Baxter International Inc. (BAX)

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Baxter International Inc. (BAX)

Q3 2009 Earnings Call

October 15, 2009 8:30 am ET


Mary Kay Ladone – VP IR

Bob Parkinson – CEO

Rob Davis - CFO


Mike Weinstein - JPMorgan

Bob Hopkins – Banc of America

Bruce Nudell – UBS

Matt Miksic – Piper Jaffray

Rick Wise - Leerink Swann

Matt Dodds - Citigroup

David Lewis – Morgan Stanley

Glenn Navarro – RBC Capital Markets

Ben Andrew - Willilam Blair & Company



Good morning ladies and gentlemen and welcome to Baxter International’s third quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Miss Mary Kay Ladone, Vice President Investor Relations of Baxter International. Miss Ladone, you may begin.

Mary Kay Ladone

Good morning everyone. Welcome to our Q3 2009 earnings conference call. Joining me today are Bob Parkinson, CEO and Chairman of Baxter International, and Rob Davis, Chief Financial Officer.

Before we get started, let me remind you that this presentation including comments regarding our financial outlook, new product development, and regulatory matters, contain forward-looking statements that involve risks and uncertainties, and of course our actual results could differ materially from our current expectations.

Please refer to today’s press release and our SEC filings for more details concerning factors that could cause actual results to differ materially. In addition, in today’s call non-GAAP financial measures will be used to help investors understand Baxter’s ongoing business performance.

A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures, is included in our earnings release issued this morning and available on our website.

Now I’d like to turn the call over to Bob Parkinson.

Bob Parkinson

Thanks Mary Kay, good morning everyone and thanks for calling in this morning. While Rob is going to provide more detail on our financial results and outlook in just a few minutes, what I’d like to do is take a moment to highlight just a few key points at the outset this morning.

First as you saw in the press release that was issued earlier this morning, adjusted EPS of $0.98 exceeded guidance for the quarter and increased 11% versus last year. This was primarily the result of continued margin expansion derived from favorable product and business mix, price improvements, and enhanced manufacturing and cost efficiencies, as well as expense leverage and benefits from our ongoing share repurchase program.

Third quarter sales excluding FX was 6% and excluding transfusion therapy from both years, sales increased 7% generally in line with our sales growth over the last several quarters. I continue to be pleased with the improvement in two key value metrics; gross margin and operating margin.

On an adjusted basis, gross margin in the third quarter was 52.8% and operating income as a percentage of sales exceeded 24%. Both metrics showed significant year over year improvement and represent new record levels for our company.

In addition we’re advancing and expanding our global pipeline through investments in research and development augmented by business development initiatives. In the quarter R&D spending increased by 5% on an adjusted basis or high single-digits on a constant currency basis.

Recent achievements include the following, first the commercial launch of HYLENEX in the US for use in pediatric rehydration. As you know, HYLENEX, is an enzyme that allows fluids to be administered under the skin or subcutaneously as opposed to intravenously.

This facilitates rapid initiation of treatment and delivery of IV fluids for dehydration in children, a potentially serious consequence of viral respiratory diseases including influenza and other conditions that can cause fluid loss.

Second in our renal business, the Investigational Device Exemption, or IDE, was recently submitted to the FDA four our new home hemodialysis system, which will allow the initiation of a clinical study to collect the safety and effectiveness data required for a 510(k) approval.

Third in our regenerative medicine business, we initiated a Phase III study evaluating the use of ARTISS in facial surgery in the United States. This is the second of three pivotal studies required by the FDA to obtain a broad adherence label.

As you know, ARTISS is the first and only slow-setting fibrin sealant indicated for use in adhering skin grafts in adult and pediatric burn patients. And is the newest agent in our expanding biosurgery portfolio.

Fourth in our vaccines business, we achieved several milestones including the completion of the seasonal influenza Phase III confirmatory study in healthy adults in the United States. We expect final study reports to be available by the end of the year, that will support our regulatory filing in the US in the first half of 2010.

Also in the quarter, we completed the acquisition of the hemofiltration business, also known as Continuous Renal Replacement Therapy or CRRT, from Edwards Life Sciences Corporation. CRRT provides a method of continuous and adjustable fluid removal that can gradually remove excess fluid and waste products that accumulate with the acute impairment of kidney function, and is usually administered in an intensive care setting in the hospital.

Before turning the call over to Rob, let me briefly update you on the status of Baxter’s CELVAPAN H1N1 pandemic vaccine. As you all know, the European Commission granted marketing authorization for CELVAPAN earlier this month.

This vaccine is the first cell culture-based and non-adjuvanted pandemic influenza vaccine to receive marketing authorization in the European Union. While our current license calls for two doses of CEVAPAN, the clinical data would suggest that a one-dose regimen may be possible and we’ve recently submitted this data to the appropriate regulatory authorities for their consideration and approval.

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