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Edited Transcript of BAX earnings conference call or presentation 24-Oct-19 12:30pm GMT

Q3 2019 Baxter International Inc Earnings Call

Deerfield Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Baxter International Inc earnings conference call or presentation Thursday, October 24, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clare Trachtman

Baxter International Inc. - VP of IR

* James K. Saccaro

Baxter International Inc. - Executive VP & CFO

* José E. Almeida

Baxter International Inc. - Chairman, President & CEO

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Conference Call Participants

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* Danielle Joy Antalffy

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Lawrence Soren Keusch

Raymond James & Associates, Inc., Research Division - MD

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Matthew Stephan Miksic

Crédit Suisse AG, Research Division - Senior Research Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

* Vijay Muniyappa Kumar

Evercore ISI Institutional Equities, Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Baxter International Third Quarter 2019 Earnings Conference 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. Clare Trachtman, Vice President, Investor Relations at Baxter International. Ms. Trachtman, you may begin.

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Clare Trachtman, Baxter International Inc. - VP of IR [2]

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Thanks, Catherine. Good morning, and welcome to our third quarter 2019 conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer.

As you saw in today's press release, the company recently initiated an internal investigation into misstatements in our previously reported nonoperating income related to foreign exchange gains and losses. While the investigation is ongoing, we are not able to provide full financial results and will be focusing today's call on preliminary operating results for the third quarter of 2019. As such, we will not be commenting on any financial measures other than those above the operating income line for the third quarter or any future period.

A supplemental presentation to complement this morning's discussion can be accessed on our website. This presentation includes related non-GAAP reconciliations and can be accessed on Baxter's external website in the Investors section under Events & News.

With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product development, business 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, on 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 preliminary operating results press release issued this morning and is available on our website within our investor presentation.

On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and generic competition for cyclophosphamide in the U.S.

Now I'd like to turn the call over to Joe. Joe?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [3]

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Thanks, Clare. And before we get into a discussion regarding our third quarter performance, I want to address the ongoing internal investigation that we disclosed in today's press release. First, I want to emphasize that our Board and leadership teams are taking this matter very seriously. Baxter recently begun an internal investigation assisted by experienced outside investors (sic) [advisers] into misstatements in our previously reported nonoperating income related to foreign exchange gains and losses. These misstatements were in part a result of the company's historical use of a foreign exchange rate convention that was not consistent with GAAP. Our Board's Audit Committee is overseeing the investigation with the assistance of independent experienced external advisers. We voluntarily advised the SEC that the internal investigation is underway and intend to provide them with additional information as the investigation progresses. The investigation is in its early stages, and we cannot predict its duration or outcome.

As a result, we do not expect to file a quarterly report on Form 10-Q for the period ended September 30, 2019, on a timely basis. Upon completion of the investigation, our evaluation of the materiality of the misstatements, we expect to either amend our periodic reports previously filed with the SEC to include restated financial statements that correct those misstatements or include in reports for future periods restated comparative financial statements that correct those misstatements.

As part of any corrections to previously issued financial statements after completion of the nonoperating income investigation, Baxter also expects to correct certain operational items that were immaterial to its previously reported results of operations. These items include impact of the use of the foreign exchange rate convention to translate the results of the company's foreign operations into U.S. dollars and the impact of the incorrect accounting for placed equipment that the company leases to its customers.

Across Baxter, we're taking steps to strengthen and enhance our internal controls and look forward to sharing our full financial results as soon as it is appropriate. We will continue to execute against our business strategies targeted to deliver top-quartile industry performance. And our 50,000 employees remain focused on building our positive momentum and maintaining ethics and compliance in everything we do.

Please note that there isn't additional detail regarding investigation that we can share beyond what we have provided in our press release. We therefore ask that your questions during the Q&A portion of this call be focused on our preliminary operating results, business progress and innovation efforts.

With that, I will now turn the call over to Jay.

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [4]

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Thanks, Joe, and good morning, everyone. Our third quarter results reflect strong performance across our 3 geographic segments and all 6 Global Business Units. Given the ongoing internal investigation, we are not able to provide year-over-year comparisons for segments and Global Business Units but will speak to the specific drivers of performance in the quarter.

In the third quarter, global sales of $2.85 billion increased 3% on a reported basis and 5% on both a constant currency and operational basis, reflecting strength across our diversified portfolio. Adjusted operating margin of 19.5% was driven by our solid top line performance and ongoing operational efficiencies.

Now I'll walk you through performance by our geographic segments and global businesses. Starting first with our 3 geographic segments. Sales in the Americas totaled $1.5 billion, sales in EMEA totaled $730 million, and sales in our Asia Pacific region totaled $587 million.

Moving to performance by global businesses. Global sales for Renal Care were $918 million. Performance in the quarter was driven by strength in PD therapies globally with patient volumes advancing approximately 7% year-over-year and representing the highest quarterly patient volume growth year-to-date. Partially offsetting this was lower sales of select in-center HD products, including the bloodlines business exited earlier this year, which negatively impacted sales in the quarter by approximately $18 million.

Renal Care sales were also impacted by the temporary supply constraints associated with the Revaclear dialyzer. The impact was less than $10 million in the quarter.

Sales in Medication Delivery of $701 million represented the focused commercial execution of our U.S. Hospital Products team. Performance in the quarter benefited from strong sales of Spectrum IQ Infusion System in the U.S. where we continue to increase our installed base of pumps and also from improved sales of small- and large-volume IV solutions globally as we continue to build momentum. We are pleased with the ongoing improvement in the business, particularly in the United States.

Pharmaceuticals sales were $527 million in the quarter. Contributing to performance in the quarter was robust demand for our international hospital pharmacy compounding services as well as increased sales of certain generic injectables. Partially offsetting these results were lower sales of anesthesia and critical care products as well as BREVIBLOC. Due to increased generic competition, U.S. cyclophosphamide sales totaled $41 million in the quarter.

Moving to Nutrition. Total sales were $219 million driven by improved sales of multi-chamber bags and micronutrients globally. International demand for automated nutrition compounding also contributed to performance in the quarter. Third quarter sales reflect the efforts taken to rebuild our U.S. business coupled with our focus on new product launch execution.

Total Advanced Surgery sales were $216 million in the quarter. Performance was driven by strength in hemostats and sealants, which benefited by more than $10 million in sales related to previously discussed competitive supply constraints, which are not expected to continue contributing at this level.

Third quarter sales in our Acute Therapies business of $130 million were driven by increased global demand for Baxter's continuous renal replacement therapies supported by the launch of new products, including PrisMax, Baxter's next-generation CRRT system.

Finally, sales in our other category, which primarily includes our contract manufacturing services, were $140 million in the quarter.

Moving through the rest of the P&L. Our adjusted gross margin of 45.7% benefited from strong top line performance as well as positive manufacturing variances. Issues associated with our dialyzer supply constraint negatively impacted gross profit by approximately $15 million in the quarter.

Adjusted SG&A totaled $614 million as we strategically reinvest savings in general and administrative expenses to support our sales and marketing initiatives while maintaining our disciplined focus on managing discretionary expenses.

Adjusted R&D spend in the quarter was $134 million. We continue to fund our new product development programs to deliver on our innovation pipeline while also realizing benefits from our ongoing optimization initiatives to optimize our R&D processes and the organization.

Adjusted operating margin in the quarter was 19.5% due to strong top line performance, manufacturing efficiencies and ongoing efforts to improve operational effectiveness across the company.

Let me conclude by commenting on the sales and adjusted operating margin outlook for the fourth quarter of 2019. We remain confident in the health of our business and in the strength of our commercial execution. Given the ongoing investigation, we are providing limited guidance for the remainder of the year. Specific to the fourth quarter of 2019, we expect sales growth of 3% to 4% on a reported basis and approximately 5% on both a constant currency and operational basis. We expect operating margin to be between 15.2% and 15.9% on a reported basis and between 18.5% and 19% on an adjusted basis.

Finally, I want to comment on our 2020 outlook. We're currently in the process of completing our annual operating plan. And as part of that activity, we're considering several factors and their potential impacts. Some of these items include the proposed Advancing American Kidney Health initiative and the related capital investments to support this, along with other government renal policy initiatives; capital investments and operational improvements we are making to enhance our quality and manufacturing capabilities; and the finalization of our agreements with various GPOs and IDNs in our U.S. Hospital Products business. As a result, it is premature to comment on 2020 guidance and beyond but anticipate providing more detail on our next earnings call.

With that, I'd like to turn the call back over to Joe.

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [5]

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As Jay shared, our strategic transformation yielded positive performance across all of our business units and regions in the third quarter. The fundamental health of our business remains strong and reflects our growing momentum. We are continuing to drive operational excellence, strategically deploy capital to create shareholder value and advance compelling innovation in our core areas and effective adjacencies both through robust internal research and development and strategic business development.

In Renal Care, for example, we continue to believe the Advancing American Kidney Health initiative will offer tremendous benefits to patients with home dialysis embraced as a frontline option. We also continue to nurture our innovation pipeline in this space, including advancements in early-stage technology that could have a transformative impact on the treatment of end-stage renal disease.

In Medication Delivery, we're building on our leadership in IV infusion systems and solutions with the internal innovation that is complemented by our expected acquisition of Cheetah Medical, the combination of which will fuel the broader impact of our integrated family of pumps, fluids, medications and monitors.

In Pharmaceuticals, we're continuing to launch a steady stream of new molecules, including the recent introduction of Myxredlin, our new ready-to-use insulin for IV infusion.

In sum, our business strategy objectives and capital allocation philosophy remains unchanged. We are focused on addressing unmet patient and customer needs, building our pipeline and successfully launching products across the globe. At the same time, we continue to actively pursue opportunities to extend our impact through strategic partnerships and business development initiatives. This all supports our goal to accelerate performance and deliver top-quartile results for all stakeholders.

Now we'll open the call up for Q&A, keeping in mind that we'll be limited in our ability to comment beyond the details we shared this morning.

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Clare Trachtman, Baxter International Inc. - VP of IR [6]

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Catherine, you can open up the call for Q&A now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I would like to remind participants that the call is being recorded and a digital replay will be available on Baxter International website for 60 days at www.baxter.com. Our first question comes from David Lewis with Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [2]

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I want to get to fundamentals, guys. But just real quick, Joe, just in case we will be able to get this information, can you just give us any sense of how the issue was identified, any rough sense of when you hope to complete the investigation? And if not, I'll jump to some fundamental questions.

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [3]

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David, as we said before, the investigation is in early stages. Beyond what we shared in our press release, I cannot provide additional information while the investigation is ongoing. So let's move to the business fundamentals.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [4]

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Okay. So look, given those FX dynamics, Joe, obviously, it's clouding the reporting structure, but obviously, underlying constant currency growth this quarter was solid. So just first question is, can you just give us a sense of underlying business trends this quarter, how you felt about those versus plan? As you think about underlying business performance into the end of the year, how do you feel about that sort of relative to plan? And any thoughts you can share about improving revenue performance in 2020? And then I got a quick follow-up for Jay.

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [5]

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So David, let me start with our Medication Delivery business. This is one that our investors have asked so many questions and paying a lot of attention. That business was able to perform very well. Actually, it slightly exceeded my expectations. And I will say that our new pump, our version 9 of our pump is doing very well, extremely well as a matter of fact. We finished our first full integration of that pump in the 2-way system, in a hospital system in the Southwest. We have closed many, many deals that I'm very excited about it. We also are seeing our -- a very stable business in our IV solutions, small- and large-volume parenterals with recovery now on its way and good contracts being signed, some of them surprisingly us being -- doing very well.

And this is a reflection on the performance of the U.S. Medication Delivery in the U.S. As I said, our head of that business, Heather, and her team in the U.S. are doing a wonderful job there. I want to highlight as well that our launch of PrisMax has been well received in the marketplace. It's one of the fastest launches I've seen. As soon as we launched it in the U.S., within a couple of days, we had purchase orders coming in. The system is really hitting the mark. And I feel the innovation of the company is really starting to bear fruit. So I'm excited about -- when we talk to you about 2020 about the impact of new product sales into next year.

I also want to talk about the regions themselves. We see a full recovery in Europe. Europe was a real lagger for us and is coming out to be driving well our performance. And great performance in Asia Pacific as well led by China.

And I want to close by just saying the fundamentals of our PD business -- and this is one of the business when I first started here that we really were a bit concerned about because we had issues with contracts and we had issues with the ability to supply product. And seeing the product -- seeing the patient growth on a global basis is so high, in the U.S., nearly 10%, gives me tremendous confidence that when we hear back on the rule on AAKHI, that can really represent an opportunity for us.

So the fundamentals of the business puts me quite at ease in how we are doing in the marketplace, the share that we are expanding and our ability to really compete. This is a different Baxter.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [6]

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Just 2 quick follow-ups. One is just I know it's challenging to talk about forward guidance just given the dynamics that are going on. But can you talk at all about -- you said building accelerated momentum in the business in 2019. How are you thinking about that momentum into 2020?

And then for Jay, margins always tick down in the fourth quarter. Can you just bridge us to fourth quarter any onetime benefits in the third, the headwinds into the fourth and how margin outlook is tracking relative to plan? And any comments you can make on pension, which is sort of an intraquarter announcement that we haven't yet got clarity on?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [7]

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So David, we don't have or I don't have any reason to think about any changes in dynamics that would slow down our ability to grow our businesses in the future. Why is that? Baxter has, for the most part of this, largest markets either driven by contracts, which are mid to long term, as well as large tenders outside the U.S. And we see a steady positioning of our products through contracts that give me comfort -- doesn't make me relax but gives me comfort that we're hitting the right places. The innovation coming through, our new pump platform coming on next year, gives me tremendous optimism in terms of how we're going to be able to face new opportunities in the U.S. We are also launching -- we launched the 3-chamber bag in Europe for Nutrition that is doing very well. Our post-Maria recovery in Nutrition, which was very slow in the beginning, we're starting to see some momentum. So I don't have any reasons today to tell you that I'm concerned about the ability of Baxter to grow its top line.

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [8]

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Great. David, in relation to your question on margin versus expectation in sequential, I will tell you that Q3 was a very solid margin performance relative to our expectations. We were supported by top line in line with our expectations, which was great. But then as a result of savings initiatives and focus on efficiencies, we were able to come in maybe 1% ahead of our internal expectations.

Now as we move from Q3 to Q4, you will note that the margin does deteriorate, which, as you pointed out, is largely attributable to normal seasonality. In the case of this fourth quarter, gross margin will come down. In large part, our shutdowns occur in Q4, and that has period expense impact in the fourth quarter. But then secondly, R&D in the third quarter, I believe, was a little bit below 5% of sales. We will expect it to go a little bit above 5% of sales in the fourth quarter related to the timing of certain milestone payments attributable to advancing the pipeline. So that's really the story on the overall margin evolution.

As it relates to the pension, the overall goal of the pension approach is to really reduce volatility. As part of the transaction that we engaged in, we have reduced the liability by approximately $2.4 billion. That has very substantial long-term benefits to us in terms of managing the predictability of future financial results. But as it relates to commenting on the 2020 impact, in particular because this is an other income line item, I'll refrain from talking about whether this is a benefit or a headwind or tailwind. I'll stop my comments there and stick to the fact that this is more about a long-term reduction in volatility, which is why we pursued this transaction.

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Operator [9]

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Robbie Marcus from JPMorgan is on the line.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [10]

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Joe or Jay, I was just hoping -- we didn't get constant currency by segment. We didn't get guidance by segment like you typically have. Any comments you could add to maybe where you're seeing pluses or minuses versus your internal plan or any deltas we should be expecting after third quarter results here?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [11]

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Sure. Robbie, just for -- as a matter of clarification, the reason that we have not provided sales growth by segment or by region is that as part of any correction to previously issued financial statements, after we complete this investigation, we do expect to correct certain items that are immaterial to our previously reported results of operations, which include the impact of translating our foreign operations back to U.S. dollars in the exchange rate used. Like I said, this is an immaterial impact, but you can imagine how sensitive we are to any minor changes in growth rates that may emerge as a result of comparisons in this kind of situation. So I think Joe -- so that's why, for your information, we haven't shared anything in relation to growth by segment, by region.

But I think Joe said it well. Look, we had strength across the portfolio. Our Renal Care business continues with great momentum. Medication Delivery had a very solid performance in particular in the U.S. as we look to continue to drive performance in that area. The Pharmaceuticals business, not only did we couple solid performance in the quarter, but we added to that the launch of Myxredlin, which becomes an important driver for our long-term growth. So I would say, generally speaking, we sit here very pleased with the business momentum across the board.

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [12]

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I echo Jay. And I tell you, I just want to point to really the acceleration of PD business. The patient growth has been impressive and not surprising because the therapy is a desirable therapy for the home. But this is one of the levers that we have. And the other lever that we have is also the momentum in our U.S. Medication Delivery business, which we're starting to see the fruits of our change in sales force structure and organization.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [13]

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Great. And then quick clarification, Jay. Might there possibly be cash flow restatements? Or is this purely just a P&L item?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [14]

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So at this point, Robbie, we can't comment on any -- we're limiting our comments today to operating income. We have an investigation ongoing. Upon the conclusion of that, we'll be prepared to share further comments. But for purposes of our discussion here, we're not commenting on anything below operating income.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [15]

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Okay. And then just last quickly for me. Jay, we saw some recent news reports that you might be in discussion with a pharma company for a specific drug. Can you just give us your latest thoughts on the use of capital specifically for M&A and what type of deals you're looking for that might be most appropriate for Baxter here?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [16]

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Robbie, this is Joe. Great question. We don't comment on any M&A activity that we are contemplating or not. But I think you have a great question when it comes about capital allocation. Capital allocation, as we've mentioned, remains unchanged. We are -- we always prefer strategic deployment of capital into acquisitions. We said before that adjacencies are more reasonably priced and easier to integrate, and we are very open to those. We also have not changed our view on dividends at all and how -- at the end of the day, we're not going to be hoarding cash. So if we find ourselves with excess cash in our balance sheet, we make a decision to appropriately buy shares back. So I just want to say to you and to the folks on the call that no change has been contemplated neither in sight to our current capital allocation policy.

Jay, anything on that?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [17]

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No, that's a great summary. The only thing to add is -- and Robbie, of course, we have very ample liquidity with significant cash on hand to fund business development or any other activities we are interested in pursuing.

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Operator [18]

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And Bob Hopkins of Bank of America is on the line.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [19]

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First question is I just wanted to clarify something in your 8-K and make sure I'm reading it correctly. Because it says the FX gains for '14 to '18, you list those out. Should we view those as representing the magnitude of the misstatement? Or could those misstatements be, I guess, in the end larger or smaller?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [20]

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The misstatements could be larger or smaller than what was reported as gains on -- in the 8-K that we issued.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [21]

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Okay. And just the -- one of the other things in the 8-K was on Claris. It sounds like the FDA process is going a little slower. Jay, can the contingency plans that you guys have talked about prevent the potential for disruption there? Or just how should we be thinking about that?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [22]

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Bob, we are just being cautious. We can't predict when the FDA will come in and reinspect the plant. We have not been reinspected yet, and we're coming towards the end of 2019. We have done everything that we committed to do to date for the FDA. We have improved our operations. We have modified facilities. We have done a lot of different things that we -- as we promised. But we can't predict, so we're better off just not counting on something. And if it comes, fine. If it doesn't, at least we're upfront telling you.

But what you need to think about is that we are committed for a backup plan, and we're investing money to have most of these products on a CRO basis if we ever need to activate CROs. So our pharmaceutical group not only is very busy right now with significant amount of new opportunity in pipeline they will be formulating -- the example is Myxredlin, but they also will be working on continuing closing all these CRO opportunities for -- as a backup.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [23]

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Okay. Sounds like the potential for disruption is low there.

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [24]

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Oh, I just want to rephrase. I incorrectly used the contract manufacture organization, and I used CRO, which is contract research organization. I apologize to distract that from the -- CMO, CMO organizations. I'm very sorry.

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Operator [25]

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And Matt Taylor with UBS is on the line.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [26]

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So I was hoping you could comment on the PV dynamics. And do you think you're seeing a pickup in the patient volumes because of technology, because of the initiatives that the government has talked about or some combination thereof?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [27]

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Well, I think that the therapy's benefit was always very clear, but I think that our -- there is an acceptance of the therapy probably more widely today than was before. But I have to say that our partners, DaVita being one of them, have been working very closely with us in a very collaborative manner. And that has created the opportunity for us to continue to deploy our resources to train nurses and patients.

I also underscore that Baxter has made significant operational changes in making products, what we make, how much capacity we're putting in place, giving confidence to our partners that we can actually supply the market versus perhaps back in 2013, '14 and '15 when we had some constraints in allocation of resources. So if now the clinics and their doctors and our partners feel more confident, I think that plays a role, but I also think the move into the home is becoming more perfectly apparent to our constituents. This is a good result, and we'll be working very hard to make sure that we continue on with these partnerships.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [28]

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And then just to follow up on Med Del, so the U.S. number was very strong, but the OUS was a little below what the consensus was expecting. Can you talk a little bit about the dynamics OUS, if that growth could improve? And then when do you think we'll start to see more inflection from the new pump launches?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [29]

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So I think there was some timing on the performance outside the U.S. Also, we have focused tremendously in making sure that we have launched our new pump, Evo IQ, what's outside the U.S. We had a slow launch of that product in the U.K., which is going to be picking up momentum later this year into next year. That was a little bit of the weakness that we found there as well. And -- but we had a very good momentum in Latin America, very good momentum, and we are on track on that. And then we also -- in Canada, we just launched our new pump there.

So don't read anything on the OUS numbers. More so, you should feel comfortable that in the U.S., we got this thing addressed, and we've got the numbers right. And we don't talk about comparison at the moment. We're not going to be talking about quarter-over-quarter or year-over-year. But I can tell you that based on my expectations, this business is doing well. It's doing well, and I'm very happy with the performance that we have demonstrated that at one point in time was being quite challenged by other constituents. We are on track on that.

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Operator [30]

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And our next question is Pito Chickering with Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [31]

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Two quickies for me. What is the process for getting THERANOVA approved for the Medicare transitional add-on payment in 2020?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [32]

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Well, I don't want to get into the sausage making because there's a lot of work being done. We have a full team. But we are -- we submit our comments to HHS, and we also have submitted our THERANOVA for the de novo process. So I'm very happy. Our team, led by Laura Angelini and Tony Woodson, have done a great job in getting this on time to the FDA. Now is the comments need to go in, and they need to come back with the final resolution about the process itself. Remember, it does not only affect our product but affects other categories of medical devices. But we are -- we're confident. We're seeing some of the early data that was done outside the U.S. on THERANOVA, and we find that to be very compelling. I think the HHS saw that as well.

So we're on track. But remember, this is not a 2020 conversation. This is a 2021 conversation, okay, because this is going to take us time. By the time we get to the product approved and get this -- the reimbursement firmed, we'll take about 12 months to start implementing.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [33]

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Perfect. So assuming that, that isn't accepted for the add-on payment, the providers will start getting paid for -- with that add-on payment in 2021, correct?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [34]

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That is correct. This is our best estimate right now. If anything changes, we'll let you guys know in one of our calls.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [35]

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Okay. And then from a manufacturing capacity of the dialyzers, it sounds like there are some capacity constraints this quarter. Can you talk about what investments you're making in those facilities and how fast you think those facilities can get ramped up?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [36]

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Well, listen, we -- at one point in time, a few years ago, I would say, about 3 years ago, we had 2 lines within our plant in Alabama that were not operational. We did not enable them to start operating because the capacity versus demand was balanced. As we start getting more successful in the dialyzer business and start selling more product, we activate those lines. Those are complex lines, and we had issues in getting them started up. So we will have some investments that we're making in quality and operations in this plant for the next 12 months. We're going to increase our -- the amount of investment in that plant to make sure that the lines will be ready to be converted to THERANOVA if we decide to do so. But we need to do some investment, some expenses that will go up a little bit next year in terms of enabling that plant to be fully capable of making THERANOVA or Revaclear. And then we're going to decide which is the best mix for our patients and for our customers and also for Baxter in general.

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Operator [37]

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We have Larry Keusch with Raymond James on the line.

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Lawrence Soren Keusch, Raymond James & Associates, Inc., Research Division - MD [38]

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Joe, I just wanted to maybe talk a moment about the

(technical difficulty)

delivery business. Obviously, you did the Cheetah Medical deal, which is interesting. But as we get past this year and you kind of stabilize the business, what's really the right way to think about the growth outlook and what you'll be focused on over the next several years?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [39]

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Well, I had a great discussion with the head of that business, David Ferguson, the other day. And for us, the vision of that business is preventable harm. How do we create a system that integrate pumps and fluids that you continue to treat the most critical patients in a way that they can recover and exit the critical stage faster either in the septic stage or any acute other stage?

So we find that the hemodynamic balance of the patient to be very important to us. So we start with PIVA, which we started our clinical trials actually a couple weeks ago. Then Cheetah comes in and give us more qualitative data in terms of the treatment of that patient. But there are other things that we're looking around, a series of monitoring technologies that will come to surround our patient in the ICU to be able to get that patient out of the critical condition as fast as possible. And to that, we can also think about -- don't think about Medication Delivery exclusively. Think about our acute renal care therapy, our CRRT therapy because that plays a role also, not only feeding but also helping diagnose and determine when to start. Because the patient, when it gets to the point that you're checking the hemodynamic balance, you're checking the quality of that treatment, is also a patient that sometimes has acute kidney injury and is incapable of doing -- the kidneys are not operating anymore. So all of this together, how do we create a business for critical care patients that prevents harm and improves the ability of that patient to get out of the critical stage?

So you're going to see a lot of different movements from Baxter in this area that was not, in the past, a priority for us because we think having the best pump platform that is coming out next year is one lever. Having the fluids available for the hospital is a second lever. But now how do you create this net, this safety net that can bring the patient to a better outcome faster?

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Lawrence Soren Keusch, Raymond James & Associates, Inc., Research Division - MD [40]

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Okay. So just a quick follow-up on that one question. So it sounds like the aspirations are clearly to grow this business in totality sort of faster than the low single-digit growth of the markets. Is that fair?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [41]

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That is fair. That is fair. Remember, we have a very large and stable business within Medication Delivery which are fluids. And for that, we're working very hard and have worked very hard to stabilize, get the contracts in place, get the supply chain in place. So this was Phase I because without that, it's a nonstarter. So we start doing that, and that became our priority. Now the second priority, so let's get a pump platform that has all the pumps that they need. And they are connected. They are 2-way communications. And how do we make them more intelligent? Third, how do you surround that patient with a safety net that promotes -- that prevents harm and allows the patient to get out of critical care faster?

So you see this all comes together, but we had to do it in phases because we had a business that was a little bit in disarray. And now we have that business that's quite organized, quite ready to go. And by the way, when we look at the people selling this, the whole restructuring of the sales force that we're putting in place not only in the U.S. but other parts of the world, is because we're going to have a global pump product. This is not about the U.S. anymore. That makes it, I'd say, the fourth pillar of having this business completely revamped.

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Lawrence Soren Keusch, Raymond James & Associates, Inc., Research Division - MD [42]

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Okay. Perfect. And then just quickly, Jay, just while you're moving through the investigation here on the accounting misstatements, I just want to confirm whether you can deploy capital during that period. Meaning, are you free to do M&A? And more specifically, are you free to buy back stock?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [43]

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So just to be clear, obviously, we commented on this a number of times. The organization here takes the matter incredibly seriously. The management team, Audit Committee of the Board, there is an ongoing investigation, and we intend to move through it expeditiously.

As far as capital deployment, our -- on the M&A side, our principles have not changed, and we have ample cash to deploy. And so that's what I would say. In terms of our current deployment of capital, that would be the priority focus.

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Operator [44]

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Danielle Antalffy with SVB Leerink is on the line.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [45]

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Jay -- Joe and Jay, I know you're not going to provide 2020 guidance. I'm not asking you to, but just for -- at a high level, as I look out to 2020, it feels like you have a lot of tailwinds in place, new product launches that you had here in 2019 across most of the businesses. And I know some of the headwinds, I appreciate some of those back half Med Delivery comps will get tougher. You also had in the acute surgery business that supply disruption from a competitor. Just at a high level, can you help frame for us the tailwinds and headwinds from a top line perspective as we head into 2020, especially as you're exiting the year here at what seems like it would be a 5% organic growth rate?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [46]

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Thanks for the question, Danielle. I think overall, what I will say is we're pleased with the momentum and the progress that we're seeing, as I said earlier, really across the portfolio. The third quarter from a sales perspective hit on a lot of different cylinders. And furthermore, as we looked at the performance of the pipeline in innovation and new products, that -- those were all pointing in the right direction.

As far as 2020 goes, as we always do this time of year, we really do hold off on specific guidance for 2020 and specific headwinds and tailwinds. And the reason is we are literally in the process of completing our annual operating plan. In the coming weeks and months, we'll review it with our Board of Directors and walk them through it as we prepare for the new year, at which point we'll share guidance.

And then as we think about this year in particular, there are a number of different items that are -- that could have an interesting impact on our financials, things like the Advancing American Kidney Health initiative, which is an important potential driver for us. We also have to ensure that we have the right capital investments and operational investments in our manufacturing and quality systems. That's another critical area we are spending a lot of time assessing that. And then finally, one of the key areas to our long-term success relates to agreements with GPOs, IDNs and other major customers. And so that's another area that we are working -- our U.S. teams are working very hard on that.

And so until we have full line of sight to the completed operating plan along with some further information on these numerous critical drivers, it's a little too early to get into specifics on 2020.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [47]

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No, that's helpful. And just one quick follow-up. As it relates to capital deployment, we touched on your ability to do M&A while this investigation is ongoing. What about your ability to continue to buy back shares? Can you do that before you file the 10-Q? Or are you limited on what you can do there?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [48]

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We don't -- so generally speaking, we don't comment on share repurchases for a lot of different reasons. What we typically do is after having repurchased shares, we make comments on how many shares we repurchased. And there are a number of different reasons for that, that I think represent good practice. And so as it relates to going forward, stay tuned, we'll talk about share repurchases on an upcoming call.

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Operator [49]

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Vijay Kumar with Evercore ISI is on the line.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [50]

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Hello?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [51]

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Yes, Vijay. Vijay, we can hear you.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [52]

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Sorry about that. Can you hear me now?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [53]

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Yes, we can. We're good.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [54]

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So one, maybe on the fundamental side, Joe, Jay. On the 5% operational for Q4, it looks like -- sequentially, what changed? What changes, I guess, in the model? Because you do have a tougher comp Q4. I'm guessing some of this is on the pharma side. The BREVIBLOC headwind goes away. You spoke about Myxredlin. Are those the main drivers here just to offset the tougher comp?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [55]

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Yes. I mean as we always anticipated, there was an acceleration in Q4 in Medication Delivery that represents an important driver. The team is hard at work in terms of identifying new customers, doing a tremendous job on the pump side and also the large-volume solutions side. So that Medication Delivery does represent an important component as we look to close out the year successfully. And then we'll also see some improvement sequentially in Nutrition. Again, that's an important business for us. The team has been hard at work recapturing some of the lost business in the U.S. but along with also successfully launching products. So those will be a couple of things that I would point out. I don't know, Joe, if you would add anything to that?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [56]

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I would say, Vijay, that compounding has had an effect. On a sequential basis, we have -- we've been very successful with compounding. But compounding is a business that varies a lot based on what kind of drugs go into biosimilars and mineral compounding business outside the U.S. So biosimilars are very successful outside the U.S., so depends on when they go on. On biosimilars, we have not a reduction in profit, but we have a reduction in the -- in sales just because of the purchase price.

The other one is we're anniversarying dexmed. Remember, this is a $80-plus million business that we're anniversarying right now. Myxredlin is just starting to pick up the momentum. We're picking up -- starting to see sales go up on that insulin -- ready-to-use insulin product. But the Myxredlin -- I'm sorry, but the dexmed anniversaries in there. So there are some puts and takes in the whole quarter, but it's not -- no, I don't see anything terribly different that would alter the momentum.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [57]

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And Jay, just on the 2020 commentary that you made on -- I think if you heard you correctly, you were talking about CapEx investments. So I just want to put that into context. Just given free cash has been growing healthily, are we looking at a step-up in CapEx? Was that the genesis of the comment or not? And just on the topic of free cash, when you look at deploying the free cash between now and until the investigation gets resolved, can you buy back stock, right, I guess, is -- and I apologize if this has been asked. But with that, I'll stop. Hello?

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [58]

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So yes -- sorry, Vijay. A couple of things. As it relates to your question on capital, my comments about 2020, I highlighted a few drivers. The AAKHI, that initiative is an important long-term growth driver for us. We have not reflected that particular initiative in our long-term plans but also in terms of our short-term capital plans. So that would be above and beyond our prior expectations in terms of CapEx investment.

As it relates to manufacturing and quality, one of the things we are intensely focused on is ensuring the high-quality manufacturing and that we have the right investments in quality. And that comes in 2 forms: OpEx certainly and also some CapEx. So that's another feature that we're looking at as we think about our 2020 planning. So those are a couple of highlights. And I've just chosen a few things to highlight as we think about our 2020 and -- which is why really we don't want to get into more detail on what our expectations are at this stage.

The -- as it relates to share buyback, like I say, our policy is simple and straightforward. And frankly, we really haven't varied from it over the last many years. We simply cannot comment on share buybacks until we've completed them. So you can expect...

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [59]

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What I meant here was that, was there -- is there -- can you -- are you allowed to buy back, I guess? I wasn't asking on if you are now.

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [60]

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Yes. So Vijay, totally understood. But in conjunction with my comment regarding we don't comment on share buybacks, furthermore, we don't comment on our ability to buy back shares. That's just -- that's how we do it.

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [61]

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Vijay, this has been a policy that's been here. Independent of this investigation, we wouldn't have given you this answer no matter what, no matter what.

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Operator [62]

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Larry Biegelsen with Wells Fargo is on the line.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [63]

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One on Renal and one on Nutrition. Just, Joe, on the renal care initiative, what are the next steps there? When do you think you'll be in a position to tell us more about the impact, not just from a capital standpoint but in terms of the impact on your PD business? And just is the point-of-care PD system still a 2020 launch? And I had one follow-up.

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [64]

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Larry, we -- all the comment -- sorry, ours and a bunch of it, over 100 comments that went into the system. I think the government -- original prediction was in November, we would hear from the HHS. It can be January. We hope as soon as possible. So as soon we hear from that, we are internally preparing several different scenarios in terms of growth rates and investments. That's why we announced the $500 million investment. But there's some stuff that we can do in the meantime to increase capacity, but we're going to have to invest money. So we are looking -- we have all these scenario planned, ready to go. We're just waiting to hear what is going to be the rule itself. Is this mandatory or voluntary? Is there -- are there any changes that will make demand go up or down? Is the population that they're experimenting with, the change in the policy, the same size that was originally conceived or differently? So there are so many variables. We are on it, and we'll be ready to talk to you folks as soon as we hear from the HHS when the rule is finalized, and we are ready to go.

Your question on point of care. Point of care, we are continuing with the clinical trial. We have more patients enrolled. And that's a great thing for us to understand how to mix a -- how to compound a drug in somebody's home. And we've been successful in doing that. But don't get all focused on that alone. We are making investments in some very interesting early technologies, and we're very excited about it. So we're seeing some other stuff. We're being first there, getting to know. We are making investments, sitting on boards of these technology companies. We think the horizon is opening quite rapidly for innovation when it comes to treatment of patients at home. So I would say, in about 5 to 7, 8 years, this outlook how you treat patients may change. And Baxter will be there because we are in the -- embedded in a lot of this new technology that is being developed at the moment.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [65]

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That's very helpful. Just quickly for me on Nutrition, what's the outlook there? You talked about new products in the U.S. and Europe, 2 new products, but you talked about a 3-chamber bag, I think, outside the U.S. Do you need that in the U.S. to accelerate your growth?

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José E. Almeida, Baxter International Inc. - Chairman, President & CEO [66]

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Larry, we do have product in the U.S. that will have multi-chambers. We think the U.S. is a slightly different market than the European market. The European market's a really early adopter of multi-chamber bags. We -- our multi-chamber bag in the U.S. will come at the right time. As a matter of fact, we have some very advanced plans in having the product here.

The thing that I want you to focus is that there are opportunities outside the U.S. that we are very concentrated right now in putting together. There's opportunities in China. There are opportunities in other parts of the world. And we are also developing and feel really good about a new multi-chamber technology that our folks in Belgium are looking in developing.

So we will continue to compete well. As you know, we are market leaders in the U.S. in parenteral nutrition. And we'll continue to affirm our position by launching either multi-chamber bags, either with fish oil, olive oil, whatever we think is the best combination for the patients here.

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Operator [67]

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We have one from Matt Miksic with Crédit Suisse.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [68]

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Just a quick one for me. I think we've covered a lot of the -- of topics. But I've been hopping back and forth between the calls, so I apologize if this was answered. But oddly, the topic is FX but not the investigation. Just to maybe, Jay, if you could, quantify maybe the impact of what looked like worse FX on some of your businesses, if they showed up more in one place than another during the quarter just in terms of dollar terms. I know that's all netted out organic growth. But any color you could provide just because it looked -- did look like it stepped up during the quarter at least relative to our estimates.

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [69]

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Matt, I think you can appreciate our sensitivity with respect to discussions of FX on a business line or regional basis today. So I'll refrain from answering that question, and perhaps at a future date, we can get into more detail by line, by business and so on.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [70]

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I understand.

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James K. Saccaro, Baxter International Inc. - Executive VP & CFO [71]

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We definitely appreciate your understanding.

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Clare Trachtman, Baxter International Inc. - VP of IR [72]

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Catherine, I think we can wrap up the call now.

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Operator [73]

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Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating, and have a nice day.