Jan 26, 2012
Operator
Good morning, ladies and gentlemen, and welcome to Baxter International's Fourth Quarter 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. Mary Kay Ladone, Corporate Vice President, Investor Relations of Baxter International.
Ms. Ladone, you may begin.
Mary Kay Ladone
Thanks, Sean. Good morning, and welcome to our Q4 2011 Earnings Conference Call.
Joining me today are Bob Parkinson, CEO and Chairman of Baxter International; Bob Hombach, Chief Financial Officer; and Dr. Norbert Riedel, Chief Science and Innovation Officer.
Before we get started, let me remind you that this presentation including comments regarding our financial outlook, new product developments and regulatory matters contain forward-looking statements that involve risks and uncertainties, and of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more details concerning factors that could cause actual results to differ materially.
In addition, in today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website.
Now I'd like to turn the call over to Bob Parkinson.
Robert L. Parkinson
Thanks, Mary Kay. Good morning.
Thanks for calling in. As I've had the opportunity to reflect on 2011, I can tell you that I'm very pleased with the progress our company continues to make financially, operationally and scientifically.
In fact, despite the global macro environment, competitive landscape and ongoing uncertainty, Baxter continues to report strong financial results. This includes record sales and earnings for 2011, as you saw this morning, while accelerating investments in innovation, advancing our new product pipeline and pursuing other initiatives to enhance long-term growth while returning significant value to our shareholders.
As you saw in our press release issued earlier this morning, adjusted EPS in the fourth quarter increased 5% to $1.17 per diluted share. For the full year, adjusted EPS was $4.31, which exceeded our original guidance range provided last January of $4.15 to $4.25 per diluted share.
On a reported basis, worldwide sales in the fourth quarter increased 3%, and after adjusting for the U.S. multisource generic injectable divestitures, sales growth was 4%.
For the full year 2011, worldwide sales increased 8% or 5% after adjusting for foreign exchange and the divestiture. And we're particularly pleased with our continuing ability to generate significant cash flow, which exceeded $2.8 billion for the year while maintaining our disciplined capital allocation strategy of returning value to our shareholders through increased dividends and share repurchases.
As some of you may know, in October, Baxter achieved an important milestone in celebrating our 80th anniversary, providing an opportunity to reflect on our great heritage as a pioneer and innovator in the development of lifesaving, life-sustaining therapies for patients and customers around the world. As you've heard me say many times, innovation is our most important strategic priority, and 2011 was an outstanding year, as we significantly increased our R&D investment to a record level.
This has resulted in a meaningful new product pipeline that's as strong today as at any time in our company's history, one that's focused on enhancing clinical outcomes, improving the safety and cost effective of treatments and expanding access to care. I'm specifically encouraged with our pipeline achievements in 2011, as we advanced more than 20 key R&D programs within late-stage clinical development.
Many of these programs have the potential to profoundly improve the treatment and delivery of care for chronic diseases like hemophilia, immune deficiencies, Alzheimer's disease and end-stage renal disease. So let me take just a moment to highlight a number of these accomplishments.
Within our leading hemophilia franchise, we have achieved a number of milestones. For example, we've now completed the global Phase I/II clinical trial of BAX 817 or recombinant Factor VIIa therapy and plan to advance into Phase III in early 2012.
We've also completed enrollment in the Phase I/III clinical trial of BAX 326, our recombinant Factor IX treatment for hemophilia B, and expect to conclude this trial and file for U.S. approval in 2012.
We initially announced the initiation of the Phase III trial of BAX 111, the first and only recombinant bundle of brent [ph] factor, which provides an alternative treatment option to currently marketed therapies that are plasma derived. This is an exciting opportunity for Baxter, with global market potential in excess of $300 million.
In December, ADVATE was approved by the FDA as the only Factor VIII prophylactic treatment for both children and adults. The approval was based on a Phase IV prophylaxis study demonstrating that ADVATE significantly reduced median annual bleed rates in hemophilia A patients by 98%, representing a reduction from 44 bleeds when treated on demand to 1 when treated prophylactically.
Of the 2 prophylactic regimens approved for use, the pharmacokinetic-driven dosing schedule of every 3 days offer some patients the choice of fewer infusions versus the current standard prophylaxis regimen. And earlier this month, we announced the dosing of the first patients in a Phase I clinical trial of BAX 855, a longer-acting PEGylated Factor VIII therapy based on the full-length ADVATE molecule.
The Phase I results will serve as the foundation for advancing this important program for clinical development in determining whether BAX 855 can offer a treatment regimen requiring fewer infusions than ADVATE. In the area of immune deficiencies, we continue to be successful in driving differentiation of GAMMAGARD LIQUID by offering various dosage forms, enhancing delivery options and expanding the number of approved indications.
As you know, early in 2011, we introduced the first and only 30-gram dose vial for GAMMAGARD LIQUID in the U.S., the most frequently prescribed dose for primary immune-deficiency patients, which enhances user convenience. We received FDA approval for GAMMAGARD LIQUID 10% subQ, allowing Baxter to participate for the first time in this fast-growing segment of the PID market in the U.S.
We're pleased with the initial market acceptance, as we secured both share gains and conversions of Baxter patients to this new therapy, and we expect to continue to capitalize on the differentiation we've achieved with this product's favorable tolerability profile, speed of infusion and low infusion site reaction rate included in our label of 2.7%. We also submitted HyQ for approval in the U.S., Europe and Canada during 2011.
HyQ allows for enhanced delivery of GAMMAGARD LIQUID subcutaneously, facilitated by recombinant human hyaluronidase. The regulatory submissions were based on results from a Phase III trial, which met both its primary and secondary endpoints and were represented at the Annual Meeting of the American College of Asthma, Allergy and Immunology in Boston.
We also received approval in Europe for GAMMAGARD LIQUID or KIOVIG as a therapy for multifocal motor neuropathy. This represents the first and only centrally licensed indication for MMN in that region and Baxter's first chronic neurological indication.
We also recently completed the Phase III MMN clinical trial and submitted for approval in the U.S. where we've been granted orphan drug status.
We enrolled the last patient in our first Phase III study for Alzheimer's in 2011 and expect to complete that trial by the end of this year. And earlier this week, we announced our plans to initiate a second confirmatory Phase III trial following a successful futility analysis that was conducted by the Data Safety Monitoring Board.
It's important to note that the futility analysis is not an interim look, and the trial remains blinded. However, the analysis indicated greater than a 20% statistical probability of success in achieving statistical significance in the primary efficacy outcomes.
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.
Results from the trial demonstrate that injection of the patient's own CD34+ adult stem cells into targeted sites in the heart had therapeutic benefits such as reduced angina episodes and improved exercise tolerance. We look forward to moving into a Phase III clinical trial early this year.
And finally, we initiated our first home hemodialysis trial, which has the potential to deliver enhanced clinical outcomes and greater patient convenience to those with end-stage renal disease. The first U.S.
clinical study will assess device performance and safety in patients undergoing in-center hemodialysis, and multiple trials are planned in the U.S. and Canada to support CE Mark in 2013 and the U.S.
launch in 2014. These achievements depict just a handful of the programs in our pipeline that will present great opportunities for Baxter in the years to come.
And I'm increasingly encouraged with our progress, and we look forward to updating you on further R&D achievements in the future. Throughout 2011, we also accelerated the pace of business development, with several new business partnerships that complement our current businesses, enhance our product portfolio and leverage our scientific, manufacturing and commercial capabilities.
Some examples include the acquisition of Prism Pharmaceuticals, a specialty pharmaceutical company that developed and received FDA approval for NEXTERONE. Second, we acquired Baxa Corporation, which complements Baxter's global portfolio of nutritional therapies and drug delivery systems, leverages our global footprint and leadership in the hospital pharmacy and supports patient safety.
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. And finally, we entered into a collaboration with Momenta to develop and commercialize follow-on biologic products, also known as biosimilars.
With this collaboration, Baxter will leverage its leading clinical development and biologic manufacturing expertise, global leadership in injectables and global commercial capabilities, while Momenta will provide its expertise in high-resolution analytics, characterization and product and process development. This collaboration complements our early stage pipeline and allows us to expand our leadership and leverage our expertise and capabilities in biologics at a time when the global regulatory pathway for approval is becoming more evident.
These transactions reflect our attempt of being more proactive on the business development front going forward, and they also exemplify the types of opportunities we will pursue. Those that complement our existing portfolio and expand our market-leading positions, leverage our global footprint, channel our customer relationships, capitalize on our core scientific or manufacturing capabilities and provide for low-integration risk and a higher confidence in achieving success.
As always, I'd be happy to address any questions on these or other topics during the Q&A. And with that, I'd like to ask Bob to review our fourth quarter financial results and guidance for 2012 in more detail, and then I'll come back to provide some closing perspectives.
Bob?
Robert J. Hombach
Thanks, Bob, and good morning, everyone. As Bob mentioned, earnings per diluted share on the fourth quarter, excluding special items, increased 5% to $1.17 per diluted share, which was at the high end of our guidance range of $1.15 to $1.18 per diluted share.
As we mentioned in our press release, our GAAP results include after-tax special items of approximately $200 million or $0.35 per diluted share. Approximately 35% of this charge is noncash.
The special items primarily include costs associated with the business optimization initiative pertaining to certain manufacturing and business operations around the world. These actions include the elimination of a number of positions, as we continue to streamline our international operations, rationalize our manufacturing footprint and optimize our general and administrative infrastructure.
Annual savings are expected to total approximately $0.12 per share when fully implemented in 2014. For 2012, savings will equate to approximately $0.05 per diluted share, which is in addition to an incremental $0.03 of savings related to our actions implemented throughout 2011.
Additionally, the Q4 charge includes certain asset impairments principally related to write-down of the company's Greek government bonds. Now let me briefly walk you through the P&L by line item for the fourth quarter and full year 2011 before turning to our financial outlook for 2012.
Starting with sales, worldwide sales totaled $3.6 billion in the fourth quarter and increased 3%. Foreign currency did not impact sales growth.
Therefore, growth on a constant currency basis was also 3% and in line with our guidance range of sales growth in the 2% to 3% range. Excluding the U.S.
multisource injectables divestiture, Q4 sales growth was 4% on both a reported and constant currency basis. For the full year, global sales increased 6% to $13.9 billion.
Excluding foreign currency and the impact of the U.S. multisource generic injectable divestiture, sales growth was 5%.
In terms of the individual business performances, beginning with BioScience, global BioScience sales of $1.6 billion increased 3% in the fourth quarter, both on a recorded and constant currency basis. For the full year, global Bioscience sales of $6.1 billion increased 7%, or 5% excluding foreign currency.
Within the product categories, recombinant sales of $578 million advanced 8%. Excluding foreign currency, sales grew 7% with balance growth between both the U.S.
and international markets. On a year-to-date basis, recombinant sales exceeded $2.2 billion, and excluding the negative impact of tenders, full year recombinant growth on a constant currency basis was in mid-single digits, consistent with global market demand.
Moving on to Plasma Proteins. Sales in the quarter were $397 million and declined 4% versus the prior year period.
On a constant currency basis, sales declined 2% despite a sequential increase in revenues of approximately 12%. This was primarily a result of a difficult comparison to last year given the phasing of tenders.
In addition, the decline in sales can be attributed to 2 items: timing of plasma-derived Factor VIII shipments related to a large Brazilian tender and temporary supply constraints and delays in the clearance of shipments in China, resulting in backorders of approximately $15 million. Excluding these items, sales growth for the Plasma Protein category was in mid-single digits.
For the full year, Plasma Protein sales exceeded $1.4 billion and increased 5% on both a reported and constant currency basis. In Antibody Therapy, sales of $406 million increased 5%.
Excluding foreign currency, sales were up 6%, driven by robust demand for GAMMAGARD LIQUID, particularly in the U.S. and a successful launch of our SubQ therapy.
As you know, Octapharma returned to the market on a global basis, and we annualized the benefits of their absence in the fourth quarter. Excluding the Octapharma benefit from both years, sales growth in the fourth quarter for Antibody Therapy on a constant currency basis was approximately 10%.
For the full year, Antibody Therapy sales exceeded $1.5 billion and increased 14% versus 2010, or 13% on a constant currency basis, faster than market demand. As we've previously mentioned, our full year results included a benefit of approximately $100 million in sales related to meeting demand previously served by Octapharma.
In the fourth quarter, sales of regenerative medicine, which includes our biosurgery products, totaled $150 million and increased 3% on both a reported and constant currency basis. High single-digit growth of our surgical sealants was offset by lower ACTIFUSE revenues resulting from our planned transition to a direct sales model from ApaTech's former distributor model, as we've discussed in previous quarters.
For the full year, regenerative medicine sales of $580 million increased 10%, or 8% on a constant currency basis, despite global weakness in surgical procedures. Finally, revenues in the other category, which includes of vaccines, totaled $44 million in the fourth quarter and declined 16% versus the prior year.
This is primarily due to a benefit in 2010 from onetime orders for our meningitis C vaccine that did not recur in 2011. In Med Products, global sales in the fourth quarter totaled approximately $2 billion, reflecting an increase of 3%, or 2% on a constant currency basis.
Adjusting for the U.S. multisource generic injectables divestiture, reported sales growth for Medical Products was 6%, or 5% on a constant currency basis.
For the full year, excluding the prior year COLLEAGUE charge, Medical Product sales of $7.8 billion increased 6%, and on a constant currency basis, sales increased 3%. Also after adjusting for the divestiture, full year sales growth was 8%, or 5% on a constant currency basis.
Now turning to the product categories. Renal sales in the quarter totaled $664 million and increased 6% on a reported basis.
Excluding foreign currency, sales growth of 5% was driven primarily by global PD growth of 8%, which was partially offset by the continuing loss of PD patients to another U.S. service provider and lower HD revenues.
I've mentioned we continue to be pleased with the ongoing momentum in patient gains in the U.S. given the recent reimbursement changes and solid patient growth across Latin America and Asia.
Sales in the Global Injectables category of $487 million declined 2%, and excluding foreign currency, sales declined 3%. Excluding the divestiture, growth of this category was 10%, or 9% on a constant currency basis, resulting from strong growth in our compounding business, as well as a robust demand for MINI-BAGs and certain injectable drugs.
IV therapy sales totaled $469 million and rose 4% on both a reported and constant currency basis. Contributing to this performance was the addition of Baxa sales to our nutrition franchise, which totaled approximately $20 million, as well as strong growth of IV solutions in the U.S.
Infusion systems sales totaled $235 million, reflecting growth of 2% on a reported and constant currency basis. Growth was a result of expanded placements and sales of the Spectrum pump.
Finally, anesthesia sales of $147 million increased 4% on a reported and constant currency basis, driven by solid demand in the U.S. primarily for Suprane and other critical care products.
This growth was partially offset by competitive pricing pressures for generic sevoflurane. Turning to the rest of the P&L.
Gross margin for the company was 51.8% in the fourth quarter, an improvement of 90 basis points sequentially and 180 basis points versus the prior year. Margin expansion in the quarter is primarily result of mixed benefits derived from across the portfolio and improved manufacturing efficiencies in the plasma business.
For the full year, gross margin was 51.4%, which is 30 basis points higher than the 2010 gross margin of 51.1% and in line with our full year guidance. SG&A totaled $748 million in the quarter and increased 6% versus the prior year period.
Excluding foreign currency, SG&A increased 5%, as incremental pension expense and investments in a number of promotional activities focused on upcoming new product launches were partially offset by business optimization savings and aggressive management of discretionary spending. For the full year, SG&A increased 7%, with FX contributing 3 percentage points of growth.
And as a percent of sales, the SG&A ratio of 21.1% was flat to 2010. R&D spending accelerated in the fourth quarter to $254 million, representing an increase of 11%, as we continue to fund in advance a number of late-stage programs, several of which Bob mentioned earlier.
R&D for the full year totaled $946 million, a new record lever for the company. The operating margin in the quarter was 23.9%, a sequential improvement of 20 basis points from the third quarter and the highest quarterly operating margin during 2011.
For the full year, operating margin was 23.5%, an improvement over 2010 by 20 basis points, primarily a result of gross margin improvements. Interest expense was $15 million compared to $19 million last year.
This reduction is primarily a result of a benefit from higher rate debt that matured last year and higher interest income. The tax rate was 20.4% in the quarter, in line with our expectations and similar to last year's rate.
And finally, as previously mentioned, adjusted EPS was $1.17 per diluted share, an increase of 5%. For the full year, adjusted EPS was $4.31, representing an 8% increase.
Turning to cash flow. Cash flow from operations in the quarter totaled $892 million compared to $935 million in the prior year period.
The reduction versus the prior year is a result of $89 million in payments primarily related to the infusion pump recall. On a full year basis, cash flow from operations exceeded $2.8 billion compared to $3 billion last year.
After adjusting for pension and the payments principally related to COLLEAGUE, cash flow from operations exceeded $3.3 billion. Capital expenditures of $960 million were similar to the prior year period, resulting in free cash flow excluding pension and other payments in excess of $2.3 billion.
DSO ended the quarter at 53.5 days, an improvement sequentially but one day higher than the year-end DSO within 2010. And inventory turns of 2.7 also improved sequentially but were lower than last year.
And lastly, during 2011, we repurchased approximately 30 million shares of common stock for approximately $1.6 billion, or a net basis 20 million shares for approximately $1.2 billion higher than our original objective. Finally, let me conclude my comments this morning by providing our financial outlook for the first quarter and full year 2012.
First, for the full year, we expect earnings of $4.47 to $4.59 per diluted share. This guidance includes a net headwind of approximately $0.25 per diluted share for nonoperational items including incremental pension expense and the impact of foreign currency, particularly in emerging markets.
By line item for the P&L and starting with sales, we project full year sales growth of approximately 2%. Excluding foreign currency, sales growth will be in the 4% to 5% range, as foreign currencies assumed to be -- to have a 2% to 3% impact on top line.
This outlook includes incremental sales from the Baxa and Synovis acquisitions of approximately $160 million and $65 million, respectively. The contribution from these acquisitions is more than offset by the impact of Octapharma, the typical first quarter comparison resulting from the U.S.
multisource generic injectable divestiture and other headwinds we've discussed. We expect the full year gross margin rate for the company to be flat to modestly below the 2011 gross margin of 51.4%, as operational improvements of approximately 50 to 100 basis points are offset by a number of headwinds, primarily dilution from recent transactions and the impact of foreign currency and pension.
We expect SG&A to grow in low-single digits and R&D to grow in low- to mid-single digits for the year. Interest expense for the year will total approximately $80 million and other expense, including noncontrolling interest, will be in the $20 million to $30 million range.
We assumed a tax rate of approximately 21.5%, flat with 2011, and a full year average share count of 550 million to 555 million shares, which assumes approximately $1 billion in net share repurchases. From a cash flow perspective, we plan to generate cash flow from operations of more than $3 billion, which includes an outflow of approximately $250 million related to the finalization of the COLLEAGUE consent order.
Now to expand on full year sales assumptions for each of the businesses. First, on a constant currency basis, we expect Medical Product sales to grow in mid-single digits.
By product category, IV therapy sales will grow in high-single digits. As you know, this category includes the nutrition business and will benefit from the Baxa acquisition that closed in the fourth quarter.
Anesthesia and Global Injectable sales will increase in mid-single digits, while infusion system sales will decline approximately 5%, reflecting a tough comparison for SIGMA as we complete the consent order later this year. And lastly, we expect renal sales to grow in low-single digits.
For BioScience, we project sales growth, excluding foreign currency, in mid-single digits. This includes low single-digit growth for recombinants, reflecting the impact of recent tenders, and Plasma Protein sales growth in mid-single digits.
For Antibody Therapy, sales of low-single digits reflecting robust underlying demand and a modest benefit related to our HyQ launch in the second half of 2012, both of which are partially offset by the impact of Octapharma. We expect regenerative medicine sales to grow approximately 20%, which includes the addition of Synovis.
And finally, we expect the other category within BioScience to decline approximately 5%, driven primarily by lower third-party plasma sales. For the first quarter, as we mentioned in our press release, we expect earnings per diluted share of $0.98 to $1 and sales growth excluding the impact of foreign currency of approximately 2%.
Based on our outlook for foreign exchange rates, we expect reported sales to be comparable to sales achieved in the first quarter of 2011. Thank you.
And now I'll turn the call back over to Bob for his closing comments.
Robert L. Parkinson
Thanks, Bob. As I mentioned earlier, I'm quite pleased with our 2011 financial and operational accomplishments.
We achieved organic sales growth of 5%, and earnings per diluted share increased 8% on an adjusted basis. We generated strong sustainable cash flow of more than $2.8 billion and returned significant value to our shareholders.
We meaningfully advanced our new product pipeline that's as strong today as it any time in our history. We accelerated the pace of business development initiatives that complement our current businesses, leverage our capabilities and provide enhanced growth in the future.
And culturally, we continue to respond to an evolving and demanding environment, with new strategies aimed at enhancing our commercial, operational and scientific effectiveness, while continuing to focus on maximizing growth opportunities across the portfolio and managing costs throughout the company. As a result, throughout 2011 we strengthened our foundation, and we remain very confident in the long-term growth prospects for our company.
We plan to expand upon this later this year when we host an Investor Conference in Chicago. Additional details will be made available from Mary Kay to all of you in the coming weeks.
So with that, thank you, and let's now open up the call to Q&A.
Operator
[Operator Instructions] I would like to remind participants that this call is being recorded and a digital replay will be available on the Baxter International website for 30 days at www.baxter.com. Our first question comes from Mike Weinstein of JPMorgan.
Michael N. Weinstein
Bob, can you update us on your plans for upgrading the old L.A. fractionation facility?
And tell us how that plays into your guidance for 2012.
Robert L. Parkinson
Yes, this is Bob Parkinson, Mike. Let me kind of kick this off, and then Bob and Mary Kay can augment my comments.
As you know, we continue to see very steady long-term growth and demand for plasma-based therapies, including IG. And our estimates are that market demand continues to grow and certainly, this strong mid single-digit range over time.
We continue to make very good progress in transitioning manufacturing to new L.A. frac.
I think last year, we had the majority of our production now move to new L.A. frac.
But obviously, given our strong pipeline of new products, our current plans include utilizing capacity. As we discussed before, the old L.A.
facility, at least for some number of years, saw. So as a result of that, we need to shut down old L.A.
to make the necessary investments to upgrade the facility, so we can keep it in play over the longer term. And we plan on doing that really in the beginning of the second half, Mike, of 2012.
We haven't defined a specific date. That will be early in the second half.
In the meantime, we've been able to adjust the scale of our operations successfully within the existing global manufacturing footprint between new L.A.; Vienna; Rieti, Italy, and through yield improvements and flexibility in the global network. We've been able to respond appropriately to demand.
Now beyond keeping old L.A. frac in commission as we've discussed before, given expansion of IG indications, the continued strong growth of plasma proteins over time, we have initiated a greenfield development process for a new site.
We haven't arrived at a final decision in terms of sites. Allegedly expect to do that shortly, and certainly would be in our position in our Investor Conference this fall to share more specifics in terms of the overall capacity demand for plasma proteins, the role that the new facility, the greenfield site, will play in that over time.
So that kind of covers kind of the overall situation. But specifically, early second half of the year, we'll take old L.A.
out of production to make the necessary upgrade.
Michael N. Weinstein
Yes. And so Bob, is it efficient to wait until the second half so that you can build inventory in the first half of the year?
And then how does taking it down the second half impact your ability to launch site 2?
Robert L. Parkinson
Bob, why don't you comment on the inventory build intent [ph] ? That's a good question.
Robert J. Hombach
Yes, absolutely. As you know, we've been running very tight on inventory and in fact with very strong demand for our product periodically experiencing backorders.
With Octa returning to the market, the expectation is that we'll be in a better position to start building some inventory in advance of the shutdown in the back half of the year and be in better shape. That way that will allow us to maintain supply and support some modest growth as we indicated in our guidance.
And I would say from a cost perspective, very modest impact to cost in 2012. Some impact to '13, but I would say a slight headwind, nothing significant.
So we're comfortable we'll be able to take it down, do the necessary upgrades and get it back up in production in 2013 and support future growth very nicely.
Michael N. Weinstein
So coming back to it, how does that impact the ability to really launch HyQ and go after CSL's business?
Robert J. Hombach
Well, I think our approach initially with HyQ, given that is -- this is a paradigm change in treatment, is to have a controlled launch, ensure that those patients and treaters that first go on the product understand how to administer it appropriately, build a good track record and good word of mouth amongst the community and then drive the momentum going forward. So again, our expectations for HyQ for 2012 are modest in any case, but we certainly expect to build a strong foundation so that we can gain some momentum in '13.
And we'll have the production available to support that moment as we go forward.
Mary Kay Ladone
And, Mike, I'd also add that Octapharma, in terms of our guidance, we've actually eliminated the $100 million of benefit we received in 2011 so that the guidance of low-single digits, if you excluded that $100 million benefit, would be in high-single digits, which is faster than the market growth.
Michael N. Weinstein
Got you. That's helpful.
Let me just ask one question to Bob Hombach again. The first quarter guidance is -- reflects flat to low-single digit EPS growth.
Can you just provide a little bit more color on why the first quarter EPS growth would be lower than the balance of the year?
Robert J. Hombach
Yes, a couple of factors there. The first quarter tends to be a lower quarter from a margin perspective, and certainly given where FX rates are at the moment, that certainly poses a bit of a headwind for us as we go into the first quarter here.
And really, FX from a headwind standpoint will be there for most of the year, as we indicated in our prepared comments. But as we get through the first quarter, as we annualize out the impact of the divestiture, we did book revenues in the tune of about $50 million to $60 million related to the multisource generic business in the first quarter of last year.
That will annualize after the first quarter and have a bit more of a normalized growth rate beyond that.
Operator
David Lewis of Morgan Stanley is online with a question.
David R. Lewis
Maybe a couple questions for Bob Hombach. Bob, just real quickly on cash flow, you're guiding to cash flow from operations up year-on-year, but there are some pretty significant hits this year, specifically in pension, as well as the deliverables related to COLLEAGUE.
Can you just help us understand sort of your net-net? How you think underlying cash trends are trending into '12?
And when we see sort of a normalized cash quarter, you think, in 2012?
Robert J. Hombach
Yes. Until we get the COLLEAGUE consent order done, we won't see a normalized quarter until the third quarter.
We're targeting -- July is when the due date is to finalize that. So the amount of cash we have assumed out the door related to COLLEAGUE in 2012 is slightly higher than it is in 2011, and so those are comparable year-over-year and aren't driving a difference.
You're right. We did have a pension contribution in early 2011 that we're not expecting to make a pension contribution in 2012.
Nothing else really material to discuss around the overall working capital and cash flow assumptions. Again, our guidance, we said, exceeds $3 billion, so we'll see how things play out.
But generally, I'm very comfortable with how we've managed the inventory and DSO situations in a very tough environment, particularly DSO. You did see some slight deterioration year-over-year but certainly nothing dramatic, and it's one we're very focused on managing going forward.
David R. Lewis
Okay. Then, maybe just 2 quick ones here.
Bob, one more financially and one for Bob Parkinson. Just on the $0.20, $0.25 for currency and pension, can you just give us the relative breakout there between pension and currency or specifically just what the pension expense alone is?
Robert J. Hombach
Yes, and maybe I'll spend a bit of time on this because I think it's relevant for a lot of other folks as well. So pension is, as we projected, $0.09 of a headwind year-over-year.
And so looking at the residual of $0.16, that's kind of the midpoint of our estimate of the impact of foreign exchange. Now historically, we've talked about FX being a fairly muted impact at the bottom line for the company, a combination of having natural hedges and the use of financial hedges and a bit of a portfolio effect in the emerging markets force over time.
And in fact, if you look at 2011, despite volatility where a tailwind for us in the front half of the year and a headwind in the back half, we end the year with approximately $0.03 of a net impact on FX on the full year 2011.
Robert L. Parkinson
Favorable.
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
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.
Mary Kay Ladone
David, I would just add that what we included in our 2012 guidance was what we had discussed throughout the fourth quarter of about $30 million to $40 million related to austerity measures. That's pretty balanced between both BioScience and Medical Products.
I'd just highlight that the majority of the impact is really coming from vaccines within the BioScience business and within Med Products. It's really between IV therapy, where our nutrition products are being impacted, and then some impact in renal.
Operator
David Roman of Goldman Sachs is online with a question.
David H. Roman
I was wondering if you can walk through the impact of M&A on the guidance. I know you've provided some perspective with respect to dilution at the time you announced the deals.
But how much of the dilution that you've provided then is either going through GAAP or ongoing earnings?
Robert L. Parkinson
Bob, go ahead.
Robert J. Hombach
Yes. So within the guidance that we provided, the incremental dilution is about $0.05.
And a couple things I'd note, one is we did take about $0.01 roughly in Q4 here because we did close the Baxa acquisition a little earlier than we thought. So some of what we were projecting for '12 occurred in '11.
And then, as we've looked at this further, there are certain aspects of the transaction costs that were likely to special out going forward. But the big chunk of this really is noncash amortization related to a deal premium that you have to run through.
In our case, we'll go through cost of goods sold, and that's about $35 million of incremental headwind that's going to run through margin here. So again, about $0.05 incremental, but we did take $0.01, roughly, in Q4.
David H. Roman
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.
David H. Roman
Okay. And then lastly on the new products, Bob, in your prepared remarks, you talked about SubQ both capturing share from your competitors, as well as converting some of your own business.
When we think about things like HyQ and some of the other products that you’ll launch through the end of '12 and into '13, should we think about those more share capture, market growing, cannibalistic? How do you sort of rate that?
Robert L. Parkinson
It will be some of the each. Over time, it will be -- it should translate into both share gains, but I would say also at a price premium.
And as Bob pointed out, hopefully when we get approval between then and at the end of the year, we're going to have a very controlled launch, understand what the receptivity of product is, which then will titrate the kind of the marketing objectives between share gain pricing and so on, recognizing in the near term, managing through supply of IG. But the value in HyQ should be manifested in both share gains and pricing.
Operator
Rick Wise of Leerink Swann is online a question.
Frederick A. Wise
Can I start with gross margin? Bob, you talked about gross margin being essentially flat for the year.
But could you talk about it -- how should we think about the quarterly flow and then, particularly, as it relates to old L.A. shutdown, temporary shutdown.
Should we assume second half gross margins are lower? Can you -- and maybe if you could help us think through that.
Robert J. Hombach
No. I mean, I do think that old L.A.
in and of itself given that it's back half that will take it down and how that rolls through our P&L. As you know, there's a bit of a delay given the long lead time of that.
So most of that impact will actually impact 2013, but again, it's a slight impact. It's not that significant.
And so I wouldn't expect anything unusual quarter-by-quarter for margin, with the exception of FX. So as you know, we talked about FX as a tailwind in our Q2 margin in 2011, and then, it snapped back to a headwind given the dramatic move in emerging market currencies.
Because there is a dichotomy in terms of how margin affects -- FX affects our margin between the developed markets where we have natural hedges and financial hedges. That tends to mute the margin impact, but as reported sales come down that can actually result in a higher reported margin percentage.
But on the emerging markets side because it's more highly leveraged and we don't have the financial hedges or the natural hedges in place, that tends to be more of a straight drop-through, and so it really does matter which currencies are moving which way here between the developed markets and emerging markets. So the one caveat to my comment really is that the tailwind in Q2 and the headwind in Q3 versus where we're at here with 2012 in our initial guidance.
That would be the only tweak. But no, I don't think there's anything dramatic there.
Mary Kay Ladone
Yes, Rick, I'd add that I think Bob mentioned earlier, our Q1 gross margin is expected really to be flat to 2011 Q1. And Q2 generally, we do see a higher margin, really due to the mix of our sales, which is benefited by the FSME vaccine, which is very high margin.
So typically, Q2 is our highest gross margin quarter of the year, and then, in Q3 and Q4, it moderates a little bit.
Frederick A. Wise
Okay, that's helpful. If I could turn to the plasma market, you've talked about some of the market dynamics, but it seems like as we look at 2012, it's a lot -- the outlook is a lot different than a year ago.
Grifols, Talecris now combined. I mean, 2 questions.
Can you talk about the dynamics of the consolidation? The Octapharma, $100 million you've taken out.
Are you seeing them on track to actually do that? Or is that a conservative assumption?
And maybe a little bit about collections and supply, demand. I'd appreciate it.
Robert L. Parkinson
Now let me -- Rick, this is Bob Parkinson. Let me take the first part, and maybe you could address, Bob, collections.
And so I really don't want to comment in terms of competitive response, and so on. I know there's been a lot of changes in the market, frankly, as a result of what we've seen.
Clearly, Octapharma has gotten a lot of the business back already that we gained from them last year. Whether our assumption is conservative or not is yet to be seen.
But I think it is fair to say that most of the volume that we gained will get lost back over time to them, okay?
Robert J. Hombach
Yes. And Rick, the way I would think about that is that given how the market break down for us in the U.S., where about half of our sales are in kind of the hospital acute episodic use versus the chronic space.
Our focus, particularly with SubQ and then with HyQ, is really going to be grow out the chronic space. And so with that differentiation, we think we have great opportunities there.
And where they play today given their 5% concentration in the -- which is kind of a suboptimal product relative to what most other competitors have with a 10% concentration, likely, they're going to play in the more price-sensitive hospital space, in any case. So for us, it's about directing product to those parts of the channel that we think we have the best opportunity to win.
And if that means some of the price-sensitive accounts we lose, then so be it. So it's more of how we're focusing on where we want to drive growth in the future than trying to fight it out with them hospital to hospital.
Robert L. Parkinson
What was your question, Rick, on inventories again?
Frederick A. Wise
It was sort of supply, demand. I mean, given the weakening economy, your collection's growing.
Just wondering how you see the -- just that -- the background there for Plasma Protein.
Robert L. Parkinson
Actually the economic environment in the area of Plasma Proteins, in general, certainly in IG, frankly, we haven't seen -- little to no effect really in terms of underlying demand. So I think in terms of the projection of market growth both in '12 and going forward beyond that, very consistent with what we've communicated before, I would say, strong single digit, mid-single digits.
And as for the total market and obviously with the early encouraging feedback on our SubQ product, the hopeful launch of HyQ and then indication expansions with MMN and so on over time, it's clearly our aspiration to grow this business at a faster rate than the overall market. But overall, Rick, pretty stable.
Operator
Bob Hopkins of Bank of America Merrill Lynch is online with a question.
Robert A. Hopkins
Can you hear me okay?
Robert L. Parkinson
We can, Bob. Go ahead.
Robert A. Hopkins
Okay, great. Just 2 quick questions, one on the Analyst Day upcoming and then another on your recent press release on Alzheimer's and the futility analysis that was done.
On the futility analysis, I was wondering if you could just comment a little bit more specifically about what we should and should not read into that analysis and the 20% threshold. It's my understanding that relates specifically to safety and says nothing about efficacy related to that 20%.
Is that the right way to look at it? I just want to clarify the point, because it has impacted the stock.
Robert L. Parkinson
Bob, let me -- as Mary Kay mentioned at the outset, Dr. Norbert Riedel's with us this morning.
I'm going to ask Norbert to respond to your question on this. Go ahead, Norbert.
Norbert G. Riedel
Okay, so maybe just for a little bit of context, the Phase III trial that is ongoing has about 390 patients enrolled. Patients are on therapy for 18 months.
And the futility analysis was done on a 120-patient part of that trial that has already completed 18 months on therapy. And the Alzheimer's consortium who we worked with to conduct this trial had a statistical group determine the parameters of the futility analysis for it to be truly within the spirit of our futility analysis and not become de facto in interim analysis.
And that's where they set the cutoff for the assessment. The assessment was done and says that there is a better than 20% probability of reaching the endpoint, the primary endpoint defined for the trial.
And there's also no indication from a safety point of view as to why the trial should not proceed. Therefore, the recommendation that the trial should really proceed as planned and our communication that we will be initiating a second conservatory trial with the exact same trial design.
So specifically answering your question, I did not expect a safety signal or a safety concern primarily because immunoglobulin GAMMAGARD is used and has been used for many, many years in primary immune deficiency and has a very well defined and also, would say, a very favorable safety profile. So safety was not really the issue, but it was looked at anyway by the DSMB.
But it was about a probability assessment that we will indeed be able to achieve the primary endpoint. And so I'm encouraged by that.
I think it supports also the Phase II trial data that we have seen. It supports our hypothesis that a multifactorial disease like Alzheimer's disease will likely benefit much from a multifactorial treatment approach like the complexity of the immunoglobulins that we offer these patients.
And I think it just overall continues to make me cautiously optimistic that this might indeed be a way of going after treating the disease.
Robert A. Hopkins
And can you just kind of remind me of the primary endpoint of the study?
Norbert G. Riedel
The primary endpoint is 2 well-defined endpoints that are generally used in the space of Alzheimer's disease. One is an assessment scale that is a cognitive function assessment scale that is used, and the other is an overall function of the patient that has to do with activities of daily life and so on, so parameters that we have selected together with the FDA and that are consistent with endpoints in Alzheimer's trials typically look for.
Robert L. Parkinson
What's your question on Investors Day, then, Bob?
Robert A. Hopkins
Yes, on the Investors Day, just some thoughts on specific timing and just things that you're going to be covering on that day that you think that we should be aware of in terms of the meeting and things that we should preparing for?
Robert L. Parkinson
Well, in terms of the specific time and day, Mary Kay will be out to all of you shortly. We're nailing that down.
It will be this fall, okay? So -- but when, Mary Kay, within what time frame?
Mary Kay Ladone
Yes, within a week or 2.
Robert L. Parkinson
Within a week or 2, we'll get you all the specifics, so in terms of the logistical part of it. But what's our objective?
As we traditionally have done, is to give you a longer-term view of where we see our company going. And one of the reasons, as I've commented before, that we have not had an Investor Day for a while, I think, is really largely a result of kind of the external environment and recognizing the volatility that existed.
Candidly, we want to get a little better line of sight both in terms of our operating plan for 2012 as a baseline but to get our arms around some of the moving parts. So I think you can interpret the fact that we're scheduling that as positive in terms of our sense that we think we more definitively have our arms around where we're going and so on.
And so, it's a bit of, I think, a sense of confidence as you gathered from my prepared comments. We continue to be very confident in the long-term outlook of the company.
And we understand all of you have been waiting for a while to get a sense of something beyond the immediate year that we're operating in, and so that's really the primary objective in terms of what's going to drive the growth of the company going forward and really at what rate do we see revenue growing out over the coming years, as well as projected earnings growth and so on. So we look forward to getting together with everybody.
Operator
Larry Keusch of Morgan Keegan is online with a question.
Lawrence S. Keusch
I'm just wondering, Bob, if you might just -- I know we spent some time on Octapharma, but maybe just from a global perspective, just help us understand sort of what you're seeing on price globally. Again, I understand you don't want to, I guess, like compete in the most price-sensitive countries or hospitals in the U.S., but just what you're doing?
Robert L. Parkinson
I'll just comment to some degree, maybe not satisfying you specifically. But from our perspective, I mean, obviously we're seeing fairly stable prices in terms of what we charge our customers around the world.
I'll kind of leave it at that.
Lawrence S. Keusch
Okay. And then, obviously, emerging markets are already a big proportion of your business.
There's a lot of reasons to believe that, and Bob Hombach mentioned that they're clearly the right place to invest, and this is where you want to go long term. I think you've sort of thrown out 30% as kind of as a percent of sales of where you think these markets can go.
Can you sort of just remind us of how you're thinking about when you might kind of reach that bogey, and how we should be thinking about just the margin profile as the mix of emerging markets gets bigger?
Robert L. Parkinson
Let me make a couple of comments, and then Mary Kay and Bob can add to this. I mean, first of all, this will be an area of focus at our investor conference this fall.
I think we'll hone in, provide a little more structure and definition on the opportunity that we see long term associated with emerging, developing markets. I think the number that you cited clearly is a reasonable aspiration that we may be able to get to within a -- say, within a 5-year period of time to give you a little of framework.
In terms of profitability, actually, interestingly, if you look at, say, pretax operating margin as a percent of sales in these markets, it actually aligns fairly closely with what we see in developed markets. Obviously, the cost of doing business in not all, but many of these markets is much less.
And also, we're supporting this growth through overhead structure. Whether it's here in our corporate offices or in our regional offices, that can be further leveraged.
So I don't see, over time, a dilution to the profile of our P&L as we grow emerging and developing market revenues at a faster rate than the rest of the company. So that's probably – I don’t know, Mary Kay or Bob, if you want to add to that...
Robert J. Hombach
Yes. I was just going to say, I mean, we've tended to enter these markets over time in the IV or renal space, but the opportunity to have these economies move up the scale and start devoting more of their GDP towards healthcare, some of our higher-end products, particularly biologics, become more attractive.
And so the opportunity to increase margin through further penetration of the biologics portfolio and the higher-end products within our Med Product space, like some of our nutrition and anesthesia products, we actually see nice margin opportunities for improvement going forward there.
Lawrence S. Keusch
Okay, terrific. And then just one last housekeeping item for Bob Hombach.
I don't know if I missed this on the call, but CapEx spending for 2012 and how much is sort of contemplated in there for the improvements being made to the old L.A. frac?
And then also what are you assuming in your guidance for the R&D tax credit?
Robert J. Hombach
Yes, I mean, the R&D tax credit for us is a fairly small item, so not material. As it relates to CapEx, once again, we're looking at about $1 billion.
That may go up a little bit pending the timing of when we launch the greenfield site that we've talked about for the plasma business, but thinking about it at approximately $1 billion at this point is a good way to think about it.
Operator
Our next question comes from Kristen Stewart with Deutsche Bank.
Kristen M. Stewart
Just wanted to confirm -- sorry if I missed this in the beginning, but your guidance does include both the Baxa acquisition, and it does it include Synovis? I know that hasn't closed yet but...
Robert J. Hombach
Yes.
Mary Kay Ladone
Yes.
Kristen M. Stewart
Okay. And in total, what was the total dilution from both of those deals that's included within the adjusted number?
Robert J. Hombach
That was in the adjusted number. We talked about $0.05 incremental in '12.
We took about $0.01 in Q4 here, withholding backs a little bit early. So that's the number.
As I mentioned, there are some onetime costs related to Synovis as a public company that we'll think about specialing out, but think about $0.05, again, almost exclusively, noncash amortization that's required by purchase accounting that runs through margin.
Kristen M. Stewart
And earlier, I thought you had said that, that was running through cost of goods sold. Is that correct?
Robert J. Hombach
Yes, the aftermarket, yes.
Mary Kay Ladone
Yes.
Kristen M. Stewart
Okay. and then I guess, Bob, just a bigger picture question.
I know biosimilars or something that in the past you had kind of shied away from. Obviously, you just announced a recent deal and there seems to be a little bit clarity.
Can you just maybe expand about your thoughts on biosimilars and just kind of where you see Baxter participating over the longer haul? And then any specifics on products that you could just...
Robert L. Parkinson
Yes. Well, Kristen, I mean with the deal with Momenta, we think this could be a meaningful opportunity for our company.
And historically, it wasn't so much that we shied away from it. I think we always felt fundamentally we were probably as well positioned as anyone to participate in the market.
Clearly, there was and continues to be to a great degree some ambiguity in the regulatory pathway. But if you look at Baxter's expertise and biologic manufacturing, all these are drugs that are administered -- that are injectable, which plays to a Baxter strength in terms of packaging, formulation, technology and so on.
And obviously, given our global channel presence, again, I think we're -- we've always been as well positioned as anyone. The reason we've been historically kind of noncommittal was one, lacking definition on the regulatory pathway.
But with the collaboration with Momenta, candidly, we think we have potentially a fundamental differentiator here, at least on the 6 compounds that are part of the deal that we did with Momenta. Not to get into a lot of detail on their technology, but at least with one biologic, they have a proven track record of applying their technology, bringing it through regulatory approval and getting it launched to the market.
And we're excited about the prospects of potentially being able to minimize the clinical development spend given their ability to characterize these biosimilars more effectively and accelerate the time to market as well as lower cost to market, as well. So with the Momenta deal, I think that was really the key thing that's kind of pushed us over the edge to say, okay, we had to be able to leverage the other Baxter strengths and take advantage of this is as a significant opportunity.
So we're quite excited about it.
Kristen M. Stewart
And then, I guess, congratulations on stealing Jean-Luc Butel from Medtronic. Anything different that we can expect from him with international business?
Robert L. Parkinson
Well, I don't think so. He knows -- since Ludwig moved, the Ludwig Hantson moved from the international role to run BioScience, which I would say he's doing an outstanding job with our pipeline and clinical development throughout BioScience.
In the meantime, the regional presidents in Europe, Latin America and Asia Pacific have reported directly to me. I think that's worked fine, but I think that as we discussed in the call this morning, given the opportunity in emerging developing markets, there's probably very few people in the industry that have Jean-Luc's expertise and depth of experience in operating in these markets around the world.
And I think he will bring real value add to and direction to our international regions, so as well as depth of experience in our senior leadership team overall. So we couldn't be more pleased to have Jean-Luc come on board in a few weeks.
Operator
Our final question comes from Matt Miksic with Piper Jaffray.
Matthew S. Miksic
I’ve got one question on some of your new products in IVIG that you mentioned, reason and forthcoming launches of SubQ and HyQ and the offsetting impact on the return of Octa. Can you give us a sense of how SubQ has impacted your business so far?
Understanding HyQ is significantly more differentiated, SubQ also seems to be having a positive effect. Do you think it's -- if you can quantify that, is it $10 million or $50 million on an annualized basis or 1% or 2% incremental to your business?
And then maybe at a higher level, looking at both SubQ and HyQ, do you think that they reach a level in 2012 to offset the $100 million you've talked about, giving back to the Octa? Or, any kind of color would be great on that.
I've got one follow-up.
Robert L. Parkinson
Yes. Well, let me just maybe give you a general response and then maybe Mary Kay or Bob can maybe fill in some of the details.
I mean, obviously, we're encouraged by the early response to the SubQ. I mean, we are seeing a conversion of patients from competitive product, as well as conversion of Baxter products on the IV form as well.
So we're -- and with the low injection-site reaction, in terms of side effects, which is very -- which is in the label, and that's been validated, I think, in terms of actual clinical experience. Having said that, I think it's too early maybe to quantify, Matt, how much of the Octapharma loss could be offset with the 10% SubQ.
But I think it's fair to say that some of it will be -- I'll stop there. Bob or Mary Kay, do you want to add to that?
Robert J. Hombach
Yes. I mean, very excited about how SubQ has gone so far.
But again, I would think about 2012 as a little bit of an unusual year given taking the old L.A. facility down.
It's going to constrain our ability to grow faster than what we've described here to some degree. And so it's really about seeding the market for what we think will be a very successful HyQ launch.
And so it will be more over time than an immediate impact in '12 in terms of what it might do for our business, but clearly, it is being well received. And again it's the fastest growing segment of the PID market, so we're very happy to be participating in it.
Matthew S. Miksic
That's great. And then lastly on recombinants with Q4, we saw a pretty significant step-up in the second half of the year.
And I wanted to get a sense as you head into 2012, we got your growth expectations in your prepared remarks. But Dr.
Riedel's been talking about the peer-reviewed paper on inhibitor formation published last summer. Can you give a sense -- and maybe Doctor Riedel can answer this -- as to how that paper -- what kind of impact has that had on the thinking across coalitions and folks in the community?
And are you starting to see an impact? Or do you expect to see an impact, whether it's in tenders or utilization?
Norbert G. Riedel
Well, maybe I'll start with just touching on the paper that you referred to, the meta-analysis, which really for the first time, provides a rather encompassing comparison between B-domain deleted Factor VIII and full-length Factor VIII. And I keep pointing out that our ADVATE as the goal standard of therapy in hemophilia A is a full-length recombinant Factor VIII that is manufactured completely in the absence of any proteins added at any point in the process of making the finished product.
And I have always believed that a full-length Factor VIII most closely mimics what is naturally occurring when you have a Factor VIII. And the data in the meta-analysis suggests that B-domain deleted VIII, or Factor VIII, has a much higher incidence of inhibitor formation, about a 7 fault [ph] higher incidence than the full-length Factor VIII.
And with respect to what we call high titre antibodies, which are the most problematic for a hemophilia patient and 11 times higher incidence rate. And so we have been clear with the results that our goal continues to be to optimize ADVATE therapy.
Our longer-acting Factor VIII is fundamentally an ADVATE molecule with a minor tweak that we put on the molecule and continues our approach to working with full-length Factor VIII. And I think when you look at just the market share of B-domain deleted Factor VIII, today it is actually very small and so I believe that, given the choice, that full-length Factor VIII is very attractive therapy.
And as I mentioned, it is much closer to the natural way of dealing with bleeds or stopping the bleeds.
Robert J. Hombach
And fair to say, I think that we're starting to see this resonate more with treaters and with patients, both the Profi Label as well as the meta-analysis. But that's part of our challenge in '12 is to drive that into the market and make it happen.
So that's what we're focused on.
Operator
Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating.