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

Okay. Thank you. And good morning, everybody. My name is Bob Hopkins from Bank of America, along with my partner, Travis Steed. Welcome, everybody, to the virtual Vegas conference. Thank you much -- thank you very much for being here under these unique circumstances. We're very happy for the next fireside chat to be with Baxter International. Of course, we have Jay Saccaro on the line, who's the EVP and CFO of the company. And of course, also Clare Trachtman, who heads up the Investor Relations efforts at Baxter. So I just want to say a quick thank you to everybody for joining us and especially Jay and Clare today. So good morning, and again, thank you for being here.

Good morning, Bob. And thank you very much for the invitation to join you virtually in Las Vegas. Obviously, it's a very interesting time, but it's -- we appreciate your support and interest in the company.

Yes, absolutely. And so I think that like the place I'd like to start is a place I'm starting with most of the discussions here. And it relates to a little bit of a longer-term question on just what the medical device ecosystem may look like on the other side of COVID. I mean we'll get into some Q1 follow-ups and some intermediate-term questions. But to start out, I want to think a little bit longer term in, Jay and Clare, get your opinion on what if anything do you think might change about the kind of the med tech ecosystem and Baxter strategy for working within that ecosystem on the other side of COVID. And perhaps the answer is not much. Perhaps the answer is a lot. I know it's early, but would love your preliminary views on how this might affect the world going forward in sort of the new normal, if you will. So thanks again, and appreciate your comments.

Great. So Bob, a lot of what we do remains unchanged. The basics of our company, the notion of saving and sustaining lives, it's something that we've done for 85-plus years, and it's something that we will continue to do. And I think, frankly, what we're seeing with the current situation is we do have a very durable, resilient business. In some senses, it's kind of designed to support health care systems through this very situation. And so on the one hand, I think a lot of this will remain the same. On the other hand, there are some things that will change. And I think for us, we're taking learnings away from this experience. The first thing I would point to is, I believe that this will accelerate a trend to the home. And so if you think about our PD business, to the extent that people can adopt therapies and do so safely in the confines of their home, I think we'll start to see this COVID, coronavirus, as perhaps an accelerant of adoption of home-based therapies. And attendant with that is having the right telemedicine platform. So we've been hard at work with our Sharesource and enhancing that using artificial intelligence to help drive better outcomes. And so I think this whole emergence of the home and digitalization of data from the home will be an important trend that accelerates as a result of the pandemic. The second thing I would say is we are operating completely differently as a company. For the vast majority of employees that I work with, I haven't seen them, but through a iPad screen, in weeks, if not months. And what we're seeing is this is a digital accelerant. We're -- we have the right technologies in place, but really evaluating all of our processes, our back office infrastructure, our approach in the context of this remote environment has caused us to take a second look on optimization, on use of technology to simplify and again on the digital company and the digital back office. So that's one thing I would say. And then finally, I think companies have to really be thoughtful about their supply chains. The supply chain risk that you carry because you are sole-sourced through certain countries or regions those kinds of things have been very much exposed as a result of COVID. And we're making sure that we have the right supply chain, the right inventory levels in place so that we can have continuous supply and really try to manage some of the tail risks, which, prior to December or January, we didn't think were likely to materialize, but now we're dealing with the tail risk as we sit here today. Bob, I would add one more thing, which is the notion of having adequate liquidity and a ironclad balance sheet so that we can survive shop test scenarios. I think that's something that we've always been thoughtful about, but this has caused us to take a second look about some of the stress test scenarios that could materialize.

Okay. Yes, it's important to get some preliminary fuse on where we might be headed, even though I recognize they may change. So I appreciate your comments. Can I -- next, if okay, I'd like to just ask a few follow-ups following your Q1 report. You guys were nice and disclosed your views on the gross kind of demand benefit that you saw from COVID of about $55 million in the quarter. So 2 questions there. Just curious like how much of that $55 million was in acute care dialysis versus pumps and sets? And then as a follow-up, I think a lot of -- I get a lot of questions on, okay, of the businesses that are benefiting, which are the ones where the growth -- that benefit might be more durable lasting late into this year and into next year and which might be a little more temporary.

Sure. So as we think about the impact by product line, certainly, there were a number of them. In the Medication Delivery business, we estimate about $15 million of impact related to COVID in the first quarter. In the acute business, we estimate roughly $10 million to $15 million worth of benefit related to COVID. In renal, there was some pre-buying that took place, perhaps $5 million to $10 million worth of impact. Pharmaceuticals had roughly $10 million worth of impact. So it was really dispersed throughout the portfolio. But the thing to keep in mind is, one, some of those sales, particularly in relation to renal, were pulled forward from Q2 in large part because in markets like China, they were doing double delivery to avoid stock-out issues in the event of a shutdown. So that's a clear pull forward. In some other areas, there were some prebuying that took place. So by no means, do I believe that all of the volumes that we sold in Q1 were consumed in Q1. I definitely think there was some preparation for the second quarter. And so we saw that in the U.S., in particular, as hospital systems in New York and really around the country prepared with some prebuying that took place. So I would be -- I'm very hesitant to extrapolate from the strong Q1 performance to a full year number, again, because a fair bit of that was in preparation for Q2. And the second thing I would say is, look, we -- one of the things that we took a rear step is -- and by the way we did so despite the fact that we have a very resilient business, is we suspended guidance for the year. And in part because it's really difficult to predict at this stage how long Wave 1 will last, whether or not there will be a Wave 2. A lot of different variables come into play in terms of the overall sales mix for Baxter. So we did take the rear step, as I said, to postpone or suspend guidance despite end markets and a fairly stable business, which I think are the hallmarks of our company.

So thank you for that detail. And just as we think about the areas where you're benefiting, just wondering if you could offer some high-level comments on the areas where you think the growth -- incremental growth that you saw in the first quarter might be more durable versus maybe only lasting a quarter or 2. Yes, I just would love your thoughts there.

Yes. A couple of things. One thing I will tell you is, while we did suspend guidance, we did comment that we did expect to see some level of growth in Q2, and I think that's an important element to keep in mind. And another point I would make is, while we had growth in advanced surgery in the fourth -- in the first quarter, we will see some fairly substantial declines in the second quarter as a result of postponement of discretionary procedures. On the earnings call, I said, look, this is kind of tracking in line with our meaningful decline expectations for this segment in the second quarter. So no further updates at this stage. But as of the earnings call, we were seeing declines in accordance with what we expected to see. So now looking -- as we look forward, areas that may continue to benefit, the acute business, we do anticipate some continued growth there, some small volume parenterals. Perhaps IVs, although that's a open question, perhaps some components of the pharmaceuticals business will continue to benefit. So those are some things that could benefit. But again, Bob, a lot of this depends on the duration and continued severity of COVID-19.

Yes. Okay. I mean, just for now, in terms of that $55 million gross benefit of sort of loosely modeled in for the full year, $150 million of gross benefit, I'm not sure if you want to comment on whether or not that was wildly off base in your view or within the range of what you think might be a reasonable estimate.

I'm not prepared to make any statements in terms of projections at this point. And again, part of this depends on how this evolves. We've modeled 6 different scenarios related to coronavirus, 6 different scenarios. And a lot of this -- and it's not about so much guidance for us because we're not giving guidance. But what it's about is are 2 things: One is, are we solid from a liquidity standpoint in every scenario we can imagine; and second, are we prepared from a supply chain standpoint for as many of those scenarios as we can support. The reality is, we won't be able to support all the scenarios. We've talked about multiple order of magnitude demand increases in our acute business. But unfortunately, we don't have the capacity to be able to ramp up to support that. So we're going to do everything we can. But I can't comment on your numbers just because there are too many uncertainties and things like second wave and so on. So I'm not going to back into giving guidance by commenting on one component of guidance.

Fair enough. And then just -- is it fair to say, though, Jay, that when we think about the main unknowns from a headwinds perspective, that those main unknowns for the remainder of the year are the decline in advanced surgery and the temporary impact on the PD business? Is it fair that those are sort of 2 main unknown headwinds to quantify?

Those are 2. So basically, declines in Advanced Surgery and our anesthesia business and sort of wildcards around PD, although that's less of an issue. But Bob, let's be clear about the potential impact of this virus. They span far beyond just the really unfortunate and dire health situation but they spill to a macroeconomic situation. We are going to see hospitals and governments potentially severely stressed as a result of this. And so what you will see is declines perhaps in capital spending. I don't know how quickly this rebound will take place nor how hospitals will consider deferring capital outlays. But that could be another factor. We do have some -- in our original thinking on the year, we did have some healthy sales related to our new pump platform, which we're incredibly excited about long term. But that could be negatively impacted in the second half of the year. I don't know.

Yes. Do you -- on that topic, on the pumps and set side, can you maybe give me a sense in the quarter of how pumps did in the first quarter? And is that one of the areas where you think there might be a quarter or 2 kind of increased demand because of COVID? And then beyond that, we don't know, or could demand for pumps be more durable?

Well, generally speaking, we think demand for pumps is durable because the replacement cycle is once every 7 to 10 years. We have a large installed base, and we have a product cycle coming. We're incredibly excited about the new pumps that we're launching. In the first quarter, we definitely had some benefit related to COVID. There were certain purchases that took place in anticipation, hospital systems in the hot zones wanted to be prepared. So we had some sales of pumps in the first quarter. Perhaps those were pulled forward, perhaps they were incremental, but some level of benefit in Q1. As we look to Q2, I don't expect to see corona-related benefits of real substance in the areas of pumps. There will be some, but again, this is more about a steady, long-term durable business. We're really -- we've talked extensively about the attributes of the new pump that will allow us to compete very effectively. So we're very excited about getting that approval and getting this going in the second half of the year. But like I say, a wildcard here could be, are we facing a recession in the second half of the year? And how are hospitals responding from a capital outlay standpoint.

Yes, totally fair. And then just a couple more quick follow-ups on Advanced Surgery and PD. First, on the Advanced Surgery side. I think from some of the comments that you guys were talking about that maybe Advanced Surgery, that business was down maybe 40% or so. I'm just curious, have you seen what a lot of other device companies have talked about where you sort of bottomed in April and then getting a little bit better off of a low base? Or had you yet to see any signs of a bounce off of the worst of it?

As I said, we saw a really substantial decline in April, in line with our expectations. It's early to say anything beyond that. We expect, as hospitals start to allow for discretionary procedures that there will be some level of bounce back. And we're starting to see markets talking about those kinds of things being permitted. So we're watching this very closely. But relative to April 30 or when we gave guidance or didn't give guidance but talked about this particular segment, nothing much to update.

Okay. And then on the PD side, I think it's really important because that's an area of great focus. And you guys commented about some really strong growth rates over the last couple of quarters and in the first quarter. Are the comments you made on the call about the negative impact from COVID? Could you just put those in perspective for us? Is the PD business still going to be able to grow through this? And I'm just curious about the magnitude of the impact short term from COVID. And then -- and does this at all change your view on the potential for PD to be a significant growth driver for the company over the next year to 2?

The only short-term impact could relate to delay of starts. But the reality is, ESRD patients are really quite sick. And while there's some latitude in terms of when a patient starts, there's not an enormous amount of latitude. And so the long-term fundamentals of this business are very solid. And while the exact timing of AAKHI is an open question, what's really exciting is the PD in-home offering, I believe, has heightened in attractiveness substantially as a result of coronavirus. Because think about it, as a patient, you have a decision to make. Decision number one is modality, but linked to that is the setting in which you are going to undertake your therapy. And that is a -- there is going to be, I believe, a strong preference for home-based therapies, as I said at the outset. So I think the long-term dynamics of this business will continue to be solid and even more solid. And then frankly, as we look at this year, yes, we'll expect to see decent growth out of this particular area. Because, again, the vast majority of the revenues are totally unimpacted by COVID.

Okay. So that's helpful. So despite some temporary disruption in new starts, you still think PD will grow through this period in the short term. I mean I hear the comments in the long term, but just want to make sure I also hear the comments on the short term.

Yes. No. It's -- again, you can't -- because again, the vast majority of the revenues relate to existing patients. So the fact that you delay new patients a month, let's say, it's not -- it doesn't impact the growth rate materially.

Okay. Okay. That's helpful. So we'll keep watching on the Advanced Surgery side, but that's going to be tied to the opening of electric procedures. And on the PD side, I think your comments were very clear. Anything more you want to add on the Advanced Surgery side and the way we should be thinking about that business?

No, I think we've covered it.

Okay. And then I -- obviously, we all heard your comments on the $150 million in incremental spend that you're talking about. But I just wanted to clarify, should we think about that as a kind of a onetime $150 million for this calendar year and that it's not there for next year? Or is this a new base from which you grow OpEx?

Yes. So let's talk about what the $150 million includes. We've basically -- we have to make sure our employees are safe. And so what that means is ensuring adequate spacing in facilities, ensuring adequate PPE is available for our employees, to the extent that our employees need support because they have kids at home, making sure that they're getting adequate pay to offset some of those incremental costs. So number one, make sure employees are safe. And we're seeing higher levels of absenteeism, as you would expect. And so in context -- in that context, making sure that we have temporary employees to support production levels crucial. So that's one component. Another component is we have to get our products to our patients, period. And so that means renting planes to ship solutions, which is a very, very rare thing, as you can imagine. And so the $150 million splits between those kinds of components. What I would say is, if the virus subsides and January 2021 is sort of we are largely virus-free, then much of these costs would go away. It's not a new normal. There will certainly be certain of the costs that remain, but a large component, the majority will go away into next year. Now stopping short of -- we're not -- we're in our budget process. Well, not yet, but in a few months, we'll be in our budget process for next year. So I don't want to preempt that process. But many of these are kind of discrete onetime in nature type costs.

Okay. And then another question on just maybe some thoughts on how to think about the financial model a little longer term. Right now, the Street models about $1 billion more in 2021 revenues than 2019 revenues, which is about a 9% increase over 2019 and maybe a 5% increase over where consensus is for 2020. I realize you're not going to be giving guidance here today, but I would appreciate if you could maybe highlight, in your mind, what are the sort of the most important variables that investors should be considering as we think about modeling Baxter beyond 2020? And it's a critical question because almost all these companies, med tech companies are being valued now on 2021 and even 2022 earnings. So I just would appreciate any thoughts that you might be able to give in terms of the kind of the key variables to consider.

Sure. So end market growth starts with that. We don't expect to see long-term disruptions to the 3% to 4% end market growth that we're operating in. And so we expect to do better than that. The way we do better than that will include really, it's a lot about new product launches. We are incredibly excited about this new pump platform. And ultimately, the 3 pumps that we'll offer on the same platform, I think it's going to be a very significant step-up in our competitiveness. And so that will be an important driver in 2021 and beyond. In addition to that, we will see the continued growth of the home for renal. We may have benefit from AAKHI for PD. Regardless, we'll see, based on my comments earlier, solid performance coming from renal in terms of sales growth. I would say further, we could have the THERANOVA reimbursement in place, should be by 2021, which would be a very important catalyst. So our long-term focus, and Bob, you know this having spent a lot of time with us here at Baxter, is all about innovation and our ability to accelerate growth beyond our end markets through customer-driven innovation. And we put all the building blocks in place. We'll start to pay that off next year. And then we'll also hopefully have some nice dynamics from the continued growth in the home setting supporting renal. So that's basically my high-level assessment. I'm going to stop short of talking about specific growth rates. As you know, we've taken our growth -- long-term growth target off the table because we're not commenting on that at this stage. And we do expect to update you at some point. But yes, we're very optimistic about the strong performance on innovation and how we're going to commercialize that in the coming years.

Could do you -- on that point, in terms of communication, is the plan now to host an Analyst Day sometime early in 2021?

It's an open question. We're still grappling with that. And so whether will we update our financials at some other point or through an Analyst Day, these are questions that we really haven't sorted out at this stage. So stay tuned. We'll come back at you.

Okay. And then similar kind of question on the earnings front. Thinking about next year, we talked a little bit about the $150 million. But if we're -- if we all come to the conclusion that modeling an extra $1 billion in revenues in 2021 over 2019 is the right thing to do, are there things that we should be thinking about from an earnings power or margin perspective in 2021 that might be kind of a residual from the impact of COVID that will be important to consider as we think about modeling the company in 2021 from a gross margin or OpEx perspective?

I think we have to -- how -- when I come -- when I made my comments about the $150 million going away, I assumed coronavirus was gone on January 1. And so one of our key modeling questions is what happens with the Wave 2, how sustained is Wave 1, and how does this evolve. Because that's going to be -- and then also, how bad does it get this year? And does that impact us in any other way? So it's really hard for me to comment on the ultimate trajectory of margin evolution. But I can tell you, we'll be really focused on minimizing that $150 million to the extent we can, going into next year, assuming steady state, and that's going to be an important factor. And then making sure we've got the right investments made for some of these critical launches and then watching those flow through because one of the things I do like to see and we do expect to see in the coming years is gross margin improvement on the back of new product launches. That's an important catalyst that we've talked about extensively in the past. And so we'll start to see that as well. So again, too early to talk about 2021, but those are a few variables that we're going to be watching carefully.

Okay. So maybe to paraphrase, if COVID is manageable in 2021, and if demand comes back, it doesn't sound like there's any sort of major moving thesis to consider around kind of margins and profitability. And I realize they're big ifs around COVID. But if we're willing to make that assumption, it doesn't sound like there's other things that we really -- in a major way, need to consider. Does that apply to sort of things like tax rate as well, Jay? Is your original comments and historical comments kind of hold on that front as well? Or are there things we need to consider there?

Look, I don't want to do a model review for 2021 sitting here in May, with all of the uncertainty. I don't think it's productive to do that. So stay tuned. We'll give guidance later in the year.

Okay. No, that's fair. Just -- I'm just curious if there's any sort of big picture considerations. So I think that about does it. Jay or Clare, if there's anything else that are kind of a point that you want to leave us with before we close here? Anything to emphasize, that would be great. Otherwise, we'll close on time.

No, Bob, we really appreciate your support and interest in the company. We're -- I want to just take the opportunity to thank our employees. Everybody here is working so hard to ensure continuity of supply to ensure that we're doing everything we can for our customers, while at the same time, protecting all of our employees. So we're pleased with our progress so far. We're trying to move forward as swiftly as we can with innovation without disruption. So all these things are key factors as we talk about the future. But thanks again, and we will talk to you soon.

Perfect. Jay, Clare, thank you very much. And thanks, everybody, for listening in. Much appreciated. Bye-bye.