Baxter International Inc. (BAX) Q4 2014 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.

Thanks, Sam. Good morning, everyone, and welcome to our Q4 2014 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; Ludwig Hantson, President, BioScience; 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, and thank you all for calling in. 2014 was a great year for our company and I'm very pleased with our achievements and progress we've made from a financial, operational, scientific and strategic perspective. First, we were successful in meeting or exceeding our financial objectives with accelerated growth in sales, solid earnings and significant cash flow. And we've consistently executed a disciplined capital allocation strategy that balances reinvestment in the business with returning value to shareholders in the form of increased dividends and share repurchases. Positive momentum continues to build across the commercial franchises as we extend our global reach with the core portfolio, enhance care with the introduction of several new products and position both businesses for sustained success. We're balancing this with investments in commercial and operational excellence as well as manufacturing capacity to improve our competitive position and support the solid underlying fundamentals in future demand that we foresee for Baxter's products and therapies across the globe. We're also transforming innovation and advancing the pipeline with the achievement of significant clinical and regulatory milestones, while expanding the portfolio through acquisitions and collaborations. And most notably, in 2014, we reached a significant milestone in Baxter's history as we remain committed to driving long-term value for shareholders with the creation of 2 independent publicly traded companies in mid-2015, providing investors with 2 unique and compelling investment opportunities. Before turning the call over to Bob Hombach for a discussion of the financial results and future outlook, let me take just a few minutes to reflect on a number of the achievements from the past year. First, strong sales performance reflects our strategic focus on improving access and treatment standards, broadening our global presence while investing to support future growth. Baxter's worldwide revenues totaled $16.7 billion in 2014, advancing 11% or 5%, excluding Gambro and foreign exchange. International sales, representing nearly 60% of Baxter's total revenues, were augmented by significant growth in emerging markets with sales in the BRIC countries advancing by more than 15%. Continued emerging market penetration represents a significant opportunity for both businesses going forward as many products and therapies remain underpenetrated, diagnosed or treated. For example, in Medical Products, we continue to drive global penetration for higher-margin specialty products, including those from BioSurgery and nutrition franchises, with the expanded launches of FLOSEAL in Japan, HEMOPATCH in Europe and our proprietary triple-chamber nutritional containers in several new markets like China, Brazil, Australia and France. To address strong demand across our hospital products and renal portfolio, we announced plans to invest approximately $600 million to expand capacity and enhance production capabilities in several key markets and product areas, representing some of the greatest opportunities for future growth. These include investments in Asia and at our North Carolina facility to support production of peritoneal dialysis and intravenous solutions. We're also executing on expansion plans at our state-of-the-art manufacturing facility in Opelika, Alabama to meet the growing global demand for dialyzers. In addition, we've successfully executed on the integration of Gambro, achieving the commercial and cost benefits that we anticipated and further extending our global reach with a comprehensive renal therapies portfolio. In BioScience, we're building upon our global leadership position in hemophilia, as evidenced by our strong double-digit revenue growth for 2014. Highlights for this franchise include: supporting rising standards of care for approximately 100,000 patients, more than 1/4 of the world's hemophilia A patients in key markets like the U.K., Australia, Brazil, Russia and China with recent product approvals, launches and multiyear tender awards. Second, driving personalized care with the launch of BAXJECT III reconstitution system and myPKFit in Europe, Canada and Japan. And thirdly, the European regulatory approval of a new manufacturing facility in Singapore for the production of recombinant proteins, including ADVATE and eventually BAX 855. Within our BioTherapeutics franchise, we remain committed to meeting patient needs by enhancing our plasma manufacturing footprint in a flexible and cost-efficient manner. We've increased capacity at our Los Angeles and Vienna, Austria plasma fractionation facilities. We're investing in a new state-of-the-art facility in Covington, Georgia, and we're making progress with the Sanquin collaboration. These efforts have led to improved growth throughout 2014, capping the year off with strong double-digit growth for this franchise during the fourth quarter. As you know, we've significantly ramped up R&D over the last several years and are now beginning to realize the benefits. In 2014, the company received regulatory approval for almost a dozen new products and therapies. We also announced an array of significant pipeline achievements and advanced many of our R&D collaborations with partners. In Medical Products, we obtained 510(k) clearance for the next-generation SIGMA Spectrum Infusion Pump in the United States and further advanced development of AMIA and HomeChoice Claria, our latest automated PD systems for the U.S. and European markets. In BioScience, we received FDA approval of several key therapies, including HYQVIA, which we launched in the United States in the fourth quarter. HYQVIA is a transformational subcutaneous treatment for adult patients with primary immunodeficiency. Our launch is progressing well with more than 400 physicians currently prescribing the therapy. We were granted FDA approval for OBIZUR, a treatment for patients with acquired hemophilia A, a very rare and potentially life-threatening acute bleeding disorder as well as the pediatric indication for RIXUBIS for the treatment of hemophilia B. In addition, we recently received European approval for RIXUBIS for both pediatric and adult patients. During 2014, we achieved several regulatory milestones, including positive top line results from the Phase III pivotal clinical trial of BAX 855, an extended half-life recombinant Factor VIII treatment for hemophilia A based on ADVATE. We also met the primary efficacy endpoint in the Phase III study of BAX 111, the first standalone recombinant treatment for von Willebrand disease. And late last year, we successfully completed the FDA regulatory submissions for both BAX 855 and BAX 111 with approvals expected later in 2015. In addition to our internal R&D accomplishments, we're collaborating with partners to advance R&D programs in new disease areas, which capitalize on our core technical capabilities, expertise and global channel. These collaborations include the partnership with Coherus Biosciences and the initiation of 2 Phase III trials for an investigational etanercept biosimilar in rheumatoid arthritis and chronic plaque psoriasis and advancement of pivotal trials for pacritinib with our partner, CTI BioPharma. Pacritinib is a novel oral JAK2/FLT3 inhibitor for patients with myelofibrosis, a chronic malignant bone marrow disorder, and we expect clinical trials results for PERSIST-1 later in the first quarter of 2015. In 2014, we augmented internal development programs with select acquisitions and new collaborations. Within Medical Products, we entered an exclusive agreement with Rockwell Medical for their leading hemodialysis concentrates in select markets, which enhances Baxter's comprehensive range of therapeutic options across home, in-center and hospital settings for patients with end-stage renal disease. And earlier this year, we acquired ICNet, a global leader in surveillance and case management software used in hospitals, which builds on Baxter's unique expertise at hospital pharmacy operations. In BioScience, the organization continues to enhance its focus on specific disease areas centered on its expertise in hematology, oncology and immunology as well as through technology platforms, including gene therapy and biosimilars. During 2014, we bolstered the portfolio with acquisitions like AesRx and Chatham Therapeutics and extended our collaboration with Xenetic Biosciences. The AesRx acquisition expands our reach in hematology with BAX 555, an investigational oral prophylactic treatment being evaluated in a Phase II clinical trial for patients with sickle cell anemia. With Chatham Therapeutics' acquisition, we obtained their development gene therapy preclinical hemophilia A and ongoing hemophilia B program, which is currently in a Phase I/II trial. This approach has the potential to redefine the concept of longer-acting therapy, and we plan this year additional data on this program at the European Association for Hemophilia and Allied Disorders in Helsinki in February. The exclusive agreement with Xenetic Biosciences is a partnership for the development of BAX 826, an extended half-life recombinant Factor VIII therapy for hemophilia A. BAX 826 is currently in preclinical development as a treatment that may be administered less frequently, potentially at once-weekly intervals without compromising efficacy. Also in BioScience, we're building on the strategic decision to expand our presence in the area of hematology/oncology, leveraging our heritage of success in developing new therapies that treat unmet medical needs for patients with rare diseases. We now have several oncology assets, including our most advanced asset, MM-398, for pancreatic cancer, which will be submitted for approval in markets outside the U.S. and Taiwan in 2015 as well as pacritinib mentioned earlier. Each of these new therapies offers the potential for numerous additional indications for patients with a variety of hematologic and solid malignancies. In summary, our core portfolio remains strong, and we continue to benefit from our focus on life-saving therapies, along with strong global channels that provide a platform for ongoing geographic expansion and growth. We're investing for the future to enhance our commercial, operational and scientific effectiveness. Our pipeline remains robust, and we've accelerated the pace of business development with opportunities that are aligned with our core strengths. And we're committed to overcoming the challenges presented by the external economic environment, while enhancing value through improved performance and execution. So with that, let me now turn the call over to Bob Hombach for a discussion on our 2014 financial results and outlook. And when Bob concludes his commentary, I'll provide an update on the spinoff of our biopharmaceuticals business before opening up the call for Q&A. Bob?

Thanks, Bob, and good morning, everyone. Adjusted earnings per diluted share from continuing operations increased 2% in the fourth quarter to $1.34, which exceeded our previously issued guidance range of $1.30 to $1.33 per share. These results reflect strong revenue growth across several key franchises and continued investments in operations and research and development. As we mentioned in the press release, GAAP earnings of $1.74 per diluted share reflects both earnings and an after-tax gain from the recently divested vaccines franchise totaling $429 million or $0.78 per diluted share. In addition, our GAAP results reflect after-tax special items totaling $209 million or $0.38 per diluted share for intangible amortization costs associated with business development and contingent milestone payments, integration of the company's acquisition of Gambro AB and Baxter's planned separation. Now let me briefly walk you through the P&L by line item before turning to the financial outlook for 2015. Starting with sales. Worldwide sales of approximately $4.5 billion advanced 3% on a reported basis. On a constant currency basis, sales increased 7%, reflecting a sequential improvement in growth over the last 4 quarters from an organic perspective. This growth also favorably compares to our guidance for the quarter of approximately 3%. Each product category contributed to the overachievement with particular strength coming from the hemophilia franchise, driven by ADVATE and FEIBA, and strong U.S. performance across the Medical Products portfolio. Sales in the U.S. increased 6% and international sales, excluding foreign currency, increased 7%. As Bob mentioned, sales in emerging markets were strong, advancing by more than 15% in the quarter with robust growth in the BRIC markets, driven by hemophilia sales in Brazil and the timing of tenders as expected. For the full year, worldwide sales of nearly $16.7 billion advanced 11% on a reported basis or 13% on a constant currency basis. Baxter's sales for the full year increased 5% on a constant currency basis when excluding Gambro revenues from both periods. Gambro sales were $1.6 billion in 2014 compared to $513 million in 2013. In terms of individual business performance, global BioScience sales totaled approximately $1.9 billion in the quarter and advanced 9% on a reported basis. On a constant currency basis, BioScience sales increased 12%, reflecting the highest quarterly growth in the last 5 years. For the full year, global BioScience sales advanced 7% to $6.7 billion. After adjusting for foreign currency, sales grew 8%, significantly exceeding our original expectation of sales growth in the 3% to 4% range for 2014. Within the product category, hemophilia sales in the fourth quarter of approximately $1.1 billion increased 9% on a reported basis, and excluding foreign currency, sales advanced 13%. While sales in the U.S. were strong, up 8%, international sales grew 16% on a constant currency basis. As mentioned in Bob's opening remarks, international penetration remains a significant opportunity for our company as hemophilia is a disease that remains tremendously underdiagnosed and undertreated around the world. As the established global leader, Baxter today derives approximately 60% of total hemophilia sales from outside the U.S. in more than 60 countries worldwide. In addition, in the quarter, we achieved a record level of ADVATE sales with a fifth consecutive quarter of double-digit growth. This was the result of strong global demand, prophy conversions, benefits from recent tender wins in the U.K. and Australia and conversion to recombinant therapy in Brazil. For the year, sales in Brazil totaled more than $100 million, in line with our expectations, and to date, we have converted approximately 40% of the estimated 10,000 hemophilia A patients in the country. In the U.S., where we face new competition, our recombinant Factor VIII sales outpaced market growth. In fact, for 2014, we've enhanced our overall Factor VIII unit share position despite a more competitive environment and modest patient losses. We were also pleased that growth in our hemophilia franchise was further augmented by the launch of several new products and indications, including double-digit growth of FEIBA for the treatment of hemophilia patients with inhibitors as well as contribution from RIXUBIS, a Factor IX treatment for hemophilia B patients, and the recent launch of OBIZUR for acquired hemophilia. In BioTherapeutics, sales of $628 million increased 11% on a reported basis. Sales increased 14% on a constant currency basis, driven by robust demand, particularly for immunoglobulin therapies and albumin. Throughout 2014, we enhanced our overall supply of plasma therapies as we successfully executed to increase capacity across our manufacturing network. We are now in a position to support ongoing growth in demand of at least 8% going forward. A significant achievement in the fourth quarter was the launch of HYQVIA in the U.S. This is a transformational therapy with an attractive value proposition for patients, physicians and payers. For 2014, Baxter successfully increased global subQ penetration, including U.S. HYQVIA sales in the fourth quarter of $35 million, which primarily reflects the impact of initial stocking orders by customers and the favorable reception of the product in the marketplace. In BioSurgery, sales of $197 million grew 2%. On a constant currency basis, sales rose 4%, driven by increased penetration of surgical sealants despite modest growth in surgical procedures and some competitive pricing pressures. As you may recall, the BioSurgery business will be reported in the Medical Products business going forward. In Medical Products, global sales of approximately $2.6 billion were comparable to the prior year, and on a constant currency basis, sales increased 3%. For the full year, Medical Products sales rose 15% to approximately $10 million, and on a constant currency basis, the sales growth was 16%. After adjusting for Gambro in both periods, Medical Products sales in 2014 increased 4% on a constant currency basis. Within the product categories, Renal sales in the quarter were approximately $1.1 billion, reflecting a decline of 2% on a reported basis. Excluding foreign currency, sales grew 3%, driven by solid PD patient gains in the U.S. and emerging markets and improved performance from the Gambro HD business. For the year, Gambro sales were in line with our expectations and exceeded $1.6 billion, an increase of approximately 2% on an organic basis. While sales in the first half of 2014 were comparable to the prior year, we are encouraged with the acceleration of sales to mid-single digits in the second half of 2014, driven primarily by mid-teens growth of the acute care business and improved dialyzer sales. Within the Fluid Systems category, sales of $822 million were comparable to the prior year period, and on a constant currency basis, sales grew 2%. Performance was driven by favorable demand for IV therapies as well as increased sales of cyclophosphamide, which collectively more than offset lower sales of infusion pumps. As you may know, a new competitor recently entered the U.S. market for cyclophosphamide, and we continue to expect additional competitors in the coming months. For your reference, full year 2014 U.S. cyclophosphamide sales totaled approximately $450 million. Specialty Pharmaceuticals, which includes our inhaled anesthetics and nutritional therapies, posted sales of $417 million in the quarter, reflecting an increase of 2%. Sales rose 6% on a constant currency basis as we continue to penetrate international markets with our higher-margin anesthesia portfolio and achieve strong growth in our U.S. nutrition business with improved sales of vitamins and lipids, which were constrained last year. Finally, sales in BioPharma Solutions, which is our pharma partnering business, totaled $271 million, increasing 1% on a reported basis or 4% on a constant currency basis. Performance can be attributed primarily to increased demand from our contract manufacturing partners and strong hospital pharmacy compounding revenues. Turning to the rest of the P&L. Gross margin in the quarter was 50.3% compared to 50.4% last year. Positive mix in BioScience and select pricing improvements across the portfolio were more than offset by the impact of foreign currency as well as expedited freight for PD solutions, ongoing manufacturing inefficiencies and investments we are making to enhance operational capabilities and advance our quality systems and processes. For the full year, the gross margin of 50.4% was in line with our guidance. SG&A totaled $970 million and increased 4%, driven by planned investments and promotional and marketing initiatives for new product launches in BioScience and incremental customer freight and logistical expenses to support the strong demand for IV solutions. R&D spending in the quarter of $305 million increased 6% versus the prior year, driven by the addition of new R&D programs in BioScience through acquisitions, the acceleration of other programs in the areas of hematology, oncology and immunology and investments in renal therapies aimed at improving patient outcomes across the continuum of care. Interest expense was $29 million in the fourth quarter compared to $41 million last year as we benefited from recent debt maturities and income generated from a change in the mix of floating versus fixed interest rates. Other expense totaled $25 million and was driven by the negative impact of foreign exchange on balance sheet positions. The tax rate was 20.5% for the quarter, bringing the full year tax rate to 21.7% in line with our expectations. And as previously mentioned, adjusted earnings per diluted share from continuing operations increased 2% to $1.34, and for the full year 2014, earnings per diluted share of $4.90 exceeded our guidance range. Turning to cash flow. For 2014, cash flow from operations was very strong and totaled more than $3.2 billion. Excluding cash costs associated with the spinoff of the biopharmaceutical business, we generated $3.3 billion in cash flow from operations. Capital expenditures totaled $1.9 billion for the year, reflecting investments in manufacturing capacity to support future demand and growth across the portfolio. DSO ended the quarter at 52 days, and excluding Gambro, Baxter's DSO was 50 days, lower than the prior year by more than 2 days. Inventory turns of 2.4 are lower than the prior year period by 0.3 days, driven by the impact of new product launches and enhanced inventories in our plasma business. And lastly, in 2014, the company repurchased approximately 7.8 million shares for $550 million, or on a net basis, 1.3 million shares for $206 million. Finally, let me conclude my comments this morning by providing some information on the financial outlook and assumptions affecting our performance in 2015. As I've previously mentioned, given the complexities of a midyear spend, we are not in a position today to provide full year guidance for Baxter and Baxalta. As we move into the second quarter of 2015, Baxter will likely begin reporting Baxalta as a discontinued operation, and at our investor conferences in May, each company will provide additional information on their financial profile and outlook. Today, we will provide investors with some relevant information on several key discrete challenges we expect to face in 2015. First, given significant volatility in foreign currency rates, particularly in emerging markets and more recently the euro, we expect a full year impact of approximately $0.40 per diluted share related to foreign exchange. Given the timing of currency movements, the impact of our hedging strategy and our geographic mix, the majority of this impact is expected to occur in the second half of 2015. Second, with interest rates much lower as we exited 2014, pension expense will be a headwind of approximately $0.10 per diluted share for the year. Third, given the assumption that we will experience additional competition for cyclophosphamide throughout 2015, we are assuming a full year impact of approximately $0.40 per diluted share. And lastly, as previously mentioned, we are incurring additional costs that reflect manufacturing inefficiencies and investments to enhance operational capabilities, creating an additional headwind in the first quarter of approximately $0.10 per diluted share. As we move into the second half of 2015, we expect these costs to stabilize as we begin to anniversary these impacts. Let me take a few moments to provide full year sales guidance for the 2 businesses and the major product categories for 2015. Recall that given the spin, we have taken the opportunity to step back and look at our organizational structure to ensure that we're best positioned to successfully operate 2 standalone companies. Therefore, we are moving to a new reporting configuration that is aligned with the respected internal organizations and are providing guidance in this new format this morning. For your convenience, we posted the historical restated sales, including 2014 by quarter, to the Investor Relations section of our website. Beginning with the new Baxter franchises, on a constant currency basis, we expect sales to be comparable to 2014. Excluding cyclophosphamide in both years, underlying growth will be approximately 3%. Specifically, we expect sales in our Renal franchise, which includes our leading peritoneal and hemodialysis products, to grow in the 4% to 5% range. We expect Fluid Systems sales to grow in the 2% to 3% range. This franchise includes our IV therapies, infusion pumps and associated disposables. We expect sales of our Surgical Care franchise to grow in the 4% to 5% range. This franchise includes anesthesia and BioSurgery products. We expect the Integrated Pharmacy Solutions sales to decline approximately 10%. This franchise includes injectable drugs like cyclophosphamide as well as our nutritional therapies and hospital pharmacy compounding business. Excluding the impact of cyclophosphamide of approximately $300 million, growth is expected to be in the low single digits. And finally, we expect the other category to decline approximately 15%. This category primarily includes our third-party manufacturing business, which will be impacted by a major customer electing to self-manufacture products previously manufactured by Baxter. For Baxalta, we project sales growth, excluding foreign currency, of approximately 3% to 4%. Our outlook includes growth in the hemophilia franchise of 0% to 2%. This includes sales of our recombinant and plasma-derived hemophilia therapies, including ADVATE, RIXUBIS and other treatments for Factor VIII and Factor IX deficiencies. Growth will be fueled by new product launches and strong international demand, which will be somewhat offset by anticipated high single-digit share loss in the U.S. due to increased competition. We expect growth in the inhibitors category to be in the 6% to 8% range, driven by further penetration and growth of FEIBA for the treatment of inhibitors and the launch of OBIZUR for the treatment of acquired hemophilia. For immunoglobulin therapies, which includes our antibody replacement treatments, we expect growth of 6% to 8%, driven by strong market demand and the contribution from HYQVIA. And finally, for BioTherapeutics, which includes plasma-derived therapies like albumin and treatments for alpha-1 deficiencies among others, we expect to grow in the 2% to 4% range. Now turning to the first quarter. We expect adjusted earnings, excluding special items, of $0.85 to $0.90 per diluted share, reflecting the headwinds just mentioned. It is important to note, however, that this guidance does not reflect any incremental cost or dis-synergies associated with the spinoff of the biopharmaceutical business as these costs will begin to be layered in throughout the second quarter. Now in terms of the P&L by line item, we expect first quarter sales growth, excluding the impact of foreign currency, of 2% to 3%. At current foreign exchange rates, we expect reported sales to decline 3% to 4%. By business, on a constant currency basis, we expect Medical Products sales growth of 1% to 2% and BioScience sales to grow 4% to 5%. In the first quarter, we expect gross margin for the company to decline by approximately 250 to 300 basis points versus the fourth quarter of last year of 50.4%. This reflects the impact of increased manufacturing costs, which are most pronounced in the first quarter, as well as the impact of cyclophosphamide and pension expense. We expect SG&A to decline by approximately 5% versus the prior year and R&D to be flat on a reported basis. Excluding foreign currency impacts, both SG&A and R&D are expected to grow in low single digits. And finally, for the first quarter, we expect interest expense to total approximately $35 million, no impact from other income versus gains we recorded in the prior year, and we expect a tax rate of approximately 22% with an average share count of approximately 547 million shares. This concludes my prepared remarks this morning. We look forward to providing more financial information to you in the near future. In the meantime, I'd now like to turn the call over to Bob for his closing comments.

Thanks, Bob. Let me end our prepared comments this morning with a brief update on the anticipated spinoff of our biopharmaceuticals business. Our organization has been fully engaged in separation activity since the announcement that we made last March, and we're energized by the prospects of separating Baxter into 2 leading global health care companies, one focused on developing and marketing innovative biopharmaceuticals and the other on life-saving medical products. This decision supports Baxter's evolution and underscores our commitment to ensuring long-term strategic priorities remain aligned with shareholders' best interest, while creating value for patients, health care providers and other key stakeholders. The 2 businesses operate in distinct markets with corresponding underlying fundamentals and each possesses unique and compelling growth prospects, investment requirements and risk profiles. The spinoff will create 2 well-capitalized, independent companies with strong balance sheets, investment-grade profiles and disciplined approaches to capital allocation. The spin will also provide greater management focus, the ability to more effectively commercialize new and existing product offerings to drive innovation and enhance our flexibility to pursue respective growth and investment strategies. This will result in revenue acceleration, improved profitability and enhanced returns for shareholders. During 2014, we named our senior leadership teams for both companies, established the international and commercial structures for both organizations, formally unveiled Baxalta Incorporated as the name of the new publicly traded biopharmaceutical company and filed a preliminary Form-10 with the SEC for Baxalta. While we continue to work through the complexities, this process is unfolding in line with our expectations, and we continue on track toward a mid-2015 completion. We recently announced that we'll be hosting an investor conference in New York City on the afternoon of May 18 for Baxter International and on the morning of May 19 for Baxalta Incorporated. At these conferences, we'll introduce you to the new senior management teams and provide investors with more information regarding the strategies, growth prospects, capital structure and financial outlooks for each company. We'll also engage in a comprehensive Investor Relations effort, including investor road shows for both companies with their respective senior management teams several weeks before the spinoff is completed. In closing, while 2015 will be a challenging year, momentum in the core business is building and we remain excited about our future prospects, and we're poised for improved performance in 2016 and beyond. As we chart distinct and unique paths forward as separate global health care leaders, we look forward to unlocking value for shareholders, partners, employees and the patients and health care providers that we serve. As always, I'll be happy to take any questions on these or other topics during the Q&A. So with that, I'd now like to open up the call to your questions, if we might.

[Operator Instructions] I'd like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International's website for 30 days at www.baxter.com. Our first question comes from Kristen Stewart of Deutsche Bank.

This is Brittany Henderson in for Kristen. I just wanted to kind of get more clarity as we think about 2015. How should we just think about the incremental standalone costs versus kind of the stranded costs associated with the Baxalta spin?

Okay. Well, we're still working -- as we mentioned, we're still working through the details around that. We've talked about initial dis-synergies of approximately $300 million or approximately 2% of Baxter's current sales. Interestingly enough, almost half of that is going to relate to IT-related costs, and we will be working towards separating the IT infrastructure over time, but that is one of the longer lead time items. So that is actually a difficult thing to break out at this point. Our initial estimate was a little bit heavier towards Baxalta in terms of dis-synergies, but a fair amount of stranded cost for new Baxter given, again, some of this IT overlap for some period of time. But at this point, I'm still working through those details. That's part of what we look to address in the May investor conferences where each of the 2 companies will lay out the financial outlooks.

Okay. And just a quick follow-up. How should we think about Suprane in 2015? What are the assumptions for competition there?

This is Bob Parkinson, Brittany. We anticipate Suprane is going to continue to grow in 2015. Having said that, we also anticipate that we may get generic competition in various markets around the world, although as we sit here today, it's not evident when or if or who that will be. I will tell you that there continues -- it continues to be promotionally sensitive in many markets around the world. So longer term, we view the anesthesia contract -- franchise with Suprane as kind of a foundation product as a growth vehicle, not only in '15, but, frankly, over our LRP.

Our next question comes from David Lewis of Morgan Stanley.

This is actually James in for David. Just wanted to get a quick sense from you. The first quarter earnings guidance of $0.85 to $0.90, how representative do you think that is of where the business stands from a profitability or earnings power basis today? On the one hand, obviously, you've got some idiosyncratic headwinds from quality spending that are going to fade through the year. But on the other hand, it seems as if FX and any potential ADVATE competitive impact would get greater through the year. So is 1Q kind of a reasonable representation where the business stands today? Or is it wrong?

As we've looked at the situation, there are clearly some things in Q1 that are more pronounced. The $0.10 in manufacturing, clearly, is something that is very much front-end loaded. Overall manufacturing, just to give you a sense, is definitely a meaningful headwind in the first half of the year but a slight tailwind in the back half of the year, and so that clearly is not representative of what the ongoing situation is with the company. FX and cyclo are clearly meaningful headwinds here, both around $0.40. They will be somewhat back-end loaded, particularly FX. We're very well hedged in the first half of the year on the euro and a few other key currencies. But again, as we've been highlighting for 6 months, the emerging market depreciation in currencies that happened in the back half of 2014 is still very much there, and we're much more exposed as well. So Q1, I would say, is definitely not representative. And as a general matter from a seasonality standpoint, it's usually, by far, our lowest quarter from an earnings perspective in any given year.

Okay, that's helpful. And then just second, any help that you could give us on hemophilia guidance? Obviously, you've done very well in that business, strong double digits -- or double digits at a minimum for the past several quarters, decelerating to 0% to 2% next year. Clearly, there's some competitive impact there. But how do you think about balancing the U.S. competitive impact versus the continued strength internationally?

Well, this is Ludwig, James. First of all, the hemophilia team is doing a great job, as you see from the numbers. We will continue to grow ADVATE faster than market internationally. So internationally, we'll see positive growth. In the U.S., as Bob was alluding to, our guidance of high single-digit market share loss between -- from the Biogen launch to 855's launch is still a guidance. This will result in a negative growth in the U.S. With respect to our sales guidance, as we said, hemophilia, this is the base business only. It's 0% to 2% for the year. We have a separate sales guidance for the inhibitor market. Our business will continue to grow 6% to 8%. So overall, when you take the 2 together, we're talking about those single digits market, low single-digit growth.

Our next question comes from David Roman of Goldman Sachs.

I wanted just to start on HYQVIA, which, Bob, you gave some disclosure in your prepared remarks. I think you said that there are 400 prescribers as of now. Could you maybe just go into a little bit more detail on the launch? Was that a U.S. or a global number? And how are things going thus far domestically?

Yes, David, I'll let Ludwig address that. Go ahead, Ludwig.

Yes, thanks. So we're very pleased with the launch in the U.S. The 400 number that we gave you is the U.S. number only. So the interest is very high. We have a value proposition for the patient as well as for the payer. The value proposition for the patient, clearly, it's a subQ once a month with one needle. From a payer perspective, although we take a price premium of about 30%, we -- overall, the cost of the treatment is still a favorable number. Overall cost, we think, about 10% less because of the higher viability that we have with HYQVIA versus subQ. So overall, it's a very strong proposition for all of our key stakeholders. Our objective is that HYQVIA is become -- will become a leadership brand within the PI market long term. With respect to our 2015 guidance, you saw 6% to 8% for IG. We think that HYQVIA will be about $100 million for 2015.

That's very helpful. And then maybe secondly, just broadly on the U.S. businesses. I think this was one of the better quarters you've had domestically in quite some time, particularly in some of the more volume exposed or Medical Products businesses. Can you maybe just talk through some of the underlying dynamics in the U.S., what really drove -- got better this quarter? And your guidance doesn't -- does not seem to suggest that that's sustainable, but why would that be the case?

With respect to hemophilia, when I think about ADVATE, 2014 as well as the fourth quarter, we've seen an impact of 1 to 2 market share points from the Biogen launch over the last 6 months. However, when you take all the different pieces of the puzzle together here, the positive contribution of the prophy conversions, and we have more than 650 patients that converted to -- as a prophy, so that's positive contribution. In addition to the weight gain contribution, more than offset the share loss. So that's the dynamic that we have, and that's the reason why we are growing faster than the market. Then our projection for 2015, we will continue -- as we said, we're on track for a high single-digit market share loss for the year, but we will not only have a Biogen competition, our assumption is that we will also have new entries in the short-acting Factor VIII market segment.

Yes. And David, I would just add that given the momentum we've seen the last couple of quarters, we are sticking with our original assumption here of the high single-digit market share loss, but that may prove to be conservative.

Understood. I guess, I was asking more broadly about your U.S. franchises across the board. I think if I look at the BioSurgery business, that did better. You had nice momentum in things like the specialty areas. Is that -- why wouldn't that continue in 2015?

I think -- Bob Parkinson here, David. Yes, I think, in many of those areas, it will continue in '15. I think we're seeing a little more stability in the market in terms of hospital procedures and hospital activity compared to what it was earlier, which is encouraging. We're also managing out of our -- some of the supply constraints that we incurred earlier in the year and got in a much better position in the fourth quarter on both IV solutions and PD solutions, and we're bringing some more capacity online in '15. So I think the underlying fundamentals, whether it's the IV Fluid Systems business, whether it's parenteral nutrition, BioSurgery as you mentioned, anesthesia. And again, we'll expand on this when we get together at the investor conference and so on, but I think each of these product segments, these are not -- these are never going to be double-digit growers, but they're going to be solid single-digit growers. And we'll provide some more color on that when we get together in May.

Yes, David, I think that -- yes, just to add -- it's Mary Kay. I will just say the decline in cyclo and in the other category are really predominantly what's driving the U.S. performance to where it is in 2015.

And offsetting the strength in the other areas that I commented on. So you get some pretty large netting effects there, as you know.

Correct. That's correct.

Our next question comes from Mike Weinstein of JPMorgan.

Let me just -- I want to circle back to the first quarter guidance because that's what I'm getting the most questions on. So the $0.10 that you're calling out that's kind of the manufacturing impact, the quality upgrade, how much of that do you want us to think is ongoing versus onetime?

Well, as I mentioned, we will see, on a year-over-year basis, a meaningful improvement in the back half of the year. The nature of these are partly due to capacity expansion and the timing of that, which will come online in the first half of 2015. So that will certainly alleviate the need for some of the expedited freight and incremental logistical costs that we've been incurring. Other aspects of the process modifications that we're working through will take a little bit more time to work down as we work down the cost curve on that. These are well-established processes that we've been manufacturing PD and IV solutions for, for decades, so we'll take a little bit of time. So I would say a meaningful portion in the back half, some will linger into 2016.

Okay. So if we think about just the $0.85 to $0.90 starting point and recognizing the first quarter's historically like 22% to 23% of the year's earnings so it's not a best representation, but you still have in front of you the full impact of generic cyclos. It sounds like you're assuming the front-end part, but not the whole part, so there's still a little bit of a tail there. And then, obviously, you've got that, call it, $0.45 of dis-synergies from the split of the 2 companies. Is that the right way to think about it in terms of what's still in front of you in terms of the EPS headwinds that we won't see in the first quarter, but we'll still see at some later date?

Well, as it relates to cyclophosphamide, we do anticipate a pretty meaningful impact here in the first quarter. It won't be 1/4 of the year, but it will be meaningful, and certainly, even the first -- excuse me, in the first quarter, we expect a meaningful impact. And in the first half, almost half of the full year impact we expect to see. As you know, when generics come in, the pricing volume dynamics start to play out pretty quickly. So that is fairly representative of what the full year is going to look like. As it relates to the dis-synergies estimate, again, we won't really see those in the P&L in any meaningful way until the back half of 2015. The initial estimate is around $300 million, but both of the 2 companies are going to get busy as quickly as possible post spin to start working those down. So how that plays into what our full year 2016 is going to look like, I don't anticipate that's going to be $300 million. I think it's going to be lower, and that will be part of what we lay out in the May time frame.

Our next question comes from Larry Keusch of Raymond James.

Bob, I'm wondering if you could talk a little bit about the outlook for Brazil in 2015. You obviously did as you anticipated for this year and achieved over $100 million in sales. But talk a little bit about what has to continue to happen on the conversions and where you think you are as you go towards that, I think, $200 million-ish target.

Why don't you take that?

Yes. So we gave you a target of $200 million. Clearly, we're on track to achieve that over time. As far as the market is concerned, there are about 10,000 hemophilia A patients in Brazil. We have now converted more than 4,000 patients. As we convert from plasma to recombinant, we also convert those patients from on-demand to prophy, and our penetration of prophy in those patients is about closer to 70%. So we still have a long way to go, and that's where the additional $100 million opportunity is coming from. 2015 will be the next step in the journey that is going to take longer than 2 years to get to the 100% conversion.

Okay, that's helpful. And then, I guess, for Bob Parkinson, one thing that you've talked about is potential opportunities to establish other public-private relationships such as the Brazil hemophilia agreement. Could you provide any thoughts on -- do you think that's still viable in other either geographies or other product categories and when we may see something transpiring?

Yes. I think it's -- Larry, I think it's going to be an increasing opportunity actually for both companies in both businesses because I think governments are going to be thrust in a position to kind of embrace new paradigms in terms of how they manage health care cost. And I think inevitably, it's going to involve collaborations with suppliers, certainly, leading suppliers in ways of doing business going forward that are different. So obviously, the Hemobrás collaboration in Brazil on hemophilia has been well discussed and everybody understands that. But I mean, we're building a new solutions plant in Thailand to manufacture PD solutions, which was the direct result of us working with the Thai government to establish from a policy point of view peritoneal dialysis as the therapy of choice, not hemodialysis, largely because it's lower cost. It saves the government money, and in the process, we're making investments. We're creating jobs in Thailand. China is another good example where we've had a program that we'd refer to or describe internally as the Flying Angels project, which has really been another example of a great collaboration that's driving adoption of PD therapy. And I know Ludwig and his team continue to have discussions on various fronts as does new BAX. So I just think this is going to be a new way of doing business going forward, and I would anticipate in the coming years both companies will do more of these kinds of collaborations.

Our next question comes from Derrick Sung of Sanford Bernstein.

I wanted to ask a little bit about if you could help us think about the capital structure of the 2 split businesses moving forward. Can you give us a sense for how we should think about, will debt be split evenly amongst the companies? And in terms of the dividend, how should we think about high level kind of dividend profile of the 2 businesses?

Derrick, this is Bob Hombach. As we've been saying, we're going to give the whole financial picture for both organizations, the financial outlook for sales, for earnings, CapEx spend and capital structure, including capital allocation assumptions, in the May time frame. A lot to work through as we work through the separation here and that act is obviously a very key aspect of this. We do believe both companies are going to generate significant cash flow going forward, and we'll have a significant amount of flexibility to be disciplined about capital allocation and to think about returning significant value to shareholders as we've been doing in the past, but also continue to reinvest in the businesses to support future growth. So we'll lay all that out in the May time frame.

Okay. Well, maybe then focusing a bit on the Baxter, the Medical Products business, for, I guess, either of the Bobs. You've talked a bit about the potential for a margin expansion opportunity coming out with a relatively lower margin relative to your peers. Could you help us think a little bit more about kind of -- does that margin expansion come primarily from mix shift? Is it -- we understand the Gambro piece to it. But beyond Gambro, where does that primarily come from and kind of how do we get there?

Yes, Derrick, Bob Parkinson here. Let me spend a couple of minutes responding to that. First of all, the comment about our returns being lower than peers, I think everybody understands one of the reasons for that is we are in very logistics-intensive businesses. Shipping IV solutions and PD solutions is expensive, so we have a freight distribution line on our P&L, which is inherent in those businesses as opposed to, let's say, traditional medical device or hospital supply businesses. Now having said that, what we will show you at the investor conference in May is a steady improvement over the LRP and operating margins that are very achievable and I think will be significant as well. And they really emanate from a series of things, and I'll just touch on a few in the interest of time. We clearly are going to increase our focus and investment in what I'll call higher-margin, higher-growth product categories, things like anesthesia, BioSurgery, parenteral nutrition, the acute -- the CRRT business in the hospital setting. These are all businesses today that range between $0.5 billion to $1 billion that are promotionally sensitive, have prospects for higher growth and are higher margin, so would represent a mix upgrade. Also, we're very excited about the engagement, if you will, in the infusion pump business with the approval of the SIGMA Spectrum Version 8. We'll be rolling that out in 2015 in the U.S. We effectively have been out of the infusion pump business for a number of years, and there's been a lot of margin that's been lost attendant [ph] with share loss with -- starting with the colleague, things and so on. So we're on the cusp of being able to get that back. Also, our new product low in new BAX and again, we'll get into this in detail in May, but VIVIA home hemodialysis, AMIA, the next-generation home PD solution, Prismaflex [ph], which is our next-generation CRRT. We have a program called Project Carrera [ph] internally, which is an array of premixed drugs that we'll be developing and bringing to the market in our proprietary GALAXY technology. These are all very exciting growth opportunities and new product opportunities, but all of which represent margins. In some cases, that are meaningfully higher than the overall margin percentage of the business. Clearly, we still have a lot of synergy to capture from Gambro going forward. It's tracking very well. We've achieved a lot of that, but there's still meaningful opportunity consistent with our original projections on Gambro synergies, both cost and commercial synergies. I think you'll see us managing portfolio very aggressively, both from a product and geography point of view. And to be very frankly -- to be very frank, I think the split off of the company provides a better line of sight to really focus on overhead infrastructure costs and so on, and you can anticipate that we're going to do some things in that regard to be proactive. So I'll stop there and will expand on each of these in detail in May. But each of the things I mentioned are meaningful, and that's why we're pretty confident about our ability to drive meaningful improvement over the long-range plan and beyond.

Our next question comes from Bruce Nudell of Crédit Suisse.

Ludwig, could you just parse in the U.S. hemophilia guidance for next year, how much of the high single digits kind of ELOCTATE versus more standard competitive or recombinant Factor VIII? And just comment more generally on -- basically, all the surveys, everybody did, on the sell-side indicated that ELOCTATE would be much more impactful than it's proving to be. Does that -- and given the changes in hemophilia that are likely to occur over the next 5 years or so, does it speak at all to Baxter's competitive advantage in that space because of the intimacy you have with patients and caregivers? Just any general comments in that regard.

Well, it's a good question, thank you. With respect to the surveys, I think my answer would be we'll post the surveys. We have now 6 months of data. So at this point, the surveys are very qualitative, but the quantitative piece comes from the actual data. So that will be my answer to the survey question. With respect to the market itself, it's a very sticky market. We've seen this. We see this in Factor VIII. Now when you look at the market dynamics in IX, it's not much different with the new entrants including RIXUBIS. So the market, I believe, will continue to look for the standard treatment because we raised the bar, and the bar is very high. The bar is 0 blips. And when you look at the clinical data, 0 to 1 is where the SA data comes out, and that's a very high bar. So irrespective of the new technology, we're talking about an efficacy target, which is very high. We do believe that we have a very strong strategy in place, starting from the gold standard ADVATE moving to 855, which is ADVATE in a PEGylated form to known technologies, moving to 826, which is ADVATE in a PSA technology, and then leapfrogging maybe those technology with potentially gene therapy. In gene therapy, as you know, we'll post proof of clinical concept in hemophilia B. We're going to show that data in a couple of weeks in Helsinki. But overall, we believe that we are in a position of strength to continue to grow this franchise moving forward.

And Bob, just talk -- could you give us some general comments about your assessment of the progress of Gambro? I know that PD is growing high single digits, low double digits thereabouts and your guidance for renal, 4% to 5%, in '15. How does Gambro figure into that? Is it tracking as you hoped in terms of revenue growth?

Yes. First of all, relative to synergies, we're tracking very much on target, okay? And so the numbers that we laid out at the outset will be achieved, both in total and the time frame attendant with that, so we're pleased with that. In terms of commercial performance, frankly, we got off to a little bit of a slow start that we've really picked up steam. I think if you look at the first half, second half comps, '14 versus '13, you saw the momentum build in the second half, and I think that's a by-product of the natural challenges of integrating organizationally and getting the alignment leadership established and so on. But I think we are very much on a pace to generate revenue growth commensurate with what we messaged at the time of the acquisition. And of course, we look forward to being able to expand dialyzer capacity in 2016 and beyond, which is going to be very helpful to meet more demand. The other thing I would say, the commercial synergy component of this, now having the full product line, gives us a lot of flexibility. I mentioned in response to one of the earlier questions about public-private partnerships and so on, managing the cost of providing access to treatment of end-stage renal disease, dialysis is a very -- that's a big ticket item on every health care budget for every country around the world, and this is an area where naturally they're going to look for collaborations and how to partner to manage that. Given our full product offering, I think we're in the best position to partner with governments to do that, as evidenced by the example I gave with the PD First program in Thailand. So I'm very pleased with the acquisition. There's always fits and starts when you do something of this size and complexity, but I'm really glad we did the deal, and it's going to be a big part of our growth going forward. Bob?

Yes, maybe just a clarification, Bruce. We have talked about patient double-digit patient growth in the U.S. as a result of change in reimbursement. Recall U.S. is less than 20% of global PD sales. So if we look at our guidance for 2015, kind of mid-single digits for the overall renal business. In fact, PD and the legacy Gambro business are both expected to grow in that mid single-digit range. So it's comparable.

Our final question comes from Chris Hamblett of Cowen.

Just one follow-up on hemophilia. As you kind of position gene therapy as the next major potential breakthrough for the longer competitive dynamics in that market, what do you think you'll need to show in terms of long-term durability and safety to address potential regulatory concerns there with the gene therapy? And then second, what exactly are you going to show in terms of new clinical data for BAX 335 in February? And when might the Factor VIII gene therapy be ready for the clinic? I believe you said later this year, but I wanted to make sure that was correct.

Okay. With respect to the gene therapy, as I mentioned, we'll post proof of concept on hemophilia B. So the data that we're going to present in 2 weeks from now will be individual patient data where we will be showing -- and I've shared that before, we see sustained levels of Factor VIII expression elevated versus current treatments. With respect to what is the target level, there is some data with respect to target level, depends on activity of the patient. When you're talking about patients that are active, it might be 20%-plus and yet we are able to achieve those levels with hemophilia B. Then with respect to your question on regulatory pathway, that is still a work in progress. My assumption at this moment is that for every new technology that comes into hemophilia, that it might be a little bit different than the way that we've developed ADVATE 855 because there's always going to be more questions with respect to efficacy, sustainability and long-term probability. But we'll keep you posted as soon as we got the regulatory input. And with respect to the timing of gene therapy for hemophilia A, we're planning to start our clinical program in the next year. So hemophilia B, we'll post proof of concept; hemophilia A, we're going to take the same technology into the clinic in about a year from now.

Thank you. Ladies and gentlemen, this does conclude today's conference call with Baxter International. Thank you for participating. Everyone, have a wonderful day.