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Baxter International Inc  (BAX -0.29%)
Q1 2019 Earnings Call
April 25, 2019, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen and welcome to Baxter International's First Quarter 2019 Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer segment of today's 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.

Clare Trachtman -- Vice President of Investor Relations

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

On the call this morning, we will be discussing Baxter's first quarter 2019 financial results and our updated financial outlook for full year 2019. A supplemental presentation to complement this morning's discussion can be accessed on our website. This presentation, along with related non-GAAP reconciliations, 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 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 earnings release issued this morning and is available on our website.

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

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

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Good morning and thank you for joining us. We are pleased to share our first quarter results with you today and to discuss our updated expectations for 2019. I will begin with a quick review of our performance in the quarter and Jay will then provide more detail on the financials. We will wrap up with Q&A.

Baxter opened 2019 with a solid first quarter, delivering sales growth of 2% on both a constant currency and operational basis representing the high-end of our projections. Reported sales declined 2% with foreign exchange negatively impacting sales by approximately 400 basis points in the quarter. On the bottom-line, adjusted earnings per share were $0.76 advancing 9% year-over-year.

Growth was driven by top line sales performance, operational efficiency initiatives, a lower tax rate and a reduced share count. The breadth and essential nature of our portfolio reinforced Baxter's underlying stability even in a dynamic healthcare landscape. First quarter results benefited from positive performance across our Renal Care, Pharmaceuticals, Advanced Surgery and Acute Therapies businesses supplemented by increased demand for Baxter's cytotoxic contract manufacturing services.

These trends help to offset the sales declines in our Medication Delivery and Nutrition businesses in the quarter as expected. Renal Care continued to perform well and maintain underlying momentum globally, negative growth in US as expected, was due to our strategic exit of the in-center hemodialysis bloodline business. Demand for our peritoneal dialysis therapies remains strong with patient volumes increasing high-single digits in the US and mid-single digits globally, the continuing rollout of our new PD cyclers, Amia in North America, Kaguya in Japan, and Claria in Europe is helping to fuel this growth.

Pharmaceuticals delivered a strong mid-single digit growth globally on a constant currency basis, despite facing unfavorable comparisons from increased US generic competition for cyclophosphamide and Brevibloc. The strength in the Pharmaceuticals business reflects the positive contribution of the Claris Injectables portfolio and our steady launch of new molecules, including the recent launch of two premixes in the US, dexmed and epti, increased demand for Baxter's hospital pharmacy compounding services as we always grow in our anesthesia business also contributed to grow in the quarter.

Double digit, constant currency growth in Advanced Surgery was driven by the US, which benefited from last year's acquisition of RECOTHROM and PREVELEAK. We are continuing to enhance our hemostatic product line in response to customer needs most recently with the FDA approval of a next generation passive prep configuration for Floseal. This make it even easier and quicker to employ our leading hemostatic in the operating room. And our Acute Therapies business delivered solid mid-single-digit constant currency growth globally. Recall last year, this business benefited from an intense flu season, creating a difficult year-over-year comparison, we continue to see strong trajectory here with the launch of our next generation PrisMax technology gaining traction of the ICUs in Europe and as of Q1, Asia-Pacific as well.

This quarter Baxter and NantHealth also announced that a digital health solution is now available to connect Prismaflex with hospital EMR systems. This represents a key enhancement in our digital care portfolio. In addition, a new collaboration with bioMerieux is focused on identifying biomarkers to diagnose acute kidney injury earlier, reflecting our strategy to broaden our impact across the continuum of care. The growth in these businesses was partially offset by the anticipated declines in our Medication Delivery and Nutrition businesses. This past quarter Medication Delivery faced a challenging comparison to our first quarter 2018.

You will recall, the demand for US large-volume IV solutions is spiked in the first half of the last year. This was due to hospitals and distributors stocking up in response to industrywide supply challenges following Hurricane Maria, as well as the intense flu season.

Performance in this business is expected to improve sequentially over the course of 2019 driven in part by our ongoing recapture efforts for small volume parenterals and the continued uptick of our new pump platforms Spectrum IQ in North America and Evo IQ in selected international markets. And as I have mentioned previously, we are rebasing our Nutrition business in the US, the upcoming launch of Clinolipid marks our first US launch in our Nutrition business in over a decade and will be an important milestone in our efforts to react a big growth.

Our employee base remains highly engaged and focused on delivering innovation that improves patient outcomes, enhance the safety, facilities to shift healthcare to the home setting and increases the ready access to generics including drugs in short supply. This will allow us to address many of the pressing issues faced in hospitals today as they look for opportunities to further reduce the potential for medication error and increased (ph) costs.

In sum, we are encouraged by the underlying strength of the quarter, our results are built on a combination of enhanced operational efficiency and a revitalized innovation pipeline as we are well positioned for growth acceleration. Before I pass it over to Jay, I want to provide a quick update on our quality efforts. As you know, we have been operating since 2013 with an FDA warning letter in place for our North Cove, North Carolina and Jayuya, Puerto Rico manufacturing plants. This week we received notice that the FDA has now classified our Jayuya site as Voluntary Action Indicated or VAI. We are pleased with this development, which we believe reflects our steadfast commitment to quality at Baxter and acknowledges progress in our efforts to help ensure reliable product supply for our customers.

Now, I will pass it to Jay to provide more details on our financial performance and outlook.

James Saccaro -- Executive Vice President and Chief Financial Officer

Thanks, Joe and good morning, everyone. As Joe mentioned, our first quarter results which exceeded our expectations, position us well for accelerating growth throughout the year. I'll start by discussing our first quarter results before providing our updated financial outlook for 2019. Beginning with the first quarter, global sales of $2.6 billion decreased 2% on a reported basis but increased 2% on both the constant currency and operational basis, reflecting global strength across several of our businesses.

On the bottom line, adjusted earnings increased 9% to $0.76 per diluted share. This exceeded our guidance of $0.66 to $0.68 per share driven by solid operational performance, phasing of certain R&D investments at a lower tax rate.

Now, I'll walk you through performance by our geographic segments and global businesses. Note, for this quarter, constant currency growth is equal to operational sales growth for all businesses and segments except for our Pharmaceuticals business in the Americas region, for which we will provide operational growth in addition to constant currency growth. Starting first with sales growth for our three geographic segments, sales in the Americas declined 1% on a constant currency basis and were flat operationally. Sales in Europe, Middle East and Africa grew 4% on a constant currency basis and sales in our Asia-Pacific region advanced 7% on a constant currency basis.

Moving on to performance by global businesses, global sales for Renal Care were $851 million advancing 3% on a constant currency basis. Performance in the quarter was driven by continued momentum for PD therapies, partially offset by lower sales in the US for select in-center HD products including the recently exited bloodline business. Adjusting for this impact, underlying growth in the Renal Care business was approximately 6% in the US and 5% globally. Sales in Medication Delivery of $634 million declined 4% on a constant currency basis in line with our expectations. We are on track with our recapture efforts related to small volume parenterals. As our teams continue to reinforce to our customers, the safety and efficiency of our SVPs for drug reconstitution.

Finally, we are pleased with the market response to both our Spectrum IQ and Evo IQ infusion pumps. As Joe mentioned, we expect growth to accelerate in this business over the course of the year as we anniversary 1H 2018 stocking impact, execute on SVP recapture efforts capitalize on new pump launches and improved product availability internationally. Pharmaceutical sales were $509 million increasing 6% constant currency and 9% operationally.

Contributing to performance in the quarter with strength in our international hospital pharmacy compounding business, increasing demand for anesthesia and critical care products and robust sales of generic injectable drugs which benefited from the new product launches Joe discussed earlier. Pharmaceutical growth in the quarter was partially offset by approximately $40 million of lower US sales of Brevibloc and Cyclo as compared to the prior-year period.

Moving to Nutrition, total sales were $205 million down 5% on a constant currency basis. We continue to focus on returning to positive growth in the US and are gaining traction with our recapture efforts. International sales also declined in the quarter, primarily driven by the phasing of some orders in Asia-Pacific and EMEA (ph) which shifted from Q1 to later in the year. We remain focused on enhancing performance for our global Nutrition business, through improved execution and innovation including the introduction of new products for both US and international markets.

We expect sequential improvement in growth rates for our Nutrition business throughout 2019. Sales of $198 million in Advanced Surgery increased 12% on a constant currency basis, growth in the quarter was driven by increased sales of hemostats and sealants including a contribution from RECOTHROM and PREVELEAK of approximately $17 million in the quarter. The acquisition of these assets from Mallinckrodt has allowed us to broaden our portfolio of hemostats and sealants, so we can offer surgeons more choices. Sales in our Acute Therapies business for $128 million, representing growth of 4% on a constant currency basis. As Joe mentioned, this business faced a challenging year-over-year comparison as Q1 2018 benefited by approximately $11 million due to flu-related sales in the quarter, adjusting for this impact growth in our Acute business remained strong, driven by new product launches, continued focus on geographic expansion and our clinical education efforts, demonstrating the benefits of CRRT for the treatment of hemodynamically unstable AKI patients.

Finally, sales in our other category, which primarily includes our contract manufacturing services were $107 million, an increase of 8% on a constant currency basis. Performance in the quarter was primarily driven by increased demand for our cytotoxic contract manufacturing services and reflects an easier comparison to the prior-year period. Moving through the rest of the P&L, our adjusted gross margin of 43.7% declined slightly as compared to the prior-year period as the benefits from manufacturing improvements and portfolio optimization initiatives were more than offset by lower US sales of Cyclo and Brevibloc and the less favorable product mix.

Adjusted SG&A totaled $587 million flat to prior year on a reported basis and increasing 4% on a constant currency basis. The positive contribution from our targeted initiatives to improve operational efficiency were partially offset by the loss of approximately $7 million in transition services income received from Shire in 2018. In addition, as we continue to ramp up our efforts on accelerating innovation we are making select investments in sales and marketing to help ensure successful commercial execution of new product launches.

Adjusted R&D spending in the quarter of $140 million (ph) decreased 17% on a reported basis and 13% on a constant currency basis versus the prior-year period. R&D expenses in the quarter were impacted by the timing of certain project-related spend, which is expected to pick up beginning in the second quarter. We continue to prioritize strategic investments in our innovation pipeline and the phasing of this spend does not materially impact any of our timelines related to new product launches. Adjusted operating margin in the quarter was 17.1%, an increase of 40 basis points versus the prior year. Net interest expense totaled $18 million in the first quarter, an increase of $6 million compared to the prior year driven by lower interest income and an increase in commercial paper balances in the quarter.

Adjusted other income totaled $25 million in the quarter driven by pension benefits and a gain on an equity investments as well as foreign exchange gains on balance sheet positions. The adjusted tax rate was 12.7% for the quarter, favorable to our expectations, primarily driven by a benefit of $34 million related to stock compensation deductions as compared to $13 million in deductions, the previous year. And as previously mentioned, adjusted earnings of $0.76 per diluted share exceeded our guidance of $0.66 to $0.68 per share.

Within the first quarter, we repurchased approximately $600 million or 8 million shares of Baxter stock, which was partially offset by option related dilution in the quarter. Before turning to the 2019 outlook, I will provide some commentary regarding cash flow performance. In the first quarter, free cash flow of negative $50 million was in line with our expectations, due largely to normal seasonality of the business. We do expect improvement throughout the year prior, particularly with respect to days inventory on hand.

Let me conclude my comments this morning by providing our guidance for the full year 2019 and the second quarter. For the full year 2019, we continue to expect flat to 1% reported sales growth globally, 2% to 3% constant currency growth and 3% to 4% operational growth. Moving to full year guidance by business on a constant currency basis, except or otherwise noted, in Renal Care, we continue to expect growth of 2% to 3% with ongoing momentum in PD being partially offset by lower sales in US in-center HD. As a reminder, the strategic exits made in this business are expected to negatively impact Renal Care sales in 2019 by approximately $55 million.

In Medication Delivery, we continue to expect sales to increase approximately 6% with sequential improvement due to the drivers referenced earlier. For our Pharmaceuticals business, we now expect a decline of low-single digits on a constant currency basis. US Cyclo sales are now expected to total approximately $105 million versus our previous assumption of $95 million. Adjusting for US Cyclo, operational growth is expected to increase low-single digits. As a reminder, Brevibloc sales are included in operational growth and are expected to decline approximately $75 million in 2019.

Moving to Clinical Nutrition, we continue to expect sales growth of approximately 3%. For our Advanced Surgery business, we continue to expect sales to increase 3% to 4% on a constant currency basis. For the Acute Therapies business, we continue to expect growth of approximately 7% to 8%. Finally, in our other business we now expect sales to decline, low-to-mid-single digits.

Moving down the P&L, we now anticipate adjusted operating margin expansion of 80 basis points to 100 basis points. We now expect net interest expense of approximately $65 million to $70 million and adjusted other income of approximately $85 million for 2019. For the year, we now expect an adjusted tax rate of approximately 17% reflecting the favorability from Q1. We now anticipate a slightly higher full year diluted average share count of approximately 520 million shares, driven by increased option exercises in the first quarter. Based on these factors, we now expect 2019 adjusted earnings excluding special item of $3.27 to $3.35 per diluted share. This reflects the benefit of our first quarter over-achievement as well as the anticipated shift in R&D investments to future quarter.

Finally, for the year, we continue to expect to generate operating cash flow of $2.3 billion, and free cash flow of $1.6 billion. Specific to the second quarter of 2019, we expect sales to decline approximately 2% on a reported basis, growth of approximately 2% on a constant currency basis, and growth of 2% to 3% on an operational basis. And we expect adjusted earnings, excluding special items of $0.80 to $0.82 per diluted share.

With that, we can now open up the call to Q&A.

Questions and Answers:


Thank you. We will now begin the question-and-answer session. (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 60 days at www.baxter.com. And our first question comes from Robbie Marcus of JP Morgan. Your line is now open.

Robert Marcus -- JP Morgan -- Analyst

Great. And thanks for taking the question. There's obviously a lot of investor focus on Medication Delivery, Nutrition, but we're also seeing some really good results out of pharma. So, maybe you could just spend a minute and discuss some of the puts and takes in the quarter and Medication Delivery and what you're seeing, but also some of the offsets and the benefits you're seeing in pharma. And any commentary you could give on expected cadence for the balance of the year given the focus there?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Good morning, Robbie. I will start, and then I pass onto Jay, well put, investors tend to focus on things that if you discussed about which not necessarily is how management feel. So, probably this answers about 50 questions that I'm going to get on the same thing that you just answered. So, I feel comfortable with our ramp up in Medication Delivery. Why is that?

First of all, the first quarter last year, we had close to $50 million in excess purchases, in LVPs and SVPs that we -- that were not necessarily needed, but were purchased, because the hurricane affect, the flu that was very hard, and people starting up all those products.

Consequently, the other quarters that we had, were, you start with the quarter 2, and then culminating with 3 and 4, were really, really destocking, severe destocking. So, when I compare Q1 this year with Q1 last year, what I get is a negative growth rightfully so. Now, why do I believe that we can get to the guidance in Medication Delivery? Right now, I have no indication otherwise.

First of all, we have a good pipeline of -- from either conversions or replacements in the horizon. So we feel good about that. Second, we are -- as you know, have signed all of the GPO contracts with extension of supply of our LVPs and SVPs.

We are now signing IDNs with some of the GPOs with almost 100% of IDNs resigned, and with opportunity to continue to gain potential market share, because the investment that Baxter made in its supply chain culminating with investments in quality that resulted with the FDA issuing and voluntary action indicated from the inspection that they had in December.

Not necessarily, I'm affirming that the FDA will lift or not the warning letter that we have in those two facilities, but indicates that our efforts have resulted in progress against observations of the past. So, when we show this to our customers and potential customers, we have now redundancy in our supply chain and people should feel comfortable about that.

So the SVPs and LVPs, which are part of Medication Delivery including the pumps, we have a plan to get there, and right now, I have not nothing been otherwise doesn't mean that the plant is in jeopardy. Okay. When I shift the Nutrition -- Nutrition is a longer recapture of the market, easy product that has different indications for use. The discretion of the nutritionist and physician change to once we could not supply them with amino acids after their hurricane, practice have changed. We see us continue to make progress is not only a 19 storys or 20 story, but I feel comfortable that we have enough gas in the tank with the launch of the clinical lifted this year the we can augment this growth.

Let me -- let now -- let me shift now to the Pharmaceutical business. When I first came to Baxter, I thought Baxter had a hidden gem in its ability to mix APIs in solution, make them stable either at room temperature or frozen, and continue to advance in this major space that has been very good to Baxter. Our Pharmaceutical team has executed extremely well, not only on new molecules that we're launching, but also in molecules that we purchase through Claris.

So, we will continue to double down (ph) Pharmaceuticals. We don't tell everything to everyone that we are doing, but we have a significant amount of development, a very healthy pipeline in Pharmaceutical, and there was by design, put in play, to create diversification for Baxter's based business. Anybody is doing today is exactly that. I feel very comfortable about Acute Therapies, I think we are -- huge flu season from last year, I see that business is growing. We have an opportunity with this business to get close to double digits even in face of a tough comp from last year's first quarter flu season.

We launched PrisMax, we just got filed with the FDA, and the FDA started its period of review of our PrisMax in the US, is doing well outside the US, Prismaflex which is the generation before that just get, just got augmented with two-way communication to the EMR. I found also advanced surgery to be doing a pretty good job in getting -- in getting market share, we are there, there is a shortage in the market due to a competitor having -- having a recall. We have capacity, our Floseal is still the best, our product out there for severe bleeding. So we're still doing well. We took the business from Mallinckrodt, the RECOTHROM and PREVELEAK and did extremely well last year with that. So I find the execution of the Company going well.

So going back to Medication Delivery, what I have in front of me is no indication that we're not going to do what we said we're going to do. So perhaps this can alleviate the same question in five different versions that may come up. And one last comment is on Renal Care, our patient growth has been good, it has been slightly over 5%. US is doing extremely well with 8.5% growth in peritoneal dialysis patient growth. So we feel good about that.

We got out on purpose of bloodlines. We made no money on that business. That business was $40 million, $50 million, that was making no profit. As a matter of fact, we're losing money, so we made the right decision there, So all in all, I think the Company is focused on execution, and we are absolutely with a brand new team in the US, led by Josette Macauley (ph) and by Heather Knight, both of them with great track records will continue to strive to make our commitments.

Robert Marcus -- JP Morgan -- Analyst

That's great color, Joe. Maybe, Jay, just one quick question. We saw R&D ticked down a little bit and SG&A picked up a ticked little bit in the quarter, but you felt confident enough to raise the bottom end of the operating margin, guidance for the year, maybe give us a little color, and why it was postponed in R&D and what investments are in SG&A?

James Saccaro -- Executive Vice President and Chief Financial Officer

Sure. So as I referenced during the call, one of the things we are incredibly excited about is the new product pipeline that we have. But we're launching probably more products this year than we have in many years, but attendant with that we want to make sure that we have the right commercial teams and commercial investments on the ground to support successful launches. So this was a rare quarter. On the face of it, SG&A grew 0%, but on a constant currency basis, we did see a few points of growth adjusting for TSA's maybe 3% growth.

And really what it comes down to is some of those select marketing investments, I'll stop short of delineating actually where those investments took place, but from an investment standpoint again we just want to make sure that the market is already to successfully launch. Now from an R&D standpoint, it's always difficult to get exact timing of specific milestone payments outlined in the quarter we plan. And so, one of the things we found as we looked at results for this year is certain of our payments we're shifting from Q1 and Q2 future quarters.

And so we expect an acceleration as we move through Q2 to Q4 in terms of some of these payments and frankly we have reflected in our guidance, roughly a $0.03 shift of R&D spending from Q1 to later quarters. It's not specific to one program, and I think from my standpoint most importantly, it does not impact the launch timing of any of the products that we put forth. So there is no change to timelines, I mean we can talk more about it, but we are as bullish as we've ever been about the pipeline, but we did see some phasing, and we didn't want that, we did not want to reduce R&D spending on a full year basis, we're going to see that spending come through in future quarters.

The only other comment I would make is, one of the things we've been really focused on is improving the efficiency of our R&D spending. So there have been a number of global initiatives in terms of consolidation and simplification, I mean you are seeing some of that yield dividends in the overall performance of the spend category.

Robert Marcus -- JP Morgan -- Analyst

Thanks a lot.


Thank you. And our next question comes from Bob Hopkins of Bank of America Merrill Lynch. Your line is now open.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Hi, thanks and good morning. Just a follow-up on that last train of thought on the pipeline Jay or Joe. Could you just talk a little bit about key pipeline timelines or launch dates for the rest of this year. Just kind of refocuses on what you think is the most important things as we look forward over the next 6 to 12 months from the pipeline perspective. And how that drives your confidence, not only in the outlook for this year, but in the outlook for acceleration for next year as you've expressed in the LRP?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Bob, there, let's start with Pharmaceuticals, we have couple of molecules that we're launching, we are expecting a good, good sized molecule for sometime early next year. So we're talking about 6 to 12 months from today. We also have the version 9 of our pump we launched last year, but we have a new pump platform coming up next year. And we're going to have two pumps coming up right out of the gate, which is a volume pump and syringe pump, all integrated to an integration with EMR, all the stuff that you should have plus the best of drug library in the market, we will have later that year, which is next year we'll have the PCA pump, which is a third leg of the stool.

And then in another six months after that we will have the ambulatory pumps. So we have a four pump platform. We also continue to experience a significant uptake in demand for our Kaguya, cycler in Japan, that is going -- is doing well, we just crossed 1,000 patient mark, and we see in this business for the first time since I've got here with growth in Japan.

We also have PrisMax, which I just spoke about. PrisMax pretty much is a big deal. We hope to get approval probably within six months to eight months, depends upon the FDA review, time frame. And so we have over 20 products actually coming up for launch in the next, next 12 months. So, some are in small, some are more relevant, some are more long term, some are durable like the pumps and PrisMax.

We continue to look at a lot of different molecules, and so we feel comfortable with Baxter shifting a bit now from its operations excellence and efficiency as you, all of you know, we've been doing for the last 3.5 years to starting to see the fruits of the innovation coming through.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Thank you for that. And then just one quick follow-up for Jay. Jay, can you just comment on the puts and takes impacting the gross margin this quarter was a little weaker than we anticipated and then your expectations for how gross margin flows over the course of the rest of the year?

James Saccaro -- Executive Vice President and Chief Financial Officer

Yeah. So from a gross margin standpoint, that was principally in line with my expectations, in large part because of the significant headwinds we experienced in some high margin products in the first quarter. And so, if you look at the first half of the year, we have a big drag related to Brevibloc. It's basically $30 million plus in Q1, It's another $30 million in Q2, and that comes through at a much higher margin than the corporate average.

Furthermore, we had a little bit of FX headwind. In the quarter, we also have a Cyclo headwind year-over-year again in the first quarter. And so, those were particularly pronounced year-over-year headwinds that impacted the first quarter. As we move through the balance of the year, we'll see the normal cadence of improving gross margins throughout the year. So typically Q4 is our strongest gross margin quarter, Q1 is typically our lightest.

So we'll see that uptick as we normally do, but then we'll also have the benefit of our accelerated sales growth in the second half of the year, which lend itself to a higher gross margin on both from a mix standpoint, but also from a utilization in our manufacturing facility standpoint. If you look at the first half of the year, our overall guidance operationally is in the 2% to 3% range. As we move to the back half of the year, based on easier comps, but other accelerations as well, you start to see a much faster sales growth and an uptick in the overall sales.

So I think those are a few of the drivers that impact gross margin, but like I said, this is largely in line with my expectations.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Helpful. Thank you.


Thank you. And our next question comes from David Lewis of Morgan Stanley. Your line is now open.

David Lewis -- Morgan Stanley -- Analyst

Thank you. Good morning. Just two quick questions from me. The first just want to focus on cash flow and capital deployment, maybe, Jay, the question for you would be, if cash flow got off to a slower start here in the first quarter, so what's the pacing, what drove that, in the first quarter, what's the pacing for the balance of the year. And then related to that, Joe, I just wonder if you take a second and talk about cap deployment, obviously you're still continuing to purchase dramatic amounts of stock, I think $600 million this quarter. What do you think (ph) -- to the pace of capital deployment relative to buyback versus M&A, the balance of the year and I had one quick follow up?

James Saccaro -- Executive Vice President and Chief Financial Officer

Sure. As it relates to cash flow, the cash flow came in, in line with our expectations. Q1 is typically the lowest quarter of the year for a number of different reasons, one of which is incentive payout from the prior year occurs once a year in the first quarter. We also have a large vendor payment that we had anticipated in the first quarter of this year that impacted the number, so by and large -- came in very close to our expectations.

So would that implies David, to your point, is a significant ramp as we approach the back -- for our portion of the year and will start to see improvements in Q2. Now looking at the balance sheet cash, and so what will happen, what will drive this improvement, is operating margin and earnings growth of course, but then you transition to look at working capital.

And on the working capital side, two categories, we don't expect to change too much, our days payable for the first quarter will be in the mid-50s, our days receivable will be in the low to mid-50s. So those two categories are exactly where we want them to be, and we'll continue to manage those aggressively. Where we expect to see a significant improvement in working capital relates to inventory. This is an area that has disappointed us over the last year, the inventory build up as a result of different sales mix than we anticipated has been a real problem and something that we focused on correcting, but it's not something that corrects overnight.

And in the first quarter of the year, the days inventory on hand will end at roughly 107 days, by year end, we'll expect to see roughly a 10-day improvement in that particular area. And frankly, that will be the -- drive the lion's share of performance in our cash flow, free cash flow for the year. We've got a new leader in supply chain, Philippe Reale comes to us and we're excited to have him on Board, he has been on Board for several months, and he has a number of new operating mechanisms. Joe and I are personally involved as well, along with our head of operation. So we feel quite good about this, and we also knew that this number would be higher in Q1, but I definitely, and very focused on watching this improve through the balance of the year. Joe, do you want to take the question on cap deployment?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Yes. Just going back into inventory, a bit of the inventory was planned because we had absolutely nothing in terms of our large-volume parenterals. In inventory, now we carry, inventory at the levels that are appropriate to service our customers of today and future customers.

So going back to capital deployment, David, we continue to look at extensively at all kinds of different opportunities. We like some of the stuff that we're seeing, we are looking at molecules, we buy molecules, we might see some more stuff all the way to large stuff we're looking at, buying shares back until very recently was a good deal, because we thought the multiple was depressed, and when our treasury group did a great job.

We continue to evaluate the deployment of capital in pace of opportunities that we have in front of us. So we may, we may or may not continue with the program at the pace that we had in the first quarter, will depend a lot up on what opportunities we have in M&A.

As I said before, there is always a good balance between the strategy, and buy shares back, we couldn't pass the opportunity in the last six months to buy the shares because we thought the price was adequate and long and behold, I think we made a very good decision in buying value if we speak to our investors folks who are long holders of Baxter. They probably appreciated fact that we had an opportunity to -- that opportunities. Nothing would pay back as fast as that did for us, and for our investors.

But with that said, we need to continue to look at expanding Baxter's technology and opportunities, there is not a week that goes by that, I don't see one or two opportunities. And as I say to folks, when it's the right one, you will be the first one to know.

David Lewis -- Morgan Stanley -- Analyst

Okay. And just. Thanks, Joe. And then with my follow up, I mean I take a step back here. If I think about the debate into this year, it really was focused on the ability to drive earnings and your ability to deliver on Med Delivery. I think in the first quarter you jumped over the hardest margin quarter of the year raising operating guidance and obviously raising earnings.

So I think that's sort of asked and answered. Just to come back to Medication Delivery, Joe, I think you did a nice job sort of outlining how from a share capture perspective, customer recapture you are doing as well as you expected. The key question I think is just, for the Medication Delivery underlying fundamentals the demand equation in the channel and where you see inventories in the channel?

How comfortable are you that those signals and what you are seeing in the channel are stable base that you can build on and sort of benefit from this recapture you are discussing? Thanks so much.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

So, David. I can see where our investors feel uneasy looking at a performance of the last year, a couple quarters, some in the first quarter and said how can you get there and it's one of the things based on our credibility. Right, so, what we are saying to you that we can do that because we can see through it and we can -- we have the numbers, we have the reviews.

But let me give a little bit more color. The market is quite stable, meaning, there are not shortages out there. There is not a company that is out of the market. There is nothing like that. So, what plays -- what is important to our customers that you have continuity of supply, that you have inventory, that you have the ability to supply a large swath of products under the Medication Delivery and be safe at the end of the day.

So, what Baxter brings to the table are few things. We are a very stable supply chain right now. We've modified significantly in the last three years. We invest over $120 million in our factories to improve quality, to improve output. We continue to revamp our management at our factory. So, we do have the capacity to-date from Canada, United States, Brazil, Spain and Ireland.

We have a network that is flexible enough that can provide products. We launched a new product that has been very instrumental in recapturing this small-volume parenterals the Mini-Bag Plus, which is a single pack. We also took advantage of one of the competitors that filled in during the shortage of the small-volume parenterals is on a recall, and the product is not available on the market which brings our products to light as a safe product, Mini-Bag Plus.

So we've been seeing -- signing two, three, four year agreements with hospital systems right now. So we feel that our pipeline is strong enough of deals that we think we can deliver on our promise. And things can change, six months down the road, I don't think as I see today that they will, but things can. What we are doing is making sure that we are signing every single account and we are showing to customers who are not ours today.

How Baxter can serve them with value, as well as supply and breadth of products. Remember, we are a Company that goes from the pharmacy all the way to the ICU. So we have a breadth of products that can be offered that way. On top of it, we also have one of the best pumps, if not the best, drug library on the market which we use in our secondary Spectrum Version 9.

So, all of this together, with the new team that we have with experienced people, it's not a new team, but it's experienced people, I am very confident that we can get to the end of the year and deliver to our investors what we are going to deliver. If we have any changes to that, we will let you guys know.


Thank you. And our next question comes from Danielle Antalffy of SVB Leerink. Your line is now open.

Danielle Antalffy -- SVB Leerink -- Analyst

Hey, good morning, everyone. Thanks so much for taking the question. Just wanted to ask a question about how to think about the different business segments and their growth profile, specifically in Q2? Last quarter you guys did a great job, I thought of calling out some of the quarter-specific headwinds. Can you help us think about how to think about that for Q2? And I guess, specifically as it relates to some of the more controversial businesses like Medication Delivery? And then I have one follow-up. Thanks.

James Saccaro -- Executive Vice President and Chief Financial Officer

Sure. Q1 was interesting, right, because we had a number of headwinds that were specific to the quarter and some of those go away, some of those persist in Q2. And so I referenced earlier Brevibloc, that was like $33 million in the first quarter. It will be around $30 million in the second quarter. So that is a real headwind operational Pharmaceutical sales growth that were mindful of and we have tremendous work coming from this group in terms of all the activity and the new launches.

But that's going to be a specific headwind for the second quarter. We've talked in the past about the Bloodline's headwind which is on a full year basis around $50 million. We will see continued decline related to this particular item impacting our Renal growth in the second quarter. But there are a couple of headwinds that subside.

One is, you will see a normalization of the acute growth, because the flu headwind of roughly $10 million moves away in the second quarter. So we'll see a solid performance at improved performance out of that group in the second quarter. And then, the IV buy in that we have described in the past which impacted the first quarter of this year again subsides. Now, interestingly enough, that headwind becomes an actual tailwind in Q3 and Q4. Because our Q3 and Q4 were depressed by this amount as Joe referenced earlier. Q2 is fairly neutral. So, as we think about the growth profile in Q2, you will see Renal growth kind of consistent with overall annual growth.

We expect to see acute growth closer to the annual rate that should be in line with that. Medication Delivery will increase in the second quarter, but not to the extent that we'll see in the back two quarters of the year as we look at all of the efforts that Joe described. Many of those benefits accrue to the second half of the year.

Pharmaceuticals will have a lower rate for the Brevibloc reason that I mentioned and then we will -- we expect to see some Nutrition growth in the quarter as well. Advanced Surgery, again should have a solid quarter largely in line with full year expectations, maybe a little bit better. So that really kind of walks you down the overall components of the growth in the second quarter, like I said, the biggest change in overall growth rate occurs in the second half. So, we go from this operational growth of 2% to 3% accelerating to 4% to 5%-ish in the second half of the year.

Danielle Antalffy -- SVB Leerink -- Analyst

Okay. That's super helpful. And maybe we can talk about, I thought there were two really bright spots in the quarter, Pharmaceuticals and the Advanced Surgery business and I know you called out contract manufacturing, but also curious how much contribution was from new products for Pharma and Advanced Surgery, because to me it feels like maybe the pipeline is really starting to take hold. Any color you could get there would be great. Thanks so much guys.

James Saccaro -- Executive Vice President and Chief Financial Officer

Yeah, we don't really break out new product contribution by quarter, by business. But what I can tell you is, in the case of the Pharmaceutical business, we were definitely excited with the launch of dexmedetomidine, that has been well received in the market. It's a novel presentation and that should be a continued solid growth engine for us for the balance of the year.

As we think about biosurgery, we did have the benefit in our operational growth numbers of the Mallinckrodt assets. Roughly $15 million of RECOTHROM and PREVELEAK featured in our numbers in the quarter and so that annualizes as a comp moving into the second quarter. So, the growth rate will return to a lower rate.

But we did see a very solid benefit in the first quarter in particular in US. As we look forward, biosurgery has been an area that has been performing well. The team is executing with the core hemostats and sealants and we are seeing good momentum there. So, we will expect continued positive progress in those areas.

And you know, as we think about business development, I do think the assets that we acquired from Mallinckrodt really are a great example of the kind of business development that we can be incredibly successful with. It leverages the same sales call point, same sales team and we are seeing that really resonate well as we look to commercialize that product.


Thank you. And our next question comes from Matt Taylor of UBS. Your line is now open.

Matthew Taylor -- UBS -- Analyst

Hi, thank you for taking the question. So the first question I wanted to ask was just on Renal market dynamics. So I was wondering if you had seen any shift. It seems like that PD volumes are relatively healthy and I was wondering if you could part that how much of that you think is coming from the cyclers or being helped by the cyclers or if you are seeing any market shift that push patient toward PD?

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Matt, I think, what we see is the number of patients are related to penetrate. A couple of things. One is the penetration of the therapy. Our renewed partnership with DaVita. And lastly is, also may be related to length of stay in terms of durability of the revenue, right, on therapy. So, I would say, to the number of patients, I attribute it mainly by the excellent relationship that we have with DaVita where we seek the best therapies for the patients and the organizations are aligned and Baxter has -- is making investments in its plants to provide more capacity for growth in PD, right now, as we speak, we are investing dozens of millions of dollars in our facilities to be able to support DaVita. We had this agreement with them. So I find this to be the result of that execution.

Matthew Taylor -- UBS -- Analyst

Okay. And then, just want to get at the 50th question here on the delivery. I just wanted to understand the dynamic a little bit better. You called out $50 million (ph) of excess purchasing that you had in Q1 2018. And from the outside and it's hard for us to think about the pace of destocking. Could you offer any specifics on the next couple of quarters to help us model how the comps are going to play into your recapture in the stocking?

Clare Trachtman -- Vice President of Investor Relations

So, Matt, it's $15 million, one-five (ph) was the stocking impact for US LVPs in the first quarter of last year. We did see, some elevated purchases in the first couple of months of the second quarter and then, in June of last year is when we started to see the destocking that then occurred throughout the rest of the year. So that's really how it relates to the progression of kind of that stocking impact for the US LVPs.

And again, as Joe was saying, with respect to small volume parenterals, we are on track with that and those will continue to ramp throughout the year as well. So, our recapture efforts are going there. We are doing really well with our Mini-Bag Plus, particularly with single packs. So we'll continue to drive those efforts really focused on education, about the safety and efficiency of using Mini-Bag Plus to reconstitute drugs. So our sales reps are armed with that and are out there working with clinicians on that. I think Joe talked about pumps. So we will continue to see both Spectrum IQ and Evo IQ as well ramp throughout the rest of the year.

And in addition, our reallocation of volume to international markets will continue to pick up over the course of the year, as well. So, I think those are all the dynamics. Again, it's more -- the growth will be more back-end weighted as we face those easier comps with respect to destocking in the US LVP market.

Matthew Taylor -- UBS -- Analyst

Okay. Thanks. That's really helpful.


Thank you. And our final question comes from the line of Matt Miksic of Credit Suisse. Your line is now open.

Matt Miksic -- Credit Suisse -- Analyst

Hi. Thanks for taking the questions. I'll spare you the umpteenth Med Delivery question and just ask if you could maybe elaborate on a couple of the other businesses. The first on the PD side. If you could talk maybe just remind us what some of the drivers are of that growth. If there was any macro or economic or reimbursement dynamics that are driving that strength in PD? And then I have one follow-up on Pharma.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Matt, the government announcement that they would initiate a move to take patients from clinics to home is too new to have caused any significant impact on our numbers. Our numbers, as I said are driven primarily in the US by a strong relationship with DaVita that continues to get stronger. Our availability of products which is most importantly.

We are making investments in our plants to supply the market with product. So we will have availability of products for the longer-term. We are investing in technology point-of-care. For instance, our first patient just came off successfully from the three month clinical trial period. We continue to enroll more patients on that technology.

So, all in all, the US has done well, because our renewed effort in partnership. When I look at the Asia Pacific, the growth in patients for PD was 6.6%. Don't forget that Asia, but primarily China, we are 70% plus market share holding in China and in China we have twice as many patients in PD that we have in the US.

And then the areas that we need to continue to improve is Europe has always been behind PD penetration compared to the US and parts of Asia. So, all in all, 5.1% growth in patients for PD is a pretty healthy number. And consequently, our outlook for the year is a little more than that. So we continue to see a very strong outlook in the US, Asia Pacific, as well as Canada.

Matt Miksic -- Credit Suisse -- Analyst

That's great. I appreciate that. And then, just on Pharma, again, impressive growth. Can you talk a little bit about, maybe remind us or update us just to the kinds of additional assets, businesses, size of these molecules, the strategy there and how it compares to sort of the traditional specialty injectable businesses as folks may know it's -- some perspective would be helpful.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Yeah. So, if you compare like Brevibloc, and cyclophosphamide, we will not see drugs like that in our portfolio not to that extent anymore, because those are drugs they were semi-specialty drugs. They were -- they had patents and they had things that we had and it was a different Baxter at that time. Our intent in Pharmaceuticals is to launch three to four molecules a year which are injectable mostly, mostly premixes, which is Baxter's strength, it's premix.

It's our Galaxy technology that comes to light. We will launch some APIs, primarily when once we get the warning letter resolved out of Ahmedabad. There will be some APIs launched out of that facility. But if you look at our objective is to launch in five areas of care, oncology, anesthesia, antibiotics, specialty antibiotics, and a conglomerate small parts of therapy, as well as the premixes.

So we are going to take those areas of therapy and launch specialty products, three to four molecules a year. Some are going to be $70 million, $80 million, some are going to be $3 million, $4 million. It's going to be a mix of them. Our objective by 2023 is to more than double the number of molecules that we currently have as we are ahead of plan together.

Matt Miksic -- Credit Suisse -- Analyst

Great. Thanks so much.

Jose E. Almeida -- Chairman, President and Chief Executive Officer

Thank you, Matt.


Thank you. That concludes our question-and-answer session. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating. Everyone have a great day.

Duration: 62 minutes

Call participants:

Clare Trachtman -- Vice President of Investor Relations

Jose E. Almeida -- Chairman, President and Chief Executive Officer

James Saccaro -- Executive Vice President and Chief Financial Officer

Robert Marcus -- JP Morgan -- Analyst

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

David Lewis -- Morgan Stanley -- Analyst

Danielle Antalffy -- SVB Leerink -- Analyst

Matthew Taylor -- UBS -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

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