma Protein business. Those are the most important factors. The last thing I would say, and then I'm going to ask Bob and Mary Kay maybe to add on here because there's a number of dynamics, and I don't want to miss anything, our historical growth, including this year, has largely not been impacted by any new products. And in my closing comments, I mentioned, in 2010, we did move much closer to now meaningful new product launches, which going forward, not just in 2012 but beyond, the impact of new products going forward. So those would be the three highest leverage variables that I would think of, Mike, that would address your question. Bob, Mary Kay, would you add to that?

Yes. I would point out some of the headwinds that not only affect our ability to grow the top line at where we historically liked to be growing here in 2011, but also drive the operating leverage that we've historically been driving as well. We've mentioned it many times, but probably worth spending just a moment to reiterate. We'll anniversary the impact of the U.K. tenders we moved through the course of this year, but on the front part of the year in particular, given the implementation timeframe in the U.K. That will be a drag on top line growth and operating leverage. We had pretty significant revenues related to vaccines in Q1 of last year that, again, will be a growth headwind in the front part of 2011. The pricing touchups we implemented in the U.S. and Plasma business were largely a back half event, so it will take some time to work that through and get that fully into our base during the front half of this year. And then finally, the manufacturing and efficiencies in the Plasma business as we slowed down collections and production during the front part, particularly of 2010 as we've talked about, that'll be a drag on margin or operating leverage in the front half of 2011. So many of these headwind issues work their way through our base during the course of 2011. As we move into 2012, I think the underlying dynamic that we've been driving in the past of driving higher margin products going faster than the corporate average, to drive operating leverage, I think that dynamic is still very much there, but it will take a while for that to emerge as we work through these headwinds.

And the last dynamic that I would mention, as I was listening to Bob, that I want to mention too, Mike, is really the acceleration of the growth of our Medical Products business, particularly the historical Medical Delivery business. As you know, we continued to have some exposure and erosion in our Infusion Systems business with the COLLEAGUEs, SIGMA conversion and the like, although we're quite encouraged as to how that's going. But the rest of the business is actually doing very well. So compared to the historical sales growth, that particular business moving forward, as evidenced in '10 and our guidance for '11, is actually growing at a faster rate. So we test a lot of stuff there, but those are the primary dynamics.

Let me just follow that up. So if you look at 2011, and we look at some of the dynamics particularly on your gross margin line, and as we transition from '11 to '12 and '13, without the benefit of some of the bigger new pipeline stuff that you talked about, particularly in the hemophilia, your view is that there's a natural mix benefit that should drive gross margins higher as we go to '12, '13? Just beyond the anniversary-ing of some of these one-time event in 2011.

Yes, I mean, there's product mix and business mix dynamics. Obviously, the BioScience business recovers generally higher margins across the board. I get driven by, obviously, the Plasma turnaround. That's a positive mix effect on the top line. And I don't think you can overstate the impact too on the gross margin line, relative to the manufacturing inefficiencies as a result of lowering our throughput in both collection and fractionation and how that plays through the P&L, particularly in the first half of 2011, which is one of the reasons we're calling for the rebounding of gross margin percentages later in the year. Bob, do you want to add with Mary Kay? Either one of you.

Yes, I think a couple of things. First, the fact that we're able to hold markets flat in 2011 versus 2010 despite the significant headwinds that I've mentioned: the U.K. tender impact, the higher margin vaccine sales in the 2010 base, pricing touchups, the manufacturing rollout. I think that is indicative of -- there's a lot of mixed benefit and some selective pricing opportunities here that are all setting that and allow us to maintain margin. I'd also say that the 50.0% margin you see in the fourth quarter is certainly the trough, the low-end of where we think things are going to be, the most significant impact that we expect to see here in going forward. We should see improving margins as we move through 2011.

Kristen Stewart is on the line from Deutsche Bank.

Thanks for the color. Just in terms of the restructuring initiatives, could you just comment kind of business, kind of the first wave that we should expect to see? Or are there other opportunities down the road, do you feel in combining businesses.

Yes. In terms of the restructuring impact and some of the charges, we don't have anything specifically planned, Kristen, beyond the impact of what fundamentally we've already implemented. I would tell you, there's not a lot in there that's associated with the recent reorganization and integration of the Renal and Medication Delivery business. But again, as I commented last quarter, the fundamental driver for that was less about structural cost and more about effectiveness. Both in terms of R&D and effectiveness and operational supply chain impact and so on. Not to say that going forward in the business or all of our business, as you know, we're always vigilant in looking for ways to take out structural costs and overhead costs. But we don't have anything specific planned beyond what we've communicated this morning.

And then just on the infusion pump side, it sounds like you're able to ramp up on the manufacturing side. And you said that you were able to capture it sounds like most of the business that was up in the quarter? Is that correct?

Yes. I mean look, it's still early. First of all, we've been very pleased, as I mentioned in my prepared comments, of SIGMA's ability to ramp up, okay? I mean, they've really done a great job of ramping up, and we're very encouraged by that. And then in terms of the dynamics in the marketplace, the reality is the consent order was finalized, was it June or July? I guess in the summer. And as we start 2011, you can count the number of accounts that we've lost to competition, frankly, on one hand. I mean, it hasn't been that much. So we're very pleased with not only the ramp up by SIGMA, but the receptiveness by our customers in the marketplace. So we still have a long ways to go on this. But thus far, again, we're pleased with how it's evolving.

And then just a quick one on the pharma tax, sorry if I missed this. Do you guys quantify what that was from an earnings perspective for the full year embedded within the guidance?

Yes. $40 million, and it's in the SG&A.

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

Just a quick question on, a financial one, on currency. Relative to some of your competitors who are positioned globally, your kind of impact from currency this year is a little lower than we would have expected. Maybe just the various specific dynamics impacting you in '11 are based on mix that you are seeing that's materially different from '10?

That's a Bob Hombach question.

No. Certainly, we faced a number of headwinds in our European business this year. So our European sales as a percent of total would be lower than it had been historically and that may be, probably, the single biggest driver as to why the impact on us maybe a little bit different. The vaccine issue with H1N1 pandemic and the U.K. tender, et cetera, those certainly manifested themselves within our European footprint and so on. I would attribute it to that.

David, Mary Kay here. I would say that too, our guidance reflects a slight drag in gross margin due to currency. We frequently talked about how on the bottom line, given our natural hedge position, this is really immaterial.

And then maybe a Bob Parkinson question. Bob, talking about the market environment for Plasma heading into '11, there's sort of a couple of dynamics going on. One of course is a competitor dynamic, which seems to be helping the market. But there does seem to be underlying improvement in the market. Maybe talk about sort of those two different forces, what your expectations are for sort of that competitor loss in 2011, and then what impact this could have, both on general market improvement or competitor improvement as you think about pricing for '11 and '12.

So separate issues. Let's take the competitive issue and just set it aside for a second, and look at, maybe discuss our assessment of the current market dynamics, which I think are pretty consistent with what we communicated the last quarter. I mean, antibiotic therapy is the biggest piece. Our current assessment of market growth in the U.S., as we said before, is like mid-single digits. There are bouts and certainly, it's in a faster rate, high-single digits o U.S., which is encouraging. And we anticipate that continuing. And obviously, our longer-term strategy then, from a share point of view, is to augment that through differentiation with HyQ and new indications and all of those things. So as I commented, we're pleased with how the market growth in general, both U.S. and o U.S., remains quite solid. And again, I think very encouraging outlook for that business long-term. The Octopharma piece -- excuse me, the competitive piece that we're dealing with, I'm not sure. Mary Kay, do we talk about the specific amounts that we...

Yes.

I want you to comment on to make sure I don't quote the wrong number.

In the fourth quarter, the Octapharma benefit was in the $20 million to $30 million range from a top line perspective. And we are currently expecting that same range of sales in the first half of the year, so for each of the two quarters, for a total of about $40 million to $60 million. We do expect Octapharma, based on what they said, to come back in the back half of this year. At least that's what our guidance is now contemplating. So depending on that, situation, there could be further upside in the back half of the year. But we didn't think it was prudent at this point to really build that into our guidance for the year.

And then Bob, just one last question on capital deployment. You have increased your buyback percentage, your annual allocation, by about 25%. You also have talked about potential smaller acquisitions heading into '11 and '12. Talk to us about how you're seeing capital deployment here at the stock levels as it relates to your shares versus external acquisitions and growth.

Well, I mean clearly, our position allows us to continue with our share buyback program, and yet still have flexibility to do the kinds of deals that we've talked about, which is still our intent if we can find them. So David, I would say, fundamentally, our overall capital allocation construct, if you will, hasn't changed at all. And our continuing improving financial position allows us, if anything, even more flexibility in the latitude going forward than for perhaps what we had over the last couple of years. So no big change in that regard. Bob, I don't know if you want to add anything?

Yes, I think given the strength of our current cash position and some flexibility we have within our current ratings on the debt side, we can continue to do $1 billion net in buyback and fund the type of acquisitions that we've talked about.

Larry Keusch from Morgan Keegan is on the line with the question.

Just a couple of quick ones for you. And I want to clarify one first, Bob, on what you talked about relative to the culmination of Med Del and Renal. I just want to be clear. I know that you're saying that you're look at not anticipating any further restructuring at this point, but I just want to get a sense as Rob Davis actually completed his review of the infrastructure and the combination of those two businesses?

No, I never say he's completed it, nor I don't think any of our other business heads are -- I mean look, that's an ongoing process. Now your question, of course, is with the integration of the two. There's kind of a first phase of that. I think Rob's got his arms around that. But beyond the enhanced effectiveness in terms of R&D productivity and so on, a lot of the efficiencies are not necessarily structural costs in a traditional definition, but things related to supply chain manufacturing and so on, which is another piece of it. So look, we're going to continue to look not only in that area but other areas as we've always done for opportunity to take structural cost and redirect our SG&A spending into promotion marketing and so on. But no, I wouldn't say that Rob is done, but back, I think it was Kristen Stewart's question, we don't have anything, Larry, defined going forward.

And then just two other quick ones, just trying to make sure I fully understand the PD issue in Europe. And I know you guys, this is obviously new and probably, still evolving. But can you help us understand? I think, Bob, or one of you guys indicated that -- one of the Bobs indicated that you expect to resolve this in the coming months. But can you help us understand sort of what you're assuming for incremental costs associated with this, in terms of shipping products in, et cetera?

Yes. There'll be some incremental costs incurred. I would say, Larry, it's largely going to be associated with what I described as plant inefficiencies, or support costs that we need to put into the Castlebar facility as we complete the root cause and get this line back up fully. Clearly, will be some incremental logistics or distribution costs. The most important objective here is to ensure that these patients are able to remain on therapy and remain on Baxter PD products on therapy. And we're fortunate enough to be in a position where through our other manufacturing sites around the world that -- and we've worked very collaboratively with the European Medicines Agency to work out a process where we can bring product and to ensure that those patients stay on therapy. So I mean strategically, that's the most important thing. Having said that there, there will be some incremental cost incurred because of this dynamic, both in terms of plant costs and logistics costs. Bob Hombach cited that in his comments. I don't know that we've aggregated that specifically.

About $10 million in the quarter.

For about $10 in the quarter. That's why I said in my prepared comments, Larry, financially, this is a manageable thing.

And then lastly, just any update, when you start the Phase I trial, the long-acting factor A for the presentation of the HyQ data?

I'm not sure on the timing on the Phase I for the longer-acting. It'll be sometime this year. We do have to formulate our I&D and submit that to the FDA, have them look at that, accept it and then basically start with the trial. So that's probably several months away, Larry. In terms of the HyQ data, we just finished the trial at the end of December. So we're currently pulling together the data and doing the analysis and evaluating opportunities to disclose that to you folks.

Bruce Nudell of UBS is on the line with a question.

Could you guys like just comment on -- you gave a nice view of what you felt the antibody market was doing, US, ex-US. Could you give a similar commentary on the plasma protein space, and any extraneous factors that are influencing your -- or idiosyncratic factors that are influencing your guidance in plasma proteins?

Both PD Factor VIII and albumin specifically.

Or just generally the plasma proteins, your ARALAST and FEIBA VH have been great for you...

Yes, it's a varying degree of dynamics in the U.S. We've faced some challenges in this space over the last several years. We expect that to continue, certainly the conversion from PD Factor VIII to recombinant has impacted this space for us. Outside the U.S, we've had some success especially in emerging markets in the back half of 2010. And so growing off that bases, it's going to create a bit of a challenge for us in 2011. So nothing dramatic in terms of changing market dynamics. Mary Kay?

I mean, generally speaking, albumin and PD Factor VIII are growing in low-single digits. Bruce, PD Factor VIII, the dynamic here in the U.S., is that we’re seeing the conversion to recombinant therapies. We don't have a von Willebrand factor in our PD Factor VIII, so many of our other competitors are selling their products for that particular indication. Albumin, low-single digits. It's been a little bit challenged here in the U.S., but we continue to see very strong double-digit growth outside the U.S., particularly in China. I'd mentioned ARALAST and Alpha-1 market, now with the addition of GLASSIA. That continues to grow in double digits. So as Bob mentioned, there's a lot of different dynamics because each of these different products are geared towards the different markets. But in general, when you weigh all that together, we pretty much come up with low- to mid-single digit growth.

And we're continuing to -- we're bringing on capacity, continuing to convert as much of our Albumin business to our proprietary, unique, Flexbumin container, Bruce, which we think will help solidify our position going forward as a result of that.

One of the things that probably isn't appreciated about Baxter is your internal expertise about recombinant Factor VIIIs and your ability to kind of pre-clinically test things. One of the overhangs on the stock seems to be the question about the Biogen Idec threat. And is there anything specifically about that structure of long-lasting recombinant Factor VIII that you think makes you more sanguine about its competitive threat to you, based on your preclinical testing paradigms, et cetera?

First, I would never say we're sanguine about any competitive development, okay? And I wouldn't say about this technology. But having said that, you’re right. I mean, we have a very robust and expansive assessment capability, type assessment capability, in a number of areas. But probably none stronger than the recombinant hemophilia space. And we've commented on that before that particular competitive development that you've mentioned, and I wouldn't have anything to add to that today. I mean the data that has emerged on that thus far is quite limited as you know. It's very early. As a non-scientist, I'm not going to weigh in on -- nor am I able to weigh in on the more technical scientific aspects of the actual technology and so on. Norbert, Dr. Riedel, has done that in a number of forms. And so it's the kind of thing that is so early. And like any early things, I think it's high-risk. But having said all that, I'll kind of maybe close where I started. I wouldn't suggest we're sanguine about anything.

Yes, Bruce, I'll also add. I mean, Bob mentioned in his opening comments, we screened over the years, a hundred candidate molecules, and we found one that we're moving into or Phase I clinical trial this year.

On the PEGylated.

On the PEGylated. And ADVATE really is the gold standard here in terms of its efficacy, its safety level, its inhibitor development, breakthrough bleeds. So it is a very, very high standard, I think, that the competition will have to meet. And that's something that we'll continue to look at when they come out with their Phase I data. As you know, they've moved into Phase III, and we'll be interested to see what their profile looks like.

And the other thing I would interject -- Bruce, you said, maybe a lot of people don't understand our position in this market as well as they might, a fact that I find very compelling and we've talked about this before, is that Baxter's market share on patients, new patients that go on therapy, previously untreated patients in virtually every, I think, every developed market around the world has higher, and in some cases, meaningfully higher than our overall markets share. And so when we talk about ADVATE being the gold standard, I think that's more than just our opinion and our view. I think it's substantiated by the early adopters that go on therapy. And I think that's a very compelling fact.

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

Just following up on some of the questions that Bruce was asking and some of the other questions. It seems to me, obviously, a key potential value driver for Baxter is the development of your long-term pipeline. So as we look at 2011, and then maybe into early 2012, could you just talk to some of the milestones or data releases or anything that is upcoming this year or early next that would help us understand the opportunity for Sub-Q, for HyQ, for your angina product, which I think has gotten very little attention, for Alzheimer's. You've talked about a little bit of some of these things over the course of the call, but I was just wondering if you could just walk through some of those and any potential milestones in 2011, or early '12 that, again, might help us think about the potential for those products longer-term.

Okay. Well, Bob, let me take a stab at this because that's pretty expansive, and I think I'm sure I'll miss some things and then Mary Kay and Bob can kind of pipe in. First of all, we're hopeful that in the first half of 2011, we can get approval for the 10% Sub-Q. This is without the HYLENEX technology, which in and of itself, will be meaningful. We're looking to file the HyQ. And I think I mentioned this in my comments, 10% of HyQ, we're looking to file that in the second half of this year. We're also targeting to file in the second quarter of this year, TISSEEL, for a broad hemostasis indication, which could be significant for us. We're going to complete the trials I think late this year. Mary Kay, correct me if I'm wrong on the end MMN indication. Is that, right? Just to make sure I have. We're now entering Phase III in the second quarter, soon to enter Phase III in the second quarter of this year on our recombinant von Willebrands, which we're excited about. As I mentioned in my prepared comments, we're going to complete enrollment in the third quarter of this year, on the First Phase pre-trial for Alzheimer's and targeting to initiate the second Phase III trial sometime in the second half of the year.

I think that the home Hemodialysis clinical trial will begin mid this year since the IDE approval.

I mean, really, Bob, this is the basis of my comment when I said kind of an indirect accomplishment. I suppose in 2010, as with all the challenges we faced, we did move one year closer to what I think is a very exciting pipeline. And it's something you can reach out, almost reach out and grab now. So we're excited about that. I should also mention our key product ADVATE. We launched ADVATE in Brazil in the third quarter of 2010. We're hopeful that we can launch it in Russia this year. Planning on launching ADVATE in China in 2012. And another exciting product launch that we have approval for and will be launching shortly in Japan, which is a big anesthesia market, is our proprietary Suprane. So we'll stop there. That's a lot of stuff. But I think it's pretty encouraging.

Any sense as to when we might get the next level of data on the angina product, that I know we've seen Phase II data on it? Is that more 24.12?

We're having some discussions here with the FDA. And hopefully, we'll have some information on that before too long. We haven't talked about it, you're right. We continue to be very enthusiastic about that. But we don't want to get ahead of ourselves until we get a little more definition in terms of our interaction with the agency on that. So maybe we'll have something more specific there before too long.

Just quickly on Octapharma guidance that you gave for the first half of this year. Is there anything unique about the way we should be thinking about the drop-through to EPS? Is the incremental margin on that business any greater or less than you would imagine, based on the margins that you have in those particular businesses?

I wouldn't assume the margins any different fundamentally. So you get a sense of the drop through there.

Although Bob, I would mention that a lot of that impact is going to be somewhat muted by the pricing touchup annualization effect.

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

I wanted just to follow up -- Bob Hombach made a bit of comment in the prepared remarks regarding the restructuring. And I think you said you expected annual savings starting in 2012 in the $0.15 range. Do we start to realize any of that in 2011? And what's the right way to think about this? I guess sort of the $100 million to $120 million, maybe could help us with the timing of that a little bit?

Two questions Bob, I want you to go through to that in some detail.

The $0.15, the actions that we've talked about, we've already taken a number of them and will continue throughout the course of 2011. And so we expect them, three quarters of that benefit, to be realized in 2011. The remainder to come in, in 2012.

So it's there's three quarters of that in 2011 will be realized?

Yes.

And then maybe switching to the top line side of things. Obviously, there are some potential tailwinds to the Antibody Therapy businesses as with respect to the launch of Sub-Q and the approval -- the recent 30-gram approvals. To what extent is that sort of contemplated in your guidance? And then maybe conceptually, the way you think about new product launches as it's factored into the numbers you've provided this morning.

Well I would say generally, we adopt a pretty conservative position in the sense that until you actually have the approval, it’s speculative. So we don't want to get out ahead of ourselves obviously, until the 30 grams has been approved. So you can wear a little better position there. So I think the impact on our guidance for 2011 for those particular line extensions is really not that significant.

And then lastly, just to clarify on the guidance for the first quarter, I think you said the 2% to 3% reported in flat constant currency or reverse?

At constant currency is 2% to 3%. As reported, it would be flat.

Okay, and it's 2% to 3% constant currency and reported for the full year?

2% to 3%, right. Both on an adjusted basis and at a constant currency.

Rick Wise of Leerink Swann is on the line with a question.

Maybe follow up on that cost-cutting side of things. Looking at it at another angle, SG&A as a percentage of sales obviously is getting down toward 20%. Just to use your word, Bob, about the rebasing and sort of the New World, what is the new normal as we think out? I know you're not projecting out for the next one, two, three years. But can SG&A, as you grow, and mix and you get the cost reduction, can it be in that sub-20% range? Is 19% to 20% the new normal for Baxter longer-term?

I don't know that I'd say 19% to 20%, but I think it certainly can remain down in the level in which it is right now. But I think the two dynamics, which you know, Rick, are with some of the restructuring and severance and the charges and so on. Headcount, in fact. Our commitment is to continue to add sales resources. There may be a selective area here that are like fundamentally not only are we not cutting back on sales resources, we're committed to increase those just as we're committed to increase the number of scientists that support our pipeline of development, which is a reason why making sure we are very rigorous on other indirect structural costs is so critical, it becomes the funding mechanism to allow us on the other hand to accelerate our investment strategically. How’s this offset each other by a year, I'm not going to get it to that, but I think we could probably keep it in a lower level. Bob, why don't you add to this?

While we did a very good job of leveraging SG&A, we do have a couple of challenges in 2011 that are going to put pressure on that ratio. We talked about the fact of the former tax of $40 million is going to book and that the SG&A line. We also, like many other companies with the define benefit plan, have a pretty significant uptick in pension and OPEB expenses. And so that's going to equate about $0.08 across the P&L in 2011 that we're absorbing here related to pension and OPEB incrementally, which is certainly is going to accept the SG&A line as well to some degree. So while we're benefiting from the charge and some of the efficiencies were going after, were also getting some headwinds here at the SG&A line.

Coming back to the SIGMA pump ramp and the whole transition from COLLEAGUE, Bob, just listening to your words about how you've seen an accelerated order ramp -- and you commented later that whatever accounts lost on one hand kind of thing, minimizing share loss impact, can you help us think through? Is that what we should expect to hear from you in the quarters throughout the year? Is that what you expect? Is that what's dialed into your assumptions that share loss, you hope and believe, will be minimal in 2011 and '12?

Yes. Let me see if I can address it this way. We hope that, that will continue. We have plans, I'm sure erosion, into our 2011 plan and our guidance, Rick, okay. It's why I said earlier, in response to the earlier question, while we are very encouraged by the acceptance levels of the product in the marketplace thus far and the fact, as you've pointed out, we've lost very few accounts. I think it's still early, and we have to let that manifest itself. But we're doing everything that we can to make sure that frankly, the successes we've enjoyed to date are extended. And if so, then that'll be positive. But it's still early in the game.

And last, Bob, tricky question to phrase on a public conference call, but quality issues are obviously difficult for the entire industry these days. The FDA, it's a challenging environment. But how can -- can you talk about your confidence in your quality system that maybe can help reduce the number of some of these issues that come up inevitably in a large business? How confident are you that there will be fewer of these going forward than maybe we've seen in the past? But you can rephrase the question if you like.

It's a fair question, Rick. I mean, clearly, our aspiration is to have none of these. I also would say we need to get better. I also believe we're much better today than we were. I think the development of our quality systems, central quality systems, which we referred to as 1Qsys which is really a top down Baxter system that overlays all of our businesses, which we began implementing two or three years back, is already and will pay dividends going forward. This all happening in a broader external environment, which is increasingly challenging, and I think appropriately so. So that's the external environment. We have made a great progress. Clearly, I'm not happy to have to communicate that we got a warning letter. It hasn't been posted, which is why I wanted to make sure I took advantage of the opportunity this morning to communicate that to everyone. Like to say, our aspiration is zero defect here. We're better than we were, but we have to get better. And beyond that, I really can't add a lot.

Our next question, Matt Miksic with Piper Jaffray.

I think most of the topics have been pretty well worked over. I did have one clarification on guidance, though. Your guidance for the year, Bob, I guess for Hombach, includes the divestiture of your Generic business. That's the $200 million business. Is that right?

That's correct, yes.

And ex that growth, just run through again -- and I apologize, I was juggling some calls here -- but the ex, the divestiture, the growth on the top line, and if you can, quantify the impact on the bottom line?

Sure. Top line, we said 2% to 3% with the impact. Excluding the impact, 4% to 5% topline growth organic for 2011. Bottom line for this business was very minimal. It was a low-margin business, which was one of the reasons why we were looking to divest it. And so virtually no impact on the bottom line.

And that within Medication Delivery, we said that our guidance is low-single digit growth in that business. Excluding the divestiture growth would've been in the mid-single digits consistent with performance that we saw in 2010.

And then on the Sub-Q product, hoping for approval later in the year. Is that something that you are ramping on now? I know, Bob Parkinson, you mentioned you don't want to get too far out in front of that approval. But is that something that you are -- do you start building, given a long cycle of production in Plasma -- building ahead or no?

No.

Remember, Matt, too that Sub-Q is basically just GAMMAGARD LIQUID delivered in a different administration way. So there's no change to the product. So it's not anything that we have to ramp up production on.

Yes, I mean, based on the packaged offering and kit-ing and so on and so forth, I mean that's the kind of thing we can respond fairly quickly too. So it doesn’t make a lot of sense to be building finished inventory with the components and so on at this stage. I think we can respond fairly quickly if and when we get our approval.

And then finally, this TISSEEL product that you mentioned for hemostasis, anything you can tell us about -- just the size of that opportunity, what that could mean, whether it comes this year or late this year would be helpful?

We have quantified that and communicated, I know we've quantified and communicated that.

We have. But we have several indications that are already approving. Clearly, the competition in this area, Matt, has the broad hemostasis indication. So we are a little bit put at a compromised position. So it would help in terms of share gains to have this particular indication.

And TISSEEL is a meaningfully sized product for us. So returning to growth with this new indication would be helpful.

So it's incremental, not a game changer necessarily?

Correct.

Our final question comes from Glenn Novarro with RBC Capital Markets.

Two questions. First, on IVIG. Bob, I was hoping you could give us some commentary on pricing. The reason I'm asking is when we do our channel checks, because of the Octapharma issue, we're being told that the market here in the first half of the year will soon go into an undersupply situation and that pricing should start to move higher. So any thoughts there, and do you have pricing moving up in your guidance is question one? And then the second question has to do with the recombinant U.S. sales. 4Q did come in below our expectations. I know there's some inventory adjustments going on, but is there anything else going on in terms of share or pricing in the U.S. market?

All right, let me tackle the first one, which probably won't be too satisfying to you, Glenn, and I'll ask Mary Kay.

I know you don't like the pricing, but anything...

I guess that's for a lot of reasons. I'm just not going to give pricing. I think it's early to see how all this cascades out. I certainly understand why you're asking the question but I'm not going to go there.

I think it's fair to say that that supply should be tight. I mean our expectation is we're going to be tight, meeting demand we see for our products and how that plays in. We'll see.

And I would also mentioned, Glenn, that we did finalize our negotiations last year, as you know, as we worked through our touch up pricing and last it into pricing in the U.S. for 2011. So that's pretty much -- I wouldn't view Octapharma as a situation as -- a significant pricing opportunity here in the U.S., but it may perhaps drive some flexibility outside the U.S.

[indiscernible] The second part of glance question?

I mean, as we indicated in the Q3 call, we did expect to see some de-stocking in the fourth quarter. And we did in fact, see that. We're largely where we wanted to be, and we expect to be able to grow roughly in line with the market in 2011 for recombinant Factor VIII in the U.S.

So recombinant U.S. came pretty much in line with what you were expecting then?

Yes.

That is correct.

This concludes today's conference call with Baxter International. Thank you for participating.