Baxter International Earnings Call Insights: New Reporting Structure and Integration of Gambro

Baxter International Inc. (NYSE:BAX) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

New Reporting Structure

David Lewis – Morgan Stanley: Bob, obviously there is a lot of reclassification with the new reporting structure, I want to just – give me just the high level commentary. Your year-over-year core Baxter is slowing incrementally just a little bit into ‘13, just maybe give us some high level commentary on some of the significant headwinds and tailwinds to growth. And obviously there is incrementally more headwinds in ‘13 and sort of some of those are?

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Robert L. Parkinson, Jr. – Chairman and CEO: So, a couple of things, I’d say in 2012 we benefited from the acquisitions of Synovis and Baxa which are now fully in our base and as you rightly pointed out we are facing some headwinds here as we go into 2013. Starting with government austerity measures which we project to total approximately $90 million, which includes approximately $30 million for the U.S. medical device tax which we are putting through sales and margin. The other $60 million relates to a combination of austerity measures in Europe but also in Asia Pacific particularly and Chin as well. So, an even larger austerity impact this year than what we’ve seen in the last couple of years. I would also just remind everyone we will remain constrained for plasma production here in 2013 as we work through bringing the old LA facility back online and ramp up our new LA and Rieti facilities, but that is definitely on track. We should have increasing product availability throughout the course of the year. So, the other thing I would mention is we’re going to anniversary some of the recombinant Factor VIII tender impact related to Australia but that doesn’t really happen until the middle of the year.

So, in particular if you look at the guidance for the first quarter the plasma product constraints are most acute for us. In the first quarter we have increasingly robust supplies and move throughout the year. As I mentioned we anniversary the Australia tender impact until the middle of the year. The austerity measures that I’ve mentioned will be impacted immediately as we begin the year. What’s going to accelerate growth from the 2% to 3% that we’ve got in the first quarter as we move towards approximately 4% for the full year, relates to a couple of things, one of which is the timing of tenders particularly in plasma derived products such as FEIBA and plasma-derived Factor VIII those are more concentrated in the second and third quarter than have been in prior years. We do expect to begin to start shipping to Brazil related to recombinant Factor VIII in the second quarter as well and as I mentioned increased product availability throughout the course of the year on plasma-derived side will also help us drive accelerated growth beyond the first quarter.

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

Robert J. Hombach – Corporate VP and CFO: I’ll handle the IVIg one first. I would say we’ve largely made the move that we’re going to make in terms of product shift by the end of 2012 here. So 2013 we’re going to be operating at a similar level to where we’re exiting 2012 at. That (does some) provide a little bit of benefit year-over-year in the first quarter or two but that’s largely played out in terms of the shift. In terms of pricing the markets that we continue to participate in Western Europe I would say that we haven’t seen any significant impact one way or the other on price at this point. And then as it relates to recombinant Factor VIII.

Robert L. Parkinson, Jr. – Chairman and CEO: David, Ludwig Hantson is with us this morning. Ludwig, why don’t you just take a minute and maybe update the callers on what’s going on with the whole uptake on prophylaxis in the U.S. because obviously we’re experiencing some very encouraging results.

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Ludwig N. Hantson, Ph.D. – Corporate Vice President and President, BioScience: So, yes, this is a success. We go the label about a year ago. So we’re one year into the launch for ADVATE prophy. It’s a success from, I would say, from a – first of all, from a patient perspective. Unmet medical need is still high. We still have a lot of patients who are (on-demand), so we’re switching over. When you look at the number of patients that were switched over to a prophy regimen, we’re talking about more than 200 patients, we’re looking at continuing that trend into 2013. So clearly we’re moving into 2013 with a strong momentum. Having said that we’re also aware of the fact that we might get competition by the end of 2013, and to this pace, which might slow us down a little bit, but overall, we believe that we will continue to grow ADVATE in 2013 and then moving forward. Then maybe bridging also to FEIBA since it is in the same space, you might have seen the fact that we got prophy results for FEIBA. We are moving towards BLA submission, first quarter of 2013 in the U.S. We already have the indication in Europe in the majority of the countries. So you will see that by the end of this year when we get the improvement in the U.S. and increased focus on moving our FEIBA patients to prophy regimen.

Integration of Gambro

Larry Keusch – Morgan Keegan: Just a couple of quick ones. Bob, you’ve obviously done a bunch on the business development side in 2012. Just wanted to gain a little sense of your appetite for M&A as you go forward, does the integration of Gambro hold you back a little bit or how do you think about that?

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

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Robert J. Hombach – Corporate VP and CFO: I will just add that given how we’re financing the Gambro acquisitions and the structure of that and the use of offshore cash, while it is a significant acquisition, it is going to allow us to position ourselves to maintain some strategic flexibility going forward here as well.

Larry Keusch – Morgan Keegan: And then just a quick one just because I wanted to revisit it. With the approval of ADVATE in China and I know this is going to be sort of a longer-term process, but how should we think about what steps need to occur before that becomes a meaningful driver of revenues for you guys, because it would certainly seem to be a big opportunity?

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

Ludwig N. Hantson, Ph.D. – Corporate Vice President and President, BioScience: Yes, maybe I’d like to add the following, so if you look at the BRIC countries, you are talking about more than 1 million activity units and when you bring it down most of these patients are being treated with plasma-derived products. So, there is a great opportunity in each of these countries to convert from plasma to Recombinant but also increase the diagnosis rate and I’d say the bigger ones are clearly Russia and Brazil. So it will affect that we have an agreement with the Ministry of Health in Hemobras in Brazil. And Bob mentioned that we will start shifting product, our plan is to start shipping product to Brazil second quarter of this year. We will also have a regulatory strategy to penetrate Russia which we are also working towards approval this year. And then China is the third one, so, clearly it’s bigger than China so we have growth opportunities in this business that clearly will continue to help us move ADVATE in hemophilia forward.

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Mary Kay Ladone – Corporate VP, IR: I’d just add that, while we have an approval in China we haven’t received reimbursement approvals so we actually haven’t launched we will launch in 2013.