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| BAX > SEC Filings for BAX > Form 10-Q on 2-May-2008 | All Recent SEC Filings |
2-May-2008
Quarterly Report
RESULTS OF OPERATIONS
NET SALES
Three months ended
March 31, Percent
(in millions) 2008 2007 change
BioScience $ 1,210 $ 1,151 5%
Medication Delivery 1,065 990 8%
Renal 558 525 6%
Transition services to Fenwal Inc. 44 9 389%
Total net sales $ 2,877 $ 2,675 8%
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Three months ended
March 31, Percent
(in millions) 2008 2007 change
International $ 1,698 $ 1,536 11%
United States 1,179 1,139 4%
Total net sales $ 2,877 $ 2,675 8%
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During the first quarter of 2008, foreign currency fluctuations benefited sales growth by 6 percentage points, principally due to the weakening of the U.S. Dollar relative to the Euro.
Three months ended
March 31, Percent
(in millions) 2008 2007 change
Total net sales $ 2,877 $ 2,675 8%
Pre-divestiture sales of Transfusion Therapies
products (included in BioScience segment through
the February 28, 2007 divestiture date) - 79 (100% )
Transition services to Fenwal Inc. (subsequent to
the February 28, 2007 divestiture date) 44 9 389%
Total net sales excluding Transfusion Therapies $ 2,833 $ 2,587 10%
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Net sales excluding Transfusion Therapies (TT) increased 10% during the first
quarter of 2008 (including a 6 percentage point favorable impact from foreign
currency fluctuations). Management believes that net sales and sales growth
excluding TT facilitates a more meaningful analysis of the company's net sales
growth due to the divestiture of this business in 2007. See Note 3 for further
information regarding the divestiture of the TT business.
BioScience
Sales in the BioScience segment increased 5% during the first quarter of 2008
(including a 5 percentage point favorable impact from foreign currency
fluctuations).
The following is a summary of sales by significant product line.
Three months ended
March 31, Percent
(in millions) 2008 2007 change
Recombinants $ 436 $ 388 12%
Plasma Proteins 260 225 16%
Antibody Therapy 286 222 29%
Regenerative Medicine 94 82 15%
Transfusion Therapies - 79 (100% )
Other 134 155 (14% )
Total net sales $ 1,210 $ 1,151 5%
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Recombinants
The primary driver of sales growth in the Recombinants product line during the
first quarter of 2008 was increased sales volume of recombinant factor VIII
therapies. Factor VIII products are used in the treatment of hemophilia A, which
is a bleeding disorder caused by a deficiency in blood clotting factor VIII.
Sales growth was fueled by the continuing adoption by customers of the advanced
recombinant therapy, ADVATE (Antihemophilic Factor (Recombinant),
Plasma/Albumin-Free Method) rAHF-PFM, with strong patient conversion in both the
United States and international markets, and increased demand for new dosage
forms that reduce both the volume of drug and infusion time required for
hemophilia patients needing high doses of factor VIII. Sales of ADVATE totaled
approximately $325 million in the first quarter of 2008, compared to
$260 million in the first quarter of 2007.
Plasma Proteins
Plasma Proteins include specialty therapeutics, such as FEIBA, an anti-inhibitor
coagulant complex, and ARALAST (alpha 1-proteinase inhibitor (human)) for the
treatment of hereditary emphysema, plasma-derived hemophilia treatments and
albumin. Sales growth in the first quarter of 2008 was driven by strong sales of
albumin, FLEXBUMIN [Albumin (Human)] (an albumin therapy packaged in flexible
containers), FEIBA and ARALAST, with both volume and pricing improvements
contributing to the sales growth of these products.
Antibody Therapy
Higher sales of IGIV (immune globulin intravenous), which is used in the
treatment of immune deficiencies, fueled sales growth during the first quarter
of 2008, with increased volume, continuing improvements in pricing in the United
States and Europe, and continuing customer conversions to the liquid formulation
for the product. Because it does not need to be reconstituted prior to infusion,
the higher-yielding liquid formulation offers added convenience for clinicians
and patients.
Regenerative Medicine
This product line principally includes plasma-based and non-plasma-based
biosurgery products for hemostasis (the stoppage of bleeding), wound-sealing and
tissue regeneration. Growth in the first quarter of 2008 was driven by increased
sales of the company's FLOSEAL and COSEAL sealants.
Transfusion Therapies
The transfusion therapies product line included products and systems for use in
the collection and preparation of blood and blood components. See Note 3 for
information regarding the company's February 28, 2007 sale of substantially all
of the assets and liabilities of this business.
Other
Other BioScience products primarily consist of vaccines and sales of plasma to
third parties. The decrease in sales in this product line in the first quarter
of 2008 was primarily due to the transfer of marketing and distribution rights
for recombinant FIX (BeneFIX) back to Wyeth effective June 30, 2007. Sales of
BeneFIX were approximately $50 million in the first quarter of 2007. Also
contributing to the decrease in sales were large shipments of candidate H5N1
influenza vaccine to various governments worldwide in the first quarter of 2007.
Partially offsetting these declines in the quarter were strong international
sales of FSME Immun (for the prevention of tick-borne encephalitis), principally
due to pricing improvements. Sales of vaccines may fluctuate from period to
period based on the timing of government tenders and new supply agreements.
Medication Delivery
Net sales for the Medication Delivery segment increased 8% during the first
quarter of 2008 (including a 6 percentage point favorable impact from foreign
currency fluctuations).
The following is a summary of sales by significant product line.
Three months ended
March 31, Percent
(in millions) 2008 2007 change
IV Therapies $ 371 $ 320 16%
Global Injectables 368 361 2%
Infusion Systems 220 209 5%
Anesthesia 99 89 11%
Other 7 11 (36% )
Total net sales $ 1,065 $ 990 8%
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IV Therapies
This product line principally consists of intravenous (IV) solutions and
nutritional products. Growth for the quarter was principally driven by increased
demand for IV therapy products in Europe, Latin America, and Asia, particularly
in China, and strong international sales of nutritional products. Also impacting
sales growth in the quarter were pricing improvements for IV therapy products in
the United States and the favorable impact of foreign currency fluctuations.
Global Injectables
This product line primarily consists of the company's pharmaceutical company
partnering business, enhanced packaging, premixed drugs and generic injectables.
Contributing to sales growth in the first quarter of 2008 were strong
international sales in the pharmacy-compounding business. Sales levels in the
quarter were unfavorably impacted by a decline in revenues in the pharmaceutical
company partnering business in the United States and lower sales of generic
injectables, principally due to the transfer of marketing and distribution
rights for generic propofol back to Teva Pharmaceutical Industries Ltd.
effective July 1, 2007. Sales of propofol totaled approximately $20 million in
the first quarter of 2007.
Infusion Systems
Sales growth in the first quarter of 2008 was driven by the favorable impact of
foreign currency fluctuations and increased sales of disposable tubing sets used
in the administration of IV solutions. Sales of COLLEAGUE infusion pumps were
flat in the first quarter of 2008 as compared to the prior year period. Refer to
Note 4 and the "Certain Regulatory Matters" section below for additional
information, including charges recorded in the first quarter of 2008, related to
the COLLEAGUE infusion pump.
Anesthesia
Sales growth in the first quarter of 2008 was driven by strong international
sales, principally as a result of increased penetration of SUPRANE (desflurane,
USP) and the impact of the launch of sevoflurane in additional geographic
markets. Partially offsetting this growth were decreased sales in the United
States, which were unfavorably impacted by wholesaler purchasing patterns in the
first quarter of 2008.
Renal
Sales in the Renal segment increased 6% during the first quarter of 2008
(including an 8 percentage point favorable impact from foreign currency
fluctuations).
The following is a summary of sales by significant product line.
Three months ended
March 31, Percent
(in millions) 2008 2007 change
PD Therapy $ 445 $ 419 6%
HD Therapy 113 106 7%
Total net sales $ 558 $ 525 6%
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PD Therapy
Peritoneal dialysis, or PD Therapy, is a dialysis treatment method for end-stage
renal disease. PD Therapy, which is used primarily at home, uses the peritoneal
membrane, or abdominal lining, as a natural filter to remove waste from the
bloodstream. Excluding the impact of foreign currency, sales declined slightly
in the quarter, as increased numbers of patients in Asia, particularly in China,
the United States, and Central and Eastern Europe were more than offset by the
loss of a government tender in Mexico. Increased penetration of PD Therapy
products continues to be strong in emerging markets, where many people with
end-stage renal disease are currently under-treated.
HD Therapy
Hemodialysis, or HD Therapy, is another form of end-stage renal disease dialysis
therapy that is generally performed in a hospital or outpatient center. In HD
Therapy, the patient's blood is pumped outside the body to be cleansed of wastes
and fluid using a machine and an external filter, also known as a dialyzer. The
sales growth during the first quarter of 2008 was principally driven by the
favorable impact of foreign exchange, which was partially offset by a decline in
sales of dialyzers.
Transition Services to Fenwal Inc.
Net sales in this category represents revenues associated with manufacturing,
distribution and other services provided by the company to Fenwal Inc. (Fenwal)
subsequent to the divestiture of the TT business on February 28, 2007. See Note
3 for further information.
GROSS MARGIN AND EXPENSE RATIOS
Three months ended
March 31,
2008 2007 Change
Gross margin 48.0% 47.3% 0.7 pts
Marketing and administrative expenses 22.2% 21.8% 0.4 pts
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Gross Margin
The improvement in gross margin in the first quarter of 2008 was principally
driven by continued customer conversion to ADVATE and the liquid formulation of
IGIV, manufacturing efficiencies and yield improvements, improved pricing for
certain plasma protein products, and strong sales of certain vaccines.
Included in the company's gross margin in the first quarter of 2008 were charges
of $53 million related to COLLEAGUE infusion pumps and $19 million related to
the company's recall of its heparin products in the United States. These charges
decreased the gross margin by approximately 2.5 percentage points in the
quarter. Refer to Note 4 for further information on these charges.
Marketing and Administrative Expenses
The increase in the marketing and administrative expense ratio in the first
quarter of 2008 was principally due to an increase in stock compensation costs
and spending related to certain marketing programs, particularly in the
BioScience segment, partially offset by a reduction in expenses due to the
February 28, 2007 divestiture of the TT business. See Note 3 for further
information about the TT divestiture.
RESEARCH AND DEVELOPMENT
Three months ended
March 31, Percent
(in millions) 2008 2007 change
Research and development (R&D) expenses $190 $159 19%
As a percent of sales 6.6% 5.9%
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R&D expenses increased during the first quarter of 2008, with strong growth in
spending on R&D projects across all three of the company's businesses reflecting
the company's commitment to accelerate R&D investments. Refer to the 2007 Annual
Report for a discussion of the company's R&D pipeline.
2007 RESTRUCTURING CHARGE
During 2007, the company recorded a restructuring charge of $70 million
principally associated with the consolidation of certain commercial and
manufacturing operations outside of the United States. Based upon a review of
current and future capacity needs, the company decided to integrate several
facilities in order to reduce the company's cost structure and optimize the
company's operations.
Included in the charge was $17 million related to asset impairments and
$53 million for cash costs, principally pertaining to severance and other
employee-related costs. The reserve for cash costs is expected to be utilized by
the end of 2009. Refer to Note 4 for further information, including reserve
utilization through March 31, 2008.
The company believes that the reserves are adequate. However, adjustments may be
recorded in the future as the programs are completed. Cash expenditures are
being funded with cash generated from operations.
NET INTEREST EXPENSE
Net interest expense was $17 million in the first quarter of 2008, compared to
$5 million in the first quarter of 2007. The increase was driven by a higher
average debt level, principally due to the December 2007 issuance of
$500 million of senior unsecured notes, and a lower average cash balance,
partially due to share repurchases in the quarter. Also contributing to the
increase in net interest expense was the impact of the terminations of certain
cross-currency swap agreements.
OTHER INCOME, NET
Other income, net was $1 million and $10 million during the first quarters of
2008 and 2007, respectively. Other income, net in both periods principally
included amounts relating to foreign exchange, minority interests and equity
method investments. Other income, net in the first quarter of 2008 included
$16 million of income related to the finalization of the net assets transferred
in the divestiture of the TT business. Other income, net in the first quarter of
2007 included a gain on the sale of the TT business of $58 million less related
charges of $35 million. See Note 3 for further information.
PRE-TAX INCOME
Refer to Note 8 for a summary of financial results by segment. The following is
a summary of significant factors impacting the segments' financial results.
BioScience
Pre-tax income increased 21% in the first quarter of 2008. The primary drivers
of the increase were strong sales of higher-margin products, which were fueled
by the continued adoption of ADVATE, the conversion to the liquid formulation of
IGIV, improved pricing of certain plasma protein products, strong sales of
certain vaccines, continued cost and yield improvements and the favorable impact
of foreign currency fluctuations. Partially offsetting this growth was the
impact of higher spending on new marketing programs and increased R&D spending
related to the adult stem-cell therapy program and certain clinical trials.
Medication Delivery
Pre-tax income decreased 40% in the first quarter of 2008. The primary drivers
of the decline were charges in the first quarter of 2008 of $53 million related
to COLLEAGUE infusion pumps and $19 million related to the company's recall of
its heparin products in the United States, as well as increased spending on
marketing programs and R&D. See Note 4 for further information about the
COLLEAGUE and heparin charges. Partially offsetting the impact of these items
was an improved product mix, particularly outside of the United States, and the
favorable impact of foreign currency fluctuations.
Renal
Pre-tax income decreased 17% in the first quarter of 2008. The decrease was
principally due to the loss of a PD tender in Mexico and increased spending on
marketing programs and new product development, including the next-generation
home HD machine, partially offset by the favorable impact of foreign currency
fluctuations.
Other
Certain items are maintained at the company's corporate level and are not
allocated to the segments. These items primarily include net interest expense,
certain foreign currency fluctuations and the majority of the foreign currency
and interest rate hedging activities, stock compensation expense, income and
expense related to certain non-strategic investments, corporate headquarters
costs, certain employee benefit plan costs, certain nonrecurring gains and
losses, and income related to the manufacturing, distribution and other
transition agreements with Fenwal. Refer to Note 8 for a reconciliation of
segment pre-tax income to income before income taxes per the consolidated income
statements. The significant factors impacting these other items are described
below.
Refer to the discussion above regarding net interest expense. The $9 million
change related to foreign exchange fluctuations and hedging activities was due
to the favorable impact of the company's cash flow hedges. The increase in stock
compensation expense was principally due to recent changes in the company's
stock compensation programs, including the granting of performance share units
beginning in 2007 and an amendment to the company's employee stock purchase plan
effective January 1, 2008. Refer to the 2007 Annual Report for further
information regarding these changes.
The decrease in other corporate items in the first quarter of 2008 was primarily
due to income of $16 million related to the finalization of the net assets
transferred in the divestiture of the TT business, revenue recognized as
services were performed under the manufacturing, distribution and other
transition agreements with the buyer of the TT business, and the impact of a
$10 million voluntary contribution to the Baxter International Foundation in the
first quarter of 2007. These items were partially offset by income of
$23 million in the first quarter of 2007, reflecting the $58 million gain on the
sale of the TT business less related charges of $35 million. Refer to Note 3 for
further information regarding the divestiture of the TT business.
INCOME TAXES
The company's effective income tax rate was 19.7% and 23.8% in the first
quarters of 2008 and 2007, respectively. The effective tax rate in the first
quarter of 2007 was unusually high due to the tax impact of the gain on the
divestiture of the TT business and related charges recorded in that period.
Refer to Note 3 for further information about the divestiture of the TT
business. The company anticipates that the effective tax rate, calculated in
accordance with generally accepted accounting principles (GAAP), will be
approximately 19% to 19.5% in 2008, excluding any impact from additional audit
developments or other special items.
INCOME AND EARNINGS PER DILUTED SHARE
Net income was $429 million, or $0.67 per diluted share, for the first quarter
of 2008 and $403 million, or $0.61 per diluted share, in the prior year quarter.
The significant factors and events contributing to the changes are discussed
above.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. A summary of the company's
significant accounting policies as of December 31, 2007 is included in Note 1 to
the company's consolidated financial statements in the 2007 Annual Report.
Certain of the company's accounting policies are considered critical, as these
policies are the most important to the depiction of the company's financial
statements and require significant, difficult or complex judgments, often
employing the use of estimates about the effects of matters that are inherently
uncertain. Such policies are summarized in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section in the 2007
Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash flows from operating activities
Cash flows from operating activities increased during the first quarter of 2008
as compared to the prior year, totaling $362 million in the first quarter of
2008 and $215 million in 2007. The increase in cash flows was primarily due to
higher earnings (before non-cash items) and the other factors discussed below.
Accounts Receivable
Cash flows relating to accounts receivable increased during the first quarter of
2008 as compared to the prior year. Days sales outstanding increased from
55.3 days at March 31, 2007 to 56.3 days at March 31, 2008, primarily due to a
shift in the geographic mix of sales to certain international locations with
longer collection periods and a decrease in cash proceeds from the
securitization and factoring of receivables, principally due to the termination
of the European securitization arrangement in the fourth quarter of 2007. See
the 2007 Annual Report for further information. The impact of these factors was
partially offset by an improvement in the collection of receivables in the
United States.
Inventories
Cash outflows relating to inventories decreased in 2008. The following is a
summary of inventories at March 31, 2008 and December 31, 2007, as well as
inventory turns for the three months ended March 31, 2008 and 2007, by segment.
Inventories Annualized inventory turns
March 31, December 31, for the three months ended March 31,
(in millions, except inventory turn data) 2008 2007 2008 2007
BioScience $ 1,355 $ 1,234 1.44 1.87
Medication Delivery 880 826 2.98 3.08
Renal 263 236 4.18 4.48
Other 38 38 - -
Total $ 2,536 $ 2,334 2.27 2.59
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Inventories increased $202 million in the first quarter of 2008, with
approximately half of the increase related to foreign currency fluctuations. The
lower inventory turns in the BioScience segment were primarily due to an
increase in plasma inventories as a result of the transition to the company's
new plasma fractionation facility in Los Angeles, California, as well as planned
increases in stock levels of certain plasma protein products to ensure
continuity of care. The lower inventory turns in the Medication Delivery segment
were primarily due to an increase in infusion pump inventory related to the
above-mentioned sales hold on COLLEAGUE pumps in the United States.
Liabilities, Restructuring Payments and Other
Cash outflows related to liabilities, restructuring payments and other increased
in the first three months of 2008 as compared to the prior year period,
principally driven by the timing of accounts payable and the payment of income
taxes. Also contributing to the increase in cash outflows were the impact of
cash inflows in the first quarter of 2007 of $52 million resulting from a
prepayment relating to the Fenwal manufacturing, distribution and other
transition agreements and $25 million of excess tax benefits from stock option
exercises. Refer to Note 3 for further information regarding the agreements with
Fenwal and Note 6 regarding the excess tax benefits from stock option exercises.
Also contributing to the increase in cash outflows were payments related to the
company's restructuring programs, which increased by $9 million.
Partially offsetting these increases in cash outflows were the settlements of
certain mirror cross-currency swaps, which resulted in operating cash inflows of
$12 million in the first quarter of 2008 as compared to cash outflows of
$31 million in the first quarter of 2007. Refer to the 2007 Annual Report for
further information regarding these swaps.
Cash flows from investing activities
Capital Expenditures
. . .
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