Skip to content
Home » Baxter International’s (BAX) CEO Robert Parkinson on Q3 2014 Results – Earnings Call Transcript

Baxter International’s (BAX) CEO Robert Parkinson on Q3 2014 Results – Earnings Call Transcript

Baxter International Inc. (NYSE:BAX)

Q3 2014 Results Earnings Conference Call

October 16, 2014, 08:30 AM ET

Executives

Robert L. Parkinson, Jr. – Chairman and CEO

Ludwig N. Hantson – President, BioScience

Robert J. Hombach – Corporate VP and CFO

Mary Kay Ladone – Corporate VP, IR

Analysts

David Roman – Goldman Sachs

David Lewis – Morgan Stanley

Matt Miksic – Piper Jaffray

Robert Hopkins – BAML

Mike Weinstein – JPMorgan

Lawrence S. Keusch – Raymond James & Associates, Inc.

Kristen Stewart – Deutsche Bank

Bruce Nudell – Credit Suisse

Glenn Novarro – RBC Capital Markets

Operator

Good morning ladies and gentlemen and welcome to the Baxter International’s, third quarter earnings conference call. Your lines will remain in a listen-only mode until the question-and-answer segment of today’s 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.

Mary Kay Ladone – Corporate VP, IR

Thanks Pam. Good morning everyone and welcome to our Q3, 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 detailed 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.

Robert L. Parkinson, Jr. – Chairman and CEO

Thanks Mary Kay. Good morning and thank you all for calling in. As you saw in this morning’s press release Baxter reported strong financial results for the third quarter, which exceeded expectations. Relative to our guidance which included vaccines adjusted earnings increased 9% to $1.35 per diluted share and worldwide sales advanced 13%. Excluding foreign currency and Gambro, from both periods, global sales increase 6%. I am very pleased with overall organic sales performance from ongoing operations as the third quarter represents the highest quarterly growth of this year. This affords us the opportunity to increase investments and research and development and further enhance manufacturing and quality and operational excellence as we position our company for sustained success.

In recent months we’ve continued to make progress in strengthening the portfolio with new collaborations advancing the new product pipeline through the achievement of meaningful milestones and the organization remains engaged in working to separate Baxter into two leading global healthcare companies aimed at enhancing shareholder value over the long term. For example within BioScience we are building on the strategic decision to expand our presence in the area of oncology, leveraging the company’s heritage of success in developing new therapies that treat unmet medical needs for patients with rare diseases.

Not only has living Ludwig been building an experienced team of oncology leaders including senior clinical development, business development and proven commercial executives but we also continue to see partnership opportunities to expand the pipeline.

You may recall that last month we signed an exclusive license and collaboration agreement with Merrimack Pharmaceuticals for the development and commercialization of MM-398, an investigational drug candidate for the treatment of patients with metastatic pancreatic cancer, previously treated with the gemcitabine-based therapy. As you know pancreatic cancer is a rare and deadly disease that’s difficult to diagnose and has limited treatment options.

Through this agreement BioScience gains exclusive commercialization rights for all potential indications of MM-398 outside the United States and Taiwan. MM-398 has demonstrated robust survival results in a global Phase 3 trial that will be the basis for regulatory submissions outside the U.S. beginning in 2015. BioScience now has four oncology assets; MM-398, [inaudible] and BAX-069 with the potential for numerous indications for patients with hematologic and solid malignancies.

We look forward to discussing the progress of the oncology portfolio and advancement of the pipeline in the future. The bioscience organization also continues to enhance its focus on specific disease areas, centered on core areas of expertise in hematology, immunology and through technology platforms like gene therapy and biosimilars. It’s for this reason that we elected to divest the commercial vaccines business, including the NeisVac-C and FSME vaccines and during the third quarter announced a definitive agreement with Pfizer. We’re working to close this transaction in the fourth quarter and continue to explore strategic options, including the potential for partnering or divesting the R&D development programs focused on influenza and line disease.

In addition we’ve also achieved an array of significant pipeline milestones including the FDA approval of HYQVIA is the first subcutaneous immune globulant, a transformational subcutaneous treatment for adult patients with primary immunodeficiency. HYQVIA is the first subcutaneous immune globulant treatment approved with the dosing regimen requiring only one infusion per month and one injection site per fusion to deliver it full therapeutic dose while maintaining the same efficacy safety and tolerability profile in its currently marketed products.

Today many patients received IV infusions in a doctor’s office or infusion center and current subcutaneous treatments require weekly or bi-weekly treatment with multiple infusion sites per treatment. We expect to launch HYQVIA in the United States next week and are evaluating regulatory requirements and initiation of additional clinical trials for new indications. As a reminder the global market for primary immunodeficiency is approximately $2 billion and only approximately 35% of patients are treated subcutaneously, providing a unique opportunity for HYQVIA as a differentiated therapy.

In addition in August Baxter released positive top line results from the Phase 3 pivotal clinical trial of BAX-855, an extended half-life recombinant Factor VIII treatment for hemophilia A based on ADVATE. BAX-855 met its primary endpoint in the control and prevention of bleeding, routine prophylaxis and peri-operative management for patients who are 12 years or older with patients in a twice weekly prophylaxis arm experiencing a 95% reduction in median annualized bleeding rates as compared to those in the on-demand arm. In addition BAX-855 was also affected in treating bleeding episodes 96% of which were controlled with one or two infusions and approximately 40% of patients were bleed-free.

No patients developed inhibitors to BAX-855 and no treatment related serious adverse events including hypersensitivity were reported. Our continuation and pediatric studies are progressing and we’re planning to submit a biologics license application to the FDA before the end of 2014.

Also during the quarter Baxter received FDA approval of RIXUBIS for routine prophylactic treatment controlled and prevention of bleeding episodes and peri-operative management in children with hemophilia B. We launched RIXUBIS in the U.S. late last year for the adult population and are very pleased with its market acceptance. Our application for adults and pediatric patients is currently under review in the European Union and we expect a regulatory decision later this year.

Within the medical products business recent highlights include an exclusive agreement with Rockwell Medical to commercialize their leading hemodialysis concentrate product line in the United States and in select overseas markets. Hemodialysis concentrates help to clean a patient’s blood and remove waste and extra fluid from the body. This agreement enhances Baxter’s comprehensive range of therapeutic options across home, in center and hospital settings for patients with end stage renal disease.

And finally we recently announced the expansion plans at our state of the art manufacturing facility in OPELIKA, Alabama to help address the growing global demand for dialyzers. Baxter will invest nearly $300 million in the OPELIKA site and we expect to begin commercial production in 2016 augmenting several other recent capacity expansions for dialyzers across our footprint.

In addition to delivering solid financial results and accelerating innovation the organization is fully engaged in the process of separating Baxter into two leading global healthcare companies; one, focused on developing and marketing innovative biopharmaceuticals and the other on life-saving medical products.

During the quarter, as you know we formally unveiled Baxalta Incorporated as the name of the new publically traded biopharmaceutical company. The name Baxalta celebrates and sustains our heritages as an innovator and legacy of leadership by incorporating the Baxter name and coupling it with Alta which derives from opus which is Latin for high or profound.

Upon completion of the separation Baxalta Inc. will trade at the New York stock exchange under the symbol BXLP and Baxter International will continue trading on the New York stock exchange under the symbol BAX. While the corporate headquarters of both companies will be located in Northern Illinois, we recently announced that Baxalta is forming a new global innovation and research and development center in Cambridge, Massachusetts. This will position the new company to optimize R&D productivity, accelerate innovation by building on its robust pipeline in core areas of expertise, strengthen and increase R&D collaborations with partners in new and emerging biotech areas and enhanced patient care globally.

As many of you know we’ve now named our senior leadership teams for both companies and have established the international and commercial structures for both organizations. We have elevated several senior leaders into new roles and have complemented our strong commercial and operational teams with some new talent including experienced professionals from leading biotech pharmaceutical and medical device companies.

Many of you have also asked about appointments within Investor Relations and today I am pleased to announce that Mary Kay Ladone after a 26 year career at Baxter will become Corporate Vice President of Investor Relations for Baxalta upon completion of the spin. In the interim Mary Kay will continue in her current role and will be responsible for the ongoing Investor Relations efforts at Baxter.

In conjunction with Mary Kay’s appointment I am pleased to announce that Scott Bohaboy, a senior level Finance Executive with eight years of experience at our company will become Baxter’s Vice President of Investor Relations and Treasurer. During his tenure Scott has held several senior financial roles with Baxter including in corporate planning, the U.S. hospital business, our Asia Pacific region and he currently serves as Vice President, Finance for our international operations. Scott also has previous experience in Investor Relations at two other companies earlier in his career.

In addition Clare Trachtman, who many of you already know will be named Vice President Investor Relations for Baxter and will report directly to Scott. Both Scott and Clare will continue in their current roles for the near future and will work closely with Mary Kay and her IR team as we transition into two separate companies in mid-2015.

In closing, Baxter has an established history of executing successful spin-offs and we believe this separation provides two unique and compelling investment opportunities for shareholders. Our decision underscores our commitment to ensuring our long-term strategic priorities remain aligned with shareholders’ best interest while we seek to improve our competitive position and performance, enhance operational commercial and scientific effectiveness and create long-term value for patients’, heathcare providers’ and other key stakeholders.

As always I’d be happy to address any questions you may have with regards to the spin-off or other topics during the Q&A and so with that I’ll now turn call over to Bob Hombach. Bob please.

Robert J. Hombach – Corporate VP and CFO

Thanks Bob, and good morning everyone. As Bob mentioned, adjusted earnings per diluted share in the third quarter advanced 9% to $1.35, which exceeded our previously issued guidance range of $1.28 to $1.32 per share. This performance reflects strong sales growth as well as continued investments in research and development, unplanned gains from equity investments totaling $0.03 per diluted share which will be reinvested in the business and adjusted income from discontinued operations of $26 million or $0.04 per diluted share.

As we mentioned in the press release GAAP earnings of $0.86 per diluted share, includes income from discontinued operations of $21 million, or $0.04 per diluted share and after-tax special items totaling $273 million, or $0.49 per diluted share, primarily for intangible amortization and costs associated with upfront product development and 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 2014. Please note that with a few exceptions for purposes of today’s discussion I will focus my comments on the adjusted P&L line items as seen on page 10 of the press release which shows the reconciliation of adjusted and GAAP earnings and reflects the Vaccine franchise as a discontinued operation. For reference we disclosed historical financial information for the vaccines franchise last week and have also posted the schedules to the Investor Relations page of Baxter’s website.

Starting with sales, worldwide sales of approximately $4.2 billion advanced 13% on both a reported and constant currency basis. Excluding Gambro from both periods Baxter sales rose 5% on a reported basis or 6% on a constant currency basis reflecting an acceleration of organic growth versus the first half of the year. You may recall that our sales guidance for the quarter included vaccine revenues, which were expected to decline given the receipt of lower milestone payments versus last year. When including vaccine revenues Baxter global sales grew 5% on a constant currency basis which is at the high end of our previously issued guidance range.

Sales in the U.S. increased 7% and international sales excluding Gambro and foreign currency also increased 7%. Sales from emerging markets, which now represent almost 25% of total Baxter sales, advanced nearly 20% given very strong performance in the BRIC markets driven by the timing of tenders.

In terms of individual business performance global BioScience sales totaled approximately $1.7 billion and advanced 8% on both a reported and constant currency basis. And despite a difficult comparison the U.S. bio therapeutics franchise BioScience reported the highest quarterly growth in almost two years.

Within the product categories hemophilia sales of $942 million increased 11% on both reported and constant currency basis. This is the fourth consecutive quarter of double-digit ADVATE growth which continues to be driven by strong global demand as well as benefits from recent tender wins in the UK and Australia and conversion to recombinant therapy in Brazil where to-date we have converted approximately 40% of the estimated 10,000 hemophilia A patients and continue to expect to generate sales of more than $100 million in 2014.

In the U.S. ADVATE growth was high single-digits supported by continued conversion to prophylactic treatment and very minimal loss of share to a new competitive entrant. We are also benefiting from the launch of new products and indications. RIXUBIS, our treatment for hemophilia B patients was launched in the U.S. late last year and we continue to be pleased with its uptake.

Our hemophilia performance also reflects robust demand and double-digit growth in FEIBA for the treatment of hemophilia patients with inhibitors. As you may recall only 15% to 20% of inhibitor patients globally are treated prophylactically and with approvals of this new indication across multiple large geographies like the U.S., Canada, Australia and Japan. We expect this to represent a significant growth opportunity for our hemophilia franchise over the long-term.

In biotherapeutics sales of $546 million improved sequentially due to enhanced product availability and we continue to see robust demand and stable market growth for our immunoglobulin and albumin therapies globally. Sales growth for this product category was 3% in the quarter on a reported basis and grew 4% on a constant currency basis. As mentioned on our last earnings call we expected an acceleration in international growth this quarter as we are building on our position in many foothold markets. And we also expect the growth in the U.S. to moderate due to tough comparisons created by supply availability and the easing of constraints beginning in the third quarter last year.

In addition we are being prudent in managing our global supply and inventory levels as we prepare for the upcoming HYQVIA launch which is expected next week. And given the renewal of albumin licenses in China we are once again optimizing our geographic mix with albumin shipments into that large and growing market.

In BioSurgery sales totaled $185 million and increased 7%. On a constant currency basis sales rose 6% driven by increased penetration for surgical sealants like TISSEEL and FLOSEAL. In medical products global sales of more than $2.5 billion increased 17% on a reported basis and were up 18% on a constant currency basis. Excluding Gambro medical product sales grew 4% on both reported and constant currency basis.

Within the product categories renal sales were approximately $1.1 billion which includes a contribution from Gambro of $391 million. Recall that we closed the Gambro acquisition in September last year and recorded sales of $100 million. Excluding Gambro from both periods renal sales of $664 million increased 3% or 4% on a constant currency basis. Strong global PD growth of 7% was somewhat offset by the impact of the CRRT divestiture.

As mentioned last quarter PD patient gains remain strong particularly in the U.S. where PD sales increased 12% for the quarter and the 13% year-to-date. Given this very strong demand we are experiencing back orders and are expediting shipments as we remain committed to ensuring patients have interrupted access to their therapy. We continue to produce PD solutions at maximum capacity, are working to expand capacity to meet the growing demand and are beginning to source product from our facility in Castlebar, Ireland through the much appreciated support of the FDA which granted a temporary import license.

Going forward we will continue to work with customers to carefully manage inventory and maintain continuity of care for our patients. We are very appreciative of the close collaboration and great support we received from the agency in this regard. Going forward we will continue to work with customers to carefully manage inventory and maintain continuity of care.

Within the fluid systems category sales of $827 million increased 4% on a reported basis and 5% on a constant currency basis. Performance is driven by favorable demand and pricing for IV therapies. As you may know to date we have not experienced any new competition for cyclophosphamide and we’re updating our guidance for this new assumption. For your reference sales of U.S. cyclophosphamide in the third quarter were approximately $120 million and were lower than the prior year and sales on a year-to-date basis now total $345 million.

Specialty pharmaceuticals, which includes our inhaled anesthetics and nutritional therapies posted sales of $386 million reflecting an increase of 4%. Sales rose 3% on a constant currency basis, driven primarily by mid-single digit growth of our anesthesia portfolio where we are increasing international penetration and low single digit growth for nutritional therapies. Finally sales in bio pharma solutions which is our pharma partnering business totaled $256 million and increased 5% on reported basis or 3% on a constant currency basis. Performance can be attributed primarily to strong pharmacy compounding revenues.

Turning to the rest of the P&L gross margin in the quarter was 50.5% compared to 52.7% last year. Positive mix from franchises within bioscience was primarily offset by the impact of foreign exchange and Gambro which collectively reduced the rate by approximately 130 basis points. In addition the gross margin was impacted by product mix within medical products, expedited freight for PD solutions and lower than expected production volumes as we continue to make investments to enhance our quality systems, processes and operational excellence to meet evolving regulatory requirements.

SG&A totaled $921 million, and increased 13% with the Gambro acquisition accounting for the vast majority of the growth. Excluding Gambro SG&A increased 2% as leverage was derived from benefits associated with our business optimization initiatives. This was partially offset by select investments in 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 $292 million increased 16% versus the prior year. Excluding Gambro R&D rose 8% 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. The operating margin in the quarter of 21.6% is lower than last year’s operating margin of 23.8%. Excluding Gambro the operating margin was 23.4% reflecting the impact of foreign exchange and incremental investments referenced earlier.

Interest expense was $31 million in the third quarter compared to $45 million last year. As expected we benefited from debt maturities and a favorable change related to the mix of floating versus fixed interest rates. Other income totaled $39 million and was driven primarily by the favorable foreign exchange impact on balance sheet positions and approximately $20 million or $0.03 per diluted share in unplanned equity gains related to investments in the Baxter Ventures fund.

The tax rate was 21.8% for the quarter, in line with our expectations and as previously mentioned adjusted earnings per diluted share advanced 9% to $1.35. Turning to cash flow on a year-to-date basis, cash flow from operations totaled approximately $2.1 billion. DSO ended the quarter at 55.9 days and excluding Gambro Baxter’s DSO was 53 days lower than the prior year by more than two days.

Inventory turns of 2.2 are modestly higher than the prior period and lastly to-date we repurchased approximately 7 million shares for $500 million on a net basis, 1.5 million shares for $200 million.

Finally let me conclude my comments this morning by providing our updated financial outlook. For the full year we expect adjusted earnings from continuing operations of $4.86 to $4.89 per diluted share. After adding the expected earnings contribution from the vaccine franchise of approximately $0.27 per diluted share this guidance is in line with our previously issued and disclosed range of $5.10 to $5.20 per diluted share.

In addition we have updated our assumptions for cyclophosphamide and do not expect any new competition before the end of the year. While this has resulted in a transitory benefit it is offsetting incremental headwinds associated with foreign currency in the fourth quarter of approximately $0.04 per diluted share and other investments to enhance quality and operational effectiveness in the medical products business and additional investments in SG&A and R&D in BioScience.

Specifically by line item of the P&L and starting with sales, we now expect sales growth excluding the impact of foreign currency of approximately 11% to 12%, which includes annual sales of more than $1.6 billion for Gambro. At current foreign exchange rates we expect reported sales growth of approximately 10% to 11%. Excluding Gambro we expect Baxter’s organic sales to grow approximately 4% on a constant currency basis. For the full year we continue to expect gross margins for the company of approximately 50.5%. This compares to the prior year gross margin of 51.7%. In terms of expenses we now expect R&D and SG&A to grow in low to mid-teens for the full year.

We expect interest expense to total approximately $150 million and other income to total approximately $90 million for the full year. We expect the tax rate of approximately 22%, slightly higher than our original expectations as the vaccine franchise carry a very low tax rate and we expect a full year average share count of approximately 547 million shares which assumes approximately 300 million in net share repurchases. From a cash flow perspective we continue expect to generate cash flow from operations of approximately $3.5 billion which excludes the cash cost associated with the spin-off of the biopharmaceuticals business. We now expect capital expenditures of $1.8 billion to $1.9 billion which excludes pre-spin capital expenditures primarily in the area of information technologies.

Let me move to sales and expand on our assumptions for the two businesses in the major product categories. Beginning with medical products on a constant currency basis, including the contribution of Gambro we now expect sales growth of approximately 15% and excluding Gambro we expect sales for medical products to grow approximately 3%.

Specifically we continue to expect renal sales to grow approximately 40%, we now expect Fluid Systems sales to grow approximately 4%, as we assume no material impact from cyclophosphamide competition this year. We continue to expect specialty pharmaceutical sales, which includes our nutritional therapies and inhaled anesthetics to grow in the 3% to 5% range and we expect our biopharma solution sales to be flat for the full year.

For BioScience we are once again raising our guidance and now project sales growth, excluding foreign currency of approximately 6%. Our outlook includes strong growth in our global hemophilia franchise of approximately 8% fueled by underlying global demand for ADVATE, conversion to recombinant therapy in Brazil, new tender wins and continued benefits from new product launches including RIXUBIS and fiber prophylaxis.

For the biotherapeutics franchise we continue to expect growth of approximately 4% driven by increased demand and the contribution from the HYQVIA launch. And finally for our BioSurgery business we continue to expect growth in low to mid-single digits. As mentioned in our press release for the fourth quarter we expect earnings per diluted share from continuing operations, excluding special items of $1.30 to $1.33, we expect sales growth excluding the impact of foreign currency of approximately 3% and we expect reported sales to be flat to the prior year.

Before I open up the call for Q&A let me take a moment to update you on some of the financial aspects of the spin. First we expect to file our initial Form 10 for Baxalta before the end of this year, which will include historical financial results on a GAAP basis for the years 2010 through 2013 and year-to-date results for 2014. These financial statements will be prepared as if on a standalone basis and derive from Baxter’s consolidated financials and will include allocations of various costs previously held at Baxter corporate level.

I would highlight that these financial statements are inherently limited as costs associated with corporate overhead, income taxes, support services and interest expenses may not be indicative of future costs associated with running Baxalta as an independent standalone corporation. We expect to file amendments to the Form-10 in 2015 results which will include 2014 and year-to-date 2015 financial results for Baxalta, in addition, to pro forma adjustments to reflect the impact of expected debt and interest expense and other associated agreements and transactions.

As we previously disclosed we are in the process of designing the two new organizations and at this point our rough estimate of initial dis-synergies including [stranded] cost is approximately 2% of total Baxter sales or more than $300 million. About half of these costs will be incurred beginning in the second-half of 2015 and both companies will have the opportunity to reduce a meaningful portion of these costs over the next several years post spin.

In addition, spin related costs incurred in the first-half of 2015 will be considered special items and will be excluded from our adjusted earnings. Also, as we continue to work through the details of our IT ownership and manufacturing footprint we have not uncovered any substantial issues from a tax perspective. While we will finalizing the capital allocation strategies of each of the businesses in the coming months we expect that both will have strong balance sheet, generate significant cash flow and have the flexibility to follow a disciplined capital allocation approach which balances reinvestment of business in CapEx, R&D and M&A with returning value to shareholders in the form of dividend and share repurchases.

We look forward to sharing more information with you as we get closer to completing the spin. While we continue to work through the complexity this process is unfolding in line with our expectations and we continue on track toward a mid-2015 completion. This assumes the Form-10 registration statement is declared effective by the SEC and final approvals have been obtained including from our Board of Directors.

As we proceed towards the separation date we plan to host an investor conference in the second quarter of 2015 to introduce you to the new senior management teams and provide investors with more information regarding the strategies, growth prospects and financial outlooks for each company. We recognize that investors and analysts would like more information to help them model both companies separately and the intent of the conference is to help you establish a base line as each company will have a different financial profile after the separation. We will also engage in a comprehensive Investor Relations effort, including investor road shows for both companies with the respective senior management teams several weeks before the spin-off is completed.

Thanks. And now I’d like to open-up the call for Q&A.

Question-and-Answer Session

Read the Full Transcript Here

Related Posts

Reader Disclosure: Some links on this Site are affiliate links. Which means that, if you choose to make a purchase, we may earn a small commission at no extra cost to you. We greatly appreciate your support.

Multi-Page