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| BAX > SEC Filings for BAX > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
Refer to the company's 2008 Annual Report to Shareholders (2008 Annual Report)
for management's discussion and analysis of the financial condition and results
of operations of the company for the year ended December 31, 2008. The following
is management's discussion and analysis of the financial condition and results
of operations of the company for the three and nine months ended September 30,
2009.
RESULTS OF OPERATIONS
NET SALES
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2009 2008 change 2009 2008 change
BioScience $ 1,385 $ 1,354 2% $ 4,055 $ 3,949 3%
Medication Delivery 1,168 1,157 1% 3,337 3,386 (1% )
Renal 576 593 (3% ) 1,641 1,749 (6% )
Transition services to
Fenwal Inc. 16 47 (66% ) 59 133 (56% )
Total net sales $ 3,145 $ 3,151 0% $ 9,092 $ 9,217 (1% )
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2009 2008 change 2009 2008 change
International $ 1,813 $ 1,879 (4% ) $ 5,194 $ 5,525 (6% )
United States 1,332 1,272 5% 3,898 3,692 6%
Total net sales $ 3,145 $ 3,151 0% $ 9,092 $ 9,217 (1% )
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Foreign currency unfavorably impacted net sales by 6 and 8 percentage points in the three- and nine-month periods ended September 30, 2009, respectively, due to
the strengthening of the U.S. Dollar relative to other currencies, including the Euro and the British Pound in both periods.
BioScience
The following is a summary of sales by product category in the BioScience segment.
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2009 2008 change 2009 2008 change
Recombinants $ 528 $ 516 2% $ 1,494 $ 1,460 2%
Plasma Proteins 331 338 (2% ) 958 889 8%
Antibody Therapy 336 307 9% 1,017 908 12%
Regenerative Medicine 109 104 5% 317 307 3%
Other 81 89 (9% ) 269 385 (30% )
Total net sales $ 1,385 $ 1,354 2% $ 4,055 $ 3,949 3%
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Net sales in the BioScience segment increased 2% and 3% during the three- and nine-month periods ended September 30, 2009, respectively (including a 6 and 8 percentage point unfavorable foreign currency impact in the three- and nine-month periods ended September 30, 2009, respectively). Excluding the impact of foreign currency, net sales increased in both the third quarter and first nine months of 2009 due to increased demand across a majority of the product categories and improved pricing for select products. Sales growth in the Recombinants product category in both the quarter and year-to-
date period was the result of increased demand for ADVATE [Antihemophilic Factor
(Recombinant), Plasma/Albumin-Free Method]. Improved pricing and increased
demand for various plasma-derived products, including albumin and ARALAST [alpha
1-proteinase inhibitor (human)], drove sales growth in both periods in the
Plasma Proteins product category. Also contributing to sales growth in the
quarter and year-to-date period were improved pricing and increased demand for
GAMMAGARD LIQUID, the liquid formulation of the antibody-replacement therapy
IGIV (immune globulin intravenous), in the Antibody Therapy product category;
increased demand for FLOSEAL, a fibrin sealant product in the Regenerative
Medicine product category; and, in the Other product category, increased sales
of NEISVAC-C (for the prevention of meningitis C). Partially offsetting this
sales growth were lower sales of FSME-IMMUN (a tick-borne encephalitis vaccine),
as a result of seasonal factors, lower market demand and increased competition,
particularly in the year-to-date period. Sales growth for the nine-months ended
September 30, 2009 also benefited from improved pricing for FEIBA (an
anti-inhibitor coagulant complex) and increased demand for plasma-derived factor
VIII in the Plasma Proteins product category, and increased revenue related to
advanced purchase agreements for pandemic influenza vaccines in the Other
product category. Sales of FEIBA and plasma-derived factor VIII declined in the
third quarter of 2009 as a result of the timing of international tenders.
Medication Delivery
The following is a summary of sales by product category in the Medication
Delivery segment.
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2009 2008 change 2009 2008 change
IV Therapies $ 396 $ 403 (2% ) $ 1,124 $ 1,182 (5% )
Global Injectables 433 403 7% 1,222 1,164 5%
Infusion Systems 208 235 (11% ) 612 684 (11% )
Anesthesia 123 112 10% 352 333 6%
Other 8 4 100% 27 23 17%
Total net sales $1,168 $1,157 1% $ 3,337 $ 3,386 (1% )
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Net sales in the Medication Delivery segment increased 1% and decreased 1% during the three- and nine-month periods ended
September 30, 2009, respectively (including a 6 and 8 percentage point unfavorable foreign currency impact in the three-
and nine-month periods ended September 30, 2009, respectively). Excluding the impact of foreign currency, net sales
increased in both periods as a result of increased demand and improved pricing for intravenous (IV) solutions and
nutritional products in the IV Therapies product category; strong sales of select multi-source generics and growth in the
company's international pharmacy compounding and U.S. pharmaceutical partnering businesses in the Global Injectables
product category; and growth in anesthesia products driven by increased sales of sevoflurane and SUPRANE (desflurane).
Partially offsetting this sales growth in both periods was a decline in Infusion Systems sales due to lower revenues from
access sets and COLLEAGUE infusion pumps which remain in use as the remediation plan is executed.
Renal
The following is a summary of sales by product category in the Renal segment.
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2009 2008 change 2009 2008 change
PD Therapy $473 $480 (1% ) $ 1,347 $ 1,404 (4% )
HD Therapy 103 113 (9% ) 294 345 (15% )
Total net sales $576 $593 (3% ) $ 1,641 $ 1,749 (6% )
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Net sales in the Renal segment decreased 3% and 6% during the three- and nine-month periods ended September 30, 2009, respectively (including a 7 and 9 percentage point unfavorable foreign currency impact in the three- and nine-month periods
ended September 30, 2009, respectively). Excluding the impact of foreign
currency, net sales in both periods grew due to gains in the number of
peritoneal dialysis (PD) patients, particularly in Latin America and Eastern
Europe and double-digit growth across Asia. Penetration of PD Therapy products
continues to be strong in emerging markets where many people with end-stage
renal disease are currently under-treated. Partially offsetting the growth in PD
Therapy product line sales was a decline in Hemodialysis (HD) Therapy sales.
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 Transfusion Therapies (TT) business in
2007. Refer to Note 3 to the company's consolidated financial statements in the
2008 Annual Report for additional information regarding the TT divestiture.
GROSS MARGIN AND EXPENSE RATIOS
Three months ended Nine months ended
September 30, September 30,
(as a percentage of net sales) 2009 2008 Change 2009 2008 Change
Gross margin 51.9% 48.3% 3.6 pts 52.3% 49.1% 3.2 pts
Marketing and administrative
expenses 21.4% 21.6% (0.2 pts ) 21.4% 22.0% (0.6 pts )
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Gross Margin
The improvement in the gross margin in the third quarter and first nine months of 2009 was principally driven by an improvement in
sales mix and pricing, as well as manufacturing cost improvements. Partially offsetting the gross margin improvements, particularly
in the year-to-date period, was the unfavorable impact of lower FSME-IMMUN vaccine revenues.
Included in the company's gross margin in the third quarter of 2009 was a $27 million charge related to planned retirement costs
associated with the SYNDEO PCA Syringe Pump and additional costs related to the COLLEAGUE pumps. This charge decreased the gross
margin by 0.9 percentage points in the third quarter of 2009 and 0.3 percentage points in the year-to-date period. Included in the
company's gross margin in 2008 were charges of $125 million related to issues associated with its COLLEAGUE infusion pumps (with
$53 million recorded in the first quarter and $72 million recorded in the third quarter) and a $19 million charge in the first
quarter related to the company's recall of its heparin sodium injection products in the United States. These charges decreased the
gross margin by 2.3 percentage points in the third quarter of 2008 and 1.6 percentage points in the year-to-date period. Refer to
Note 3 for further information on the SYNDEO, COLLEAGUE and heparin charges.
Marketing and Administrative Expenses
The marketing and administrative expense ratio for the third quarter and first nine months of 2009 decreased compared to 2008 as the
company benefited from stronger cost controls, partially offset by the impact of foreign currency.
RESEARCH AND DEVELOPMENT
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2009 2008 change 2009 2008 change
Research and development
expenses $228 $230 (1%) $671 $642 5%
As a percentage of net sales 7.2% 7.3% 7.4% 7.0%
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Research and development (R&D) expenses decreased 1% during the third quarter of 2009 and increased 5% during the first nine months of 2009. Excluding the favorable impact of foreign currency, R&D expense increased in both periods as the company continues to focus on innovation and investments across its business portfolio to advance and expand its product pipeline. The company's investment in R&D in the first nine months of 2009 principally related to the
development of home HD therapy; increased spending on clinical trials for the
evaluation of GAMMAGARD LIQUID for additional indications; and investments in
recombinant proteins, vaccines, formulation and delivery technologies, and new
therapies to broaden the company's regenerative medicine portfolio. Refer to the
2008 Annual Report for a discussion of the company's R&D pipeline.
NET INTEREST EXPENSE
Net interest expense was $23 million and $20 million in the third quarters of
2009 and 2008, respectively, and $73 million and $62 million for the nine months
ended September 30, 2009 and 2008, respectively. The increases in the third
quarter and first nine months of 2009 were driven by lower interest rates which
resulted in both a reduction in interest income and lower interest expense.
OTHER EXPENSE, NET
Other expense, net was $51 million and $28 million in the third quarters of 2009
and 2008, respectively, and $52 million and $25 million in the first nine months
of 2009 and 2008, respectively. Included in both periods were amounts related to
foreign currency fluctuations, principally relating to intercompany receivables,
payables and loans denominated in foreign currencies. Included in other expense,
net in the third quarter of 2009 was a charge of $54 million associated with the
discontinuation of the company's SOLOMIX drug delivery system in development.
Included in other expense, net in 2008 was a third quarter charge of $31 million
associated with the discontinuation of the company's CLEARSHOT pre-filled
syringe program and first quarter income of $16 million related to the
finalization of the net assets transferred in the divestiture of the TT
business. Refer to Note 3 for further information regarding the SOLOMIX and
CLEARSHOT charges and Note 3 to the company's consolidated financial statements
in the 2008 Annual Report for further information regarding the TT divestiture.
PRE-TAX INCOME
Refer to Note 7 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 6% and 2% for the three- and nine-month periods ended
September 30, 2009, respectively. Continued gross margin expansion was driven by
strong sales of higher-margin products, principally fueled by the continued
customer adoption of ADVATE and GAMMAGARD LIQUID and increased demand and
improved pricing of certain other plasma protein products, as well as continued
manufacturing cost improvements. Offsetting this growth was the unfavorable
impact of foreign currency and increased R&D spending for the three and
nine-month periods ended September 30, 2009. Also offsetting the growth,
particularly in the nine-month period, was the unfavorable impact of lower
FSME-IMMUN vaccine sales.
Medication Delivery
Pre-tax income increased 50% and 30% for the three- and nine-month periods ended
September 30, 2009, respectively. Gross margin improvements resulting from
favorable product mix and manufacturing cost improvements were partially offset
by the unfavorable impact of foreign currency for the three- and nine-month
periods ended September 30, 2009. Included in pre-tax income in the third
quarter of 2009 were charges of $54 million associated with the discontinuation
of the company's SOLOMIX drug delivery system in development and $27 million
related to planned retirement costs associated with SYNDEO and additional costs
related to the COLLEAGUE pumps. Pre-tax income in 2008 included $125 million of
charges related to issues associated with its COLLEAGUE infusion pumps (with
$53 million recorded in the first quarter and $72 million recorded in the third
quarter), a third quarter charge of $31 million related to the discontinuation
of the CLEARSHOT pre-filled syringe program and a first quarter charge of
$19 million related to the company's recall of its heparin products. See Note 3
for further information about the SOLOMIX, SYNDEO, COLLEAGUE, CLEARSHOT and
heparin charges.
Renal
Pre-tax income decreased 2% and 16% for the three- and nine-month periods ended
September 30, 2009, respectively. The gross margin impact from continued gains
in PD Therapy patients was more than offset by the impact of lower HD Therapy
sales, increased R&D costs primarily related to the development of home HD
therapy, and an unfavorable impact from foreign currency for the three- and
nine-month periods ended September 30, 2009.
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 (principally relating to intercompany
receivables, payables and loans denominated in a foreign currency) and the
majority of the foreign currency hedging activities, corporate headquarters
costs, stock compensation expense, income and expense related to certain
non-strategic investments, certain employee benefit plan costs, certain
nonrecurring gains and losses, in-process R&D (IPR&D) charges and revenues and
costs related to the manufacturing, distribution and other transition agreements
with Fenwal. Refer to Note 7 for a reconciliation of segment pre-tax income to
income before income taxes per the consolidated statements of income. Refer to
the discussion above regarding net interest expense and Note 5 regarding stock
compensation expense.
INCOME TAXES
The company's effective income tax rate was 19.1% and 15.3% in the third
quarters of 2009 and 2008, respectively, and 18.8% and 18.0% in the nine-month
periods ended September 30, 2009 and 2008, respectively. The effective tax rates
in the third quarter and first nine months of 2009 were impacted by third
quarter 2009 charges in foreign jurisdictions with effective tax rates lower
than the U.S. rate. The effective tax rates in the third quarter and first nine
months of 2008 were impacted by reductions of $29 million of valuation
allowances on net operating loss carryforwards in foreign jurisdictions due to
profitability improvements, partially offset by $14 million of additional U.S.
income tax expense related to foreign earnings which are no longer considered
indefinitely reinvested outside the United States because management planned to
remit these earnings to the United States in the foreseeable future. Refer to
Note 3 for further information regarding the third quarter 2009 charges.
The company anticipates that the effective tax rate, calculated in accordance
with generally accepted accounting principles (GAAP), will be approximately
18.5% to 19.0% for the full-year 2009, excluding any impact from additional
audit developments and other special items.
Baxter expects to reduce the gross amount of its liability for uncertain tax
positions within the next 12 months by approximately $330 million due to the
expiration of a loss carryforward, the expiration of certain statutes of
limitations related to tax benefits recorded in respect of losses from
restructuring certain international operations, and the settlements of certain
multi-jurisdictional transfer pricing issues. While there continues to be a
reasonable possibility that the resolution of these items will be at amounts
other than the amounts of the liabilities, the company believes the reserves are
adequate.
INCOME AND EARNINGS PER DILUTED SHARE
Net income attributable to Baxter was $530 million and $472 million for the
three months ended September 30, 2009 and 2008, respectively, and $1.6 billion
and $1.4 billion for the nine months ended September 30, 2009 and 2008,
respectively. Net income attributable to Baxter per diluted common share was
$0.87 and $0.74 for the three months ended September 30, 2009 and 2008,
respectively, and $2.66 and $2.26 for the nine months ended September 30, 2009
and 2008, respectively. The significant factors and events contributing to the
changes are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash flows from operations
Cash flows from operations totaled $1.9 billion for both the first nine months
of 2009 and 2008. Included in cash flows from operations in the first nine
months of 2009 were outflows of $88 million related to realized excess tax
benefits from
stock issued under employee benefit plans compared to $28 million in the first
nine months of 2008. Realized excess tax benefits are required to be presented
in the statement of cash flows as an outflow within the operating section and an
inflow within the financing section. The other factors impacting cash flows from
operations are discussed below.
Accounts Receivable
Cash outflows relating to accounts receivable increased during the first nine
months of 2009 as compared to the prior year. Days sales outstanding increased
from 55.6 days at September 30, 2008 to 58.4 days at September 30, 2009,
primarily due to increased collection periods in certain international locations
and a decrease in cash proceeds from the factoring of receivables, partially
offset by improved collection periods in the United States.
Inventories
Cash outflows relating to inventories decreased in 2009. The following is a
summary of inventories at September 30, 2009 and December 31, 2008, as well as
annualized inventory turns for the three months ended September 30, 2009 and
2008, by segment.
Annualized inventory
Inventories turns for the three
September 30, December 31, months ended September 30,
(in millions, except inventory turn data) 2009 2008 2009 2008
BioScience $ 1,575 $ 1,346 1.30 1.61
Medication Delivery 781 771 3.33 3.08
Renal 266 227 4.09 4.28
Other 6 17 - -
Total company $ 2,628 $ 2,361 2.19 2.40
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Inventories increased $267 million in the first nine months of 2009, with more
than half of the increase related to the impact of foreign currency. The lower
inventory turns for the total company were principally due to an increase in
plasma-related inventories in the BioScience segment.
Other
Cash outflows related to liabilities, restructuring payments and other items
increased in the first nine months of 2009 as compared to the prior year period,
principally driven by a first quarter 2009 planned discretionary cash
contribution of $100 million to the company's pension plan in the United States,
partially offset by the timing of payments.
Cash flows from investing activities
Capital Expenditures
Capital expenditures increased $19 million for the nine months ended
September 30, 2009, from $615 million in 2008 to $634 million in 2009. The
company makes investments in capital expenditures at a level sufficient to
support the strategic and operating needs of the businesses and continues to
improve capital allocation discipline in making investments to enhance long-term
growth.
Acquisitions of and Investments in Businesses and Technologies
Cash outflows relating to acquisitions of and investments in businesses and
technologies of $156 million in the first nine months of 2009 principally
related to an April 2009 payment to SIGMA International General Medical
Apparatus, LLC (SIGMA) for $100 million for the exclusive distribution of
SIGMA's infusion pumps in the United States and international markets, a
40 percent equity stake in SIGMA, and an option to purchase the remaining
portion of SIGMA. Additionally, in August 2009 the company acquired certain
assets of Edwards Lifesciences Corporation related to their hemofiltration
product line, also known as Continuous Renal Replacement Therapy (Edwards CRRT),
for $56 million. Cash outflows relating to acquisitions of and investments in
businesses and technologies of $73 million in the first nine months of 2008
principally related to an IV solutions business in China in the first quarter of
2008, the company's third quarter 2008 in-licensing agreement with Innocoll
Pharmaceuticals Ltd. (Innocoll), payments related to the company's fourth
quarter 2007 agreements with Nycomed Pharma AS (Nycomed) and Nektar Therapeutics
(Nektar), and certain smaller acquisitions and investments. Refer to Note 2 for
further information regarding SIGMA and Edwards CRRT and Note 4 to the company's
consolidated financial statements in the 2008 Annual Report for further
information about the arrangements with Innocoll, Nycomed and Nektar.
Other
Cash flows relating to other investing activities in the first nine months of
2009 decreased as a result of a reduction in the amount of cash collected from
customers relating to previously securitized receivables. In 2007, the company
. . .
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