Wednesday, February 1, 2012

Baxter International's CEO Discusses Q4 2011 - and the International Markets

Robert L. Parkinson
...In our regenerative medicine business, we achieved a number of milestones, including the approval and U.S. launch of ARTISS Fibrin Sealant for use in facial surgery and the U.S. regulatory filing for TISSEEL Fibrin Sealant for vascular surgery providing a broad hemostasis label. As we've previously mentioned, we're very pleased with the publication of data from Baxter's Phase II chronic myocardial ischemia adult stem cell program, which was published in the scientific journal Circulation Research....
Third, we recently announced the definitive agreement to acquire Synovis, an acquisition that complements and expands Baxter's regenerative medicine and biosurgery franchise, including a number of devices and biological products for hemostasis, tissue sealing and adherence.

Robert J. Hombach
Yes. And so net-net, not much of an impact to speak of on the base of $4.31 of earnings. But as we move into 2012, clearly, we're projecting a much more pronounced impact. And maybe I'll just take a minute here and kind of walk everyone through the drivers because I think this is important. As we've talked about, regularly, Baxter has about 60% of our revenues outside the U.S. We've increasingly highlighted for investors that now slightly more than 20% of our revenues come from emerging markets. And in fact, emerging markets have been growing 2 to 3 times the rate of developed markets over the last 5 years. So the mix of our business certainly has shifted towards emerging markets to a much greater degree. As we've highlighted in the past, for developed markets, we have the ability through natural hedges given our manufacturing footprint, which we have in places like Europe and Canada and Japan, Australia and so on. We have some natural hedges there, but also we utilize financial hedges in those developed markets. Now I would pause here to say, as we've talked about in the past, our pipe policy, we hedge 80% of our projected exposures. And by the nature of hedging, when you're looking 12 to 18 to 24 months out, you have to be careful in your projections to ensure that you don't get yourself in an overhead situation, hence, the 80% with a 20% buffer. But what that does mean is we do have some residual exposure muted but some residual exposure in the developed markets. As we said in the past, with emerging markets, we do not hedge. We do not utilize financial hedges, and we have modest natural hedges in some manufacturing facilities in Latin America, Eastern Europe and so on but nothing near the degree we have in the developed markets. And so our bottom line drop to exposure on the emerging markets is much more leveraged. So to frame that exposure for you then, looking at it by region, so within Latin America, from an operating profit perspective that would be exposed to foreign currency, think of that in terms of $300 million to $400 million of annual profit. And that's primarily Brazil, Colombia and Mexico. For Eastern Europe, which is primarily Russia, Poland and Turkey, again, about $300 million of operating profit on an annual basis. And then in Asia Pacific, and there we would exclude Japan, Australia, New Zealand and China because of the stability of the currency, so all of Asia excluding those 3 is another roughly $300 million of operating profit on an annual basis. So you add that up. That's $900 million to $1 billion of profit exposed to currency in emerging markets. And as you've seen, there's been quite a bit of volatility, and given where we're sitting today and where rates are today relative to where they were on average in 2011, if you assume an 8% to 10% weakening across that basket of emerging market currencies, that's $80 million to $100 million of incremental exposure that we're factoring in here. And you add to that the slight 20% residual impact from the developed markets that goes unhedged, and that's how we get into this kind of $0.15 to $0.18 range of FX exposure. Now, as you would imagine, given the volatility, we've assumed somewhat conservative rates relative to where market rates are today. There's been of bit of a run-up here in the last few days, but given the volatility, I hesitate to call it very conservative. And so that's the picture. But if I step back and think about as a large U.S. multinational corporation in thinking about the long run, being along the emerging markets, whether it's from a growth perspective or currency perspective, is exactly where we want to be. We continue to see great opportunities there, but in times of financial crisis like this, where the correlation between those currencies and the U.S. dollar is all going one way, it creates this kind of outsized exposure that we're having to factor into our guidance here for 2012. So thanks for bearing with me, but I think it's important that people understand the breadth of the issue for us.
David R. Lewis - Morgan Stanley, Research Division
I will -- just maybe one more quick one for Bob Parkinson. And Bob, there's been a lot of concerns here in the quarter regarding European austerity. You've talked a lot about old Europe pressures. I guess we've been surprised about where that pressure's coming from. I think it's a little different than where the investor sees within your plasma business versus your injectable and your nutritional business. Can you just sort of talk to us in the way you're see the pressure and which businesses for Baxter are proving to be more robust? And then where -- which businesses are seeing sort of more pharmaceutical-like pressure?
Robert L. Parkinson
Yes. I mean, so the negative impact of the austerity measures, first of all, is just kind of what I call general softness, David, and underlying demand. But these are the kind of things we see globally. So surgical procedures and things of that nature are somewhat softer than what's been reflected historically. So now we'd run across virtually all our businesses, certainly even our IV business and so on and so forth. But the other pressure that's probably more pronounced and is more associated with our BioScience business would be pricing pressures with governments who clearly are under the gun to implement austerity measures. And given healthcare spend and well-large item that represents on national budgets and so on, we continue to see governments virtually unilaterally implementing various pricing actions, and that impact is more pronounced in things like, say, biosurgery where people are making trade-off decisions in terms of clinical options that they have but also, most of our BioScience products, which are more expensive. So as an example, countries like France implement actions in terms of taking prices down. It's a haircut, David. So it's not as pronounced as what you would see with some of the tender actions, I would say, on hemophilia because encouragingly, we haven't seen the expansion beyond the Anglo markets of the tender activity for hemophilia. But -- so we think we've captured in our guidance for next year those known pricing actions that will be taken on a country-by-country basis. We also think we've reflected kind of the underlying softness of demand. But I think we have to be cognizant of the fact that given the extreme austerity measures and pressures that exist that unlike the U.S. governments in Europe, most notably, really have a history of implementing unilateral actions for which there's not a lot of control. We think we've captured it, but like I say, given the environment, I think, we have to be cognizant that there could be more there. And by the way, this is an ongoing thing. I mean, this is -- it's why I talk about dealing with the new environment in our company, in our culture and so on. This isn't something that's going to pass through this year in -- or through the end of 2012. It's going to be with us....
David H. Roman - Goldman Sachs Group Inc., Research Division
Okay. And then as I look at the Plasma Protein business, the issues about timing of imports in China, I think you had talked about that last quarter, as well a new product, the delay on a large tender for PD Factor VIII in Brazil. Are those issues that we should think about as being ongoing for the next several quarters? Or will those normalize at some point, whereby that business gets back to sort of stable underlying growth on a reported basis?
Robert J. Hombach
Yes. Certainly, Brazil for sure is a timing issue, and we're hoping to continue to accelerate into China. Without them it becomes -- it is a great growth opportunity. So yes, you should see normalized growth rates here in 2012 for that category.
Mary Kay Ladone
Although I would mention, David, that tenders tend to be volatile, and we can see shifts from quarter-to-quarter, so just to highlight that.
Robert L. Parkinson
David, the one thing I would add to the China situation, there's been local action by the Chinese government to further scale back some of their local plasma collection operations in the country. So this importation of albumin in China would appear to be something that is going to be sustainable for the near future, certainly over the next few years, I think, given some of the local issues they manage through.

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