Baxter International Inc. (BAX) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us. I'm Danielle Antalffy, one of the senior medtech analysts here at SVB Leerink. And very lucky to have Baxter International with us, CFO, Jay Saccaro; Head of Investor Relations, Clare Trachtman. So we're going to go right into a fireside chat format, I think. Unless, Jay, do you want to sort of set up the framework of where Baxter is?

Yes. Maybe we can make a few comments to start it off.

Okay.

It's very -- thanks again for the invitation. It's always nice to see you out here in New York, Danielle. I think this is probably maybe the fifth year in a row that we've done this conference with you. And while we've had a lot of change, some of the fundamental aspects of what we're doing, I would say the majority of them, really remain the same. Our story has been about the mission of the company: to save and sustain the lives of the patients that we serve, but really doing so through accelerating the pace of innovation at the company, while also being economically efficient with the resources that we utilize. And I would say that over the last 5 years, you would probably have heard me talk a lot more about the efficiency of resources and the initiatives that we've undertaken to improve and enhance how efficient we are. And now the story changes in the sense that we are now able to talk about the impact of innovation in very significant and material ways on the revenue trajectory and the long-term prospects of our business. And while we've been focused on it the entire time, it's just that innovation at a health care company takes a while to bring to bear. And so we are so excited that 2020 marks a number of crucial launches for us. It will be the first year of Myxredlin, our premixed insulin drug. It will be the launch of our new pump platform, something we've been hard at work for 4 years. We have a number of BioSurgery launches in place. We launched THERANOVA in the U.S. So a lot of incredibly exciting things that we've been hard at work. But really to me, those are a symbol of this next phase of the transformation for Baxter. So we're excited to be here, excited to talk to you once again. But it's also nice to see -- and by the way, I will tell you, we will have a continued vigilance and focus on improving the economic efficiency of the company. That's always there. It's underlying. But what's so nice is to be able to supplement that with that, which is so critical for health care companies' innovations.

Sure. And maybe we can touch on the 4Q '19 results, the pre-announcement that you issued back in January. And give us, if you could, a little bit of color of where were the primary drivers of that outperformance. I mean Med Delivery came in very strong. What drove that? What are the highlights you can give us? And how sustainable are those? I know you issued guidance as well so...

A great quarter. And for us, I think the quarter was -- it certainly surpassed our expectations. Med Del, on a full year basis, we expected to grow 6%. But because of an outstanding performance in the fourth quarter, we ended the year actually at 7%. I mean I know that was a hotly debated and discussed number all year, so we're so pleased with that progress. In our Pharmaceuticals business, we had great performance in compounding outside the U.S., along with a number of drugs within the U.S. in terms of premixed products. So another very solid performance coming from our Pharmaceuticals business. And then all year, we saw the benefit of some competitor challenges with supply in our BioSurgery business. But I will also say we had excellent commercial execution from our BioSurgery team. So in areas like FLOSEAL and RECOTHROM, continued strong performance in that business. When you couple all of that with steadiness from the renal business, which is a very solid engine for Baxter, it ends up being a tremendous quarter. So how sustainable is that? Look, we're not forecasting 9% growth. We're not -- that's not -- our end markets are growing 3% to 4%. And we believe with innovation, we can add 100 basis points to that, to 4% to 5% in 2020. That's kind of what we've guided to. And I think for us, that steady, predictable, solid growth is really what you can count on from Baxter as opposed to the outsized growth that we saw in Q4. But having said that, we always want to position ourselves to take advantage of opportunities that arise. And so there were some onetime things that occurred in Q4 that benefited us, the most notable, probably we saw some prebuying of IV solutions heading into the flu season by certain distributors. So that was maybe a $10 million benefit in our IV business, but again, it was just great to see. And remember with our Medication Delivery business, a lot of that was forecasted and anticipated throughout the course of the year. We had a very sort of back-end loaded cadence. And so to be able to deliver and exceed that, it was a record pump quarter for Baxter. We never sold as many pumps in -- on a full year basis, but then certainly, Q4 was an absolute standout for us. So it was really nice to see that. And frankly, it's a -- it basically gives us confidence in the technology that people really like it, but also in the execution capability that we've set up as we head into 2020.

Can we follow up on the pump comment? Because one of your competitors is facing in FDA a delay in their pump offering. So just curious about how you can execute upon that and turn that to your advantage, if you see that as an opportunity for -- because pump cycles are relatively long. Like how do we think about that?

Sure. We were excited about pumps in 2020 for really 2 reasons. One is we saw a great success with Spectrum IQ, what we call our Version 9 of the Spectrum pump, which included 2-way wireless connectivity. That has been incredibly well received in the marketplace. And we saw a great pipeline buildup in 2019. And the pipeline gave us confidence in 2020, certainly in the first half prior to the launch of the new pump platform. The new pump platform is something that, for the first time, puts us on a level playing field with everybody in the marketplace. Because prior to the new pump platform, we would sell a large volume pump, which is really the workhorse that hospitals use, but we would have nothing else to go with that, okay? So if you wanted to buy a Baxter pump, necessarily, you had to turn to a competitor for a syringe and a PCA pump, patient-controlled analgesia pump. By the way, virtually all hospitals have all 3. And there are real benefits from a simplification standpoint, a standardization standpoint, to have one platform at a hospital. We didn't have that. So for me, I've been excited for pumps for years, waiting for 2020 for the launch of the large volume pump plus the syringe pump. That will be followed 6 to 9 months later by a PCA pump. Our pumps now sit with the FDA. We're working through questions with the FDA. We are -- and by the way, we recently had an approval from the FDA, so we have familiarity with how to get through this process. So we feel good about that and it's something that we're working hard to close out and meet our expectations to launch kind of in the middle of the year. So that's all great. The fact of the matter is one of our competitor has had some issues with the commercialization of their pump, some issues with the FDA. And so does that change the landscape materially? Look, pumps are a very sticky market. The reality is we replace pumps -- hospitals replace pumps every roughly 7 to 10 years, meaning in a given year, 10 to 13 market share points come up. And we roughly own 24% of the market share of the -- so we're replacing -- of the 10 to 13, 24% of those are our own house accounts. So it's a sticky market. I don't know that this is going to be some seismic shift, but it's -- we're going to be hard at work doing what we do, which is selling a great pump platform in 2020.

Yes. Okay. Another sort of big product launch or at least one that people are very focused on in 2020 is THERANOVA. And -- where are you with that product, with securing reimbursement and getting a little bit more visibility about how meaningful of a contributor that product could be? And how quickly?

Sure. So THERANOVA is a dialyzer, which we believe provides differentiated outcomes from conventional dialyzers. And there's a whole host of data that we've prepared and shared that conveys this. And so there has been limited innovation supporting end-stage renal disease in the last many years. And so we're thrilled that THERANOVA represents a meaningful step forward. With the add-on payment that was recently approved, we have now submitted for our eligibility criteria as of February 1. And we expect approval sometime between -- or inclusion at some point between July and September, by the time ESRD legislation is finalized, which would go into effect in 2021. And so we are where we expected to be. Over the long term, I believe this could represent a significant opportunity for us. What this -- what the inclusion would allow us is basically a 2-year add-on payment to the bundle. And so it really would provide the right economic incentives for the clinics to adopt and embrace what is, we think, a really unique technology. And then it's up to us to say, "Okay, how do you guide the data package and make the story that makes this even more sustainable than that?" Because if this is 2 years, and we're talking about a headwind in 2023, I don't think we've achieved what we hoped to with this. And so the work begins on how do we work it. Get first, secure the 2-year add-on payment, then secure the long-term data package. While you do that, think very carefully about how you're going to add capacity to support the market opportunity.

Worst-case scenario, if you don't secure the add-on payment, what happens with THERANOVA?

Without the add-on payment, look, we have a very modest amount in our long-range plan for 2023. I don't think it would be a downside to that, but I don't think it would be a significant upside. So this -- the package that we've put in place, we believe we'll achieve our end goals. But it's important that we do that because the reality is without an add-on to the bundle, the economic incentives make it really challenging to divert spending from the bundle to new, more expensive, admittedly, technologies.

Yes. Okay. And then on the kidney initiative, so where are we with that? When are we going to get more color around how that's going to play out over the next few years? And maybe talk a little bit about how the kidney initiative changes factors -- I'm not asking you to change a long-range plan today, but just qualitatively thinking about how additive it could be.

So qualitatively, what the government has discussed is a significant increase in home penetration. Today, home penetration is in the kind of 13-ish percent range. And the government has talked about taking that to multiples over the next 7 years. And that's a big deal for a business, which is $500 million for us today, but it could provide a structural tailwind for our U.S. PD business. We believe we've got the right technologies, including a telemedicine component to our latest cyclers, that really allow us to give patients a lot of comfort in the home. So there's a lot of momentum behind this. And with the right catalyst from a reimbursement standpoint, it could be a game changer. And so we feel very good about the long-term prospects, if implemented. But what I would say is if not implemented, we feel good about the long-term prospects of this business in any case. Why? Because we've seen PD patient growth, for the last several years, very robust in the U.S. In many cases, we've seen -- we've reported high single-digit quarters, even double-digit quarters in the U.S. patient growth because of 2 things. One is we've put a lot of work into the supply chain, ensuring consistency of supply. So that's one thing that I think has structurally changed from 2013 to '14 to today. But the second thing is my comment regarding the technologies. I believe now, the technology that we have, from a cycler standpoint, becomes an enabler or a catalyst versus a hindrance. And if you think about it, HOMECHOICE is a great cycler. But our HOMECHOICE, which was the backbone of the U.S. business, had been around for 20 years with no integration between clinic and patient. So there was limited oversight for patients operating in the home environment other than their once-a-month trip to the clinic. And that can be very isolating. So we changed that, get the consistency of supply, improve that to the best of our ability. And all of a sudden, we've seen great patient growth and increases in penetration despite largely flat or very low single-digit growth in ESRD patients, generally speaking. So I think we've got the right catalyst for growth in that business in any case, but of course, AAKHI would be an accelerant. Now the question is, "Well, what is the likelihood of AAKHI occurring and under what time frame?" We're optimistic. We have said April. It's unclear exactly when this is all going to shake out and in what form. As you know, predicting things in Washington is really challenging. And I think that we're optimistic that this will get done in the right way. But at the end of the day, if it does, that's great. If it does not, that's also okay, because the business is a very robust one. I don't know if you would add anything about that?

Yes. I mean it just -- so on the PD side of things, I mean some ex U.S. countries have PD penetration significantly higher than the U.S. Clare, correct me if I'm wrong, but I think in the 40% range...

Yes. That's in some countries, yes.

So is that the right way to think about this, with or without AAKHI going from 13% to 40% in the U.S.? Are the barriers just too high?

There are countries that have incredibly high PD penetration rates: Hong Kong, Thailand, north of 50% in some cases; Mexico, incredibly high. In those countries, the governments have typically made the decision to promote PD first. And so in that case, you see very high levels of adoption. Now there's a lot of benefits to PD because -- think about, if you want to expand the treatment of dialysis patients in a given country, in order to do so, you have to invest in significant bricks and mortar, significant capital investment to do so from an HD standpoint. Clinics are expensive to build, and then you have to fill them. And once they're filled, to add an incremental patient, you need a new clinic, which again is a very significant investment. PD is much more modular and capital-efficient from the provider standpoint because there's no -- there's really nothing required to add a patient in the home. So I think there are a lot of benefits to it, but -- and I think that's in part why governments look at it as a very attractive mechanism for treating end-stage renal disease. The other reason, of course, being that these patients can lead, for the most part, an uninterrupted life in a sense that if you're an HD patient, 3 times a week, you're in the clinic for several hours. With commute time, highly disruptive. PD is done nocturnally, right, so I think it's -- I think there are a lot of other benefits. So let's see.

Yes. So maybe the way to summarize that would be with AAKHI, if that's implemented, maybe we could get to those kinds of 40%, 50% level, so that is a little bit -- is tougher.

Yes. And look, this is a -- like it's a 7-year trial that we're talking about in half the clinics in the U.S. So if the penetration rate doubled over the next 7 years, that's great. So -- but it's one of these things where, I think, the home setting, it's a great place for PD -- for dialysis to take place. Let's see where this goes from here.