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

Good morning. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. And I'm pleased to have Baxter join our session this morning. With us from the company are Jay Saccaro, CFO; and Clare Trachtman, Vice President of Investor Relations. In terms of format, this will be a 30-minute fireside chat. And Jay and Clare, thanks for joining us.

Larry, it's great to be here under different circumstances than we normally are. We always appreciate seeing you in Boston. So we'll do it virtually this year and hopefully, be back at it next year.

I agree. Hopefully, in person next year.

So Jay, let's start with a big picture question. Q2 was a touch softer than you expected. And the stock sold off since the quarter. What I'm hearing from investors that they're no longer sure kind of what the investment case for Baxter is. There's uncertainty around the top line growth and the margin story, which has been so successful since Joe took over as CEO. How would you frame the investment case for Baxter today?

Sure. Larry, I would say there are a few things that are important to me. Now again, each investor has to make their own decision. But from my perspective, there were a number of things that emerged over the last 6 months that, I think, are important attributes of the company and several that have been there for a long time. You're fair to point out, look, Q2 was a disappointment in the sense that we came in slightly below our expectations. But I think one of the most important things that was highlighted by the second quarter, from my perspective, was the durability of the company. We saw an unprecedented decline in hospital admissions. The largest-ever decline, I think, in the history of the health care system in the United States, down 20%. We saw an enormous decline in surgical procedures. And yet, our business was basically flat, down 2%. And from a free cash flow standpoint, free cash flow actually improved year-over-year. And so the most important -- I take the point because we take guidance very seriously. It's something that we really study and try to get the right expectations out there. And so we were a bit short of expectations. But in the face of some of the sort of wild swings we are seeing in the marketplace, to decline 2% and hold cash flow better than prior year was, to me, an illustration of really the strength of the underlying business. And if I were to expand on that and say, hey, if you think about year-over-year, well, we basically have $0.20 of earnings items related to certain capital allocations, decisions we've made to improve the health of the balance sheet of the company. If you were to adjust for that, earnings are basically flat year-over-year in the face of a pandemic and all of the attendant costs associated with that. So I think from my perspective, durability is probably the most important thing that I saw as sort of an attribute of the company. And I would add to that, we really cemented the importance of our company in supporting health care systems around the world. So as an employee of the company, we are so proud of that. The second item I would say is growth through innovation. I'm pleased that we have not seen radical changes in time lines as a result of the pandemic. And in fact, we've been hard at work getting products approved, like THERANOVA, preparing for our NOVUM IQ launch, hard at work advancing the pipeline. And by the way, that was largely unimpacted by the pandemic, which was just awesome. But I think importantly, this commitment to innovation, we just launched Evo IQ syringe outside the U.S. NOVUM IQ will launch with a syringe and a large volume pump will be gone for the first time on an equal playing field with everybody in the marketplace with what we think is a really unique and differentiated offering. So continued progress there. So this idea of the importance of innovation, if you think back, in 2018, when we had an Investor Day, we had a lot of PowerPoints with a lot of products on those PowerPoints. Well, I'm so happy that those PowerPoints are translating to actual products on the market. I mean I think that element of growth through innovation will play out for years and years to come. And then the final thing I would highlight is, look, this company is committed to the efficient use of resources. We will continue to focus on margin improvement, on free cash flow generation. And I can't say specifically how 1 quarter is going to do relative to another or how 1 year is going to do relative to another in today's environment with the pandemic. Such statements are really challenging to make. But what I can tell you is the notion of long-term enhancing the economic profile of the company is something we've been able to do, and we expect we'll continue to do that. So those are a few comments I would make. But generally speaking, I think the company has withstood something that was unprecedented pretty well. And relative to peers, I think the performance of the company is solid. Relative to the economy at large, it's solid. And so I think we're quite proud of that.

That's helpful. And how should we think about the cadence of sales and EPS growth in the second half of this year? You faced a very tough comp in Q4.

Yes. I mean there's 2 countervailing things. And we -- actually, when we gave guidance, we said we're going to stop short of giving quarterly guidance because of all the volatility and what recovers, when and what's a hotspot and what's not and what happens to the environment. So we were -- we took the -- first, this year, we took the unprecedented step since I've been CFO of actually ceasing guidance and then -- we're sort of suspending guidance, I should say. And then we sort of cautiously stuck our toe back in the water and basically gave a second half guidance. And we did so because, again, predicting exactly what's going to happen when in this environment is incredibly challenging. I mean it changes by the day. And so as we look at Q3, Q4, there's 2 things going on. One thing is, we think the recovery in Q4 will be better than Q3 in terms of procedures and admissions. That was the assumption that I outlined on our call. But then offsetting that is, you're right, we did have an incredibly strong Q4 last year. I think we grew operationally, like 8% or 9% in the fourth quarter. And so tremendous growth, and that presents a tougher comp for the fourth quarter. So stay tuned, but those are some of the factors that are in play.

Jay, are there any public data points you can share? What does the guidance assume for hospital admissions and procedure trends? Are there any leading indicators, public data sources on hospital admissions that you can share? I know there's data from different states and all. So in other words, are there -- the hospital admission trends improving based on what you see publicly?

Yes. I don't -- well, we sort of put out our best estimate as of end of July. And really, interestingly enough, some of the best sources of information for us are actually proprietary data sources to us. And so we have a couple of services that we provide, which allow us insight into actually how many doses are being dosed at the representative sample set of installed base. It's a great source of data for us, but it's proprietary to us. And so that's probably one of the most valuable sources. I think there are different publicly available sources out there. But like I said, I think the most accurate ones that we've seen are ones internal to us that we use.

So basically no color that you can share today on how the recovery is progressing?

Well, 2 things. One is I don't like to give updates like the week before the quarter blackout period starts. So we don't really give intraquarter updates. But the second thing I would say is signal to noise. You got to look at things over -- in today's environment, 3 months, 4 months, 5 months, 6 months, because that -- otherwise, you look -- you're overreacting to a short-term data point. And that's the unfortunate thing in today's environment. Trading quarters is incredibly difficult because for that reason. Earlier on in the year, we were having questions about, people were saying, "Hey, elective procedures are sort of starting in Arizona. So that's a good sign for your fourth quarter." Well, actually, that's not in the model for our fourth quarter. The model for our fourth quarter has a lot of different inputs, but none of them relate to short-term procedure volume trends in a given geography. It's just too dynamic of an environment. And so that's why not only do we not like to share things generally because of the time of the quarter but we're also really sensitive in today's environment overreacting to a month of data because this is an unprecedented environment. It makes forecasting really challenging. The dispersion of outcomes is very wide, and it's something that we try to take into account. And that's -- it's a different world, Larry.

Jay, before I get to the 2021 question, why don't we talk about some of the growth drivers and start with Medication Delivery and NOVUM IQ, which seems like a good long-term opportunity for you? Remind us of when you expect approval in the U.S.? And what's special about that platform?

Yes. We expect near-term approval, and that's a platform that we're quite excited about. I think, first of all, it has Dose IQ, which is basically our drug library and dose error reduction system. And so all of the pumps on this platform will utilize this critically important system which we think is a best-in-class feature and really leads to fewer errors. We are going to be launching 2 pumps at the same time, a syringe and a large volume pump. I'm so excited about that because, from my perspective, we have not had a comprehensive offering in place. We'll shortly follow it. Months later, we'll have a PCA pump as well. So in 2021, we will have 3 pumps operating with the same interface, able to integrate into the hospital EMR, master drug library, elegantly done, stackable format. And so it really will be an exciting new offering for us. You think about it, in the past, when we've sold our large volume pump, we were competing with 1 pump up against 3. Now finally, we will have a comprehensive offering that leverages all of Baxter's knowledge and know-how and hopefully addresses customer needs in a new and unique way. So this one should be a catalyst for us for years to come and a core offering in our Medication Delivery business, and we'll expand beyond that with other sensing technologies and all sorts of different things that we'll be able to build upon this. But it's a crucially important first step, big driver for several years to come.

So Jay, when you launched Spectrum IQ in the U.S. in 2015, we saw U.S. infusion sales growing in the double digits for quite a few quarters. How should we think about the economic, the commercial opportunity for NOVUM IQ?

Yes. I mean, let me share just a few kind of market statistics which I think will allow you to do the work. I don't want to do the budget review for NOVUM IQ for 2021 here in September. But I can tell you that the market is large. So we have about a 1.4 million or 1.5 million channel market. And it's about a $400 million capital cycle per year, represents a great opportunity. Somewhere between 10 and 13 market share points come up each year. And so it's a ripe opportunity for us. The U.S. syringe and PCA market is somewhere around $100 million to $150 million of capital sales. Again, that's a market that we do not touch today. The nice thing about offering a syringe is this new market opportunity that we're afforded, but secondarily, it's the fact that we are not -- we now make our LVP even more attractive. So it's really 2 levels of benefit. And so we've been in the low 20s of share in the LVP market. We'll expect that to continue to grow. And the pace -- there is some pacing that you have to consider. So there's a hospital capital cycle, like I said, every 7 to 10 years. So it's not like it's a linear amount that comes [Audio Gap] of product and pent-up demand. We'll see how much we have as we approach 2021. But over time, [ tremendous opportunity ].

So Jay, I wanted to touch upon on acute care which is one of your smaller segments, but the fastest-growing one. And you put up tremendous numbers in the first half of the year, 45% growth, I think, in the second quarter for Acute Therapies. Can you talk about the demand and the supply there? You were supply-constrained earlier in the year. And I guess the key question is, can this business grow in 2021? Or given the benefit from COVID this year you've seen, do you expect that to decline next year?

Well, again, part of this will depend upon what happens with the virus in 2021. You're right, this is a very challenging comp for us, okay? So we had unprecedented levels of demand and historic highs, absolutely by a long shot, by a factor. And so that's going to be a tough comp to grow off of. Long term, we think this is a solid grower for us. 2021, we'll have to see. And in particular, we'll have to see in the context of, like I said, what -- does this abate or not? And I'm referring to the pandemic when I say that. And continued pandemic challenges could be a different story. But if everything is back to normal in 2021, this will -- obviously, there's going to be a challenging comp for this business that it will have to fight through.

In the second half, Jay, do you still think there'll be strong demand in the second half of 2020 from acute kidney injury in COVID patients? Or you think that will kind of abate?

We'll see. We didn't give product line guidance for the second half of the year, Larry, because, I mean, forecasting at a macro level was challenging, forecasting at a micro product level is, it's mission impossible. But look, we anticipated solid continued utilization and interest. And the pandemic is by no means over, and there's still a lot of interest in many of our product lines inclusive of this one.

Jay, let's spend a few minutes on Renal. Obviously, people are curious to hear your thoughts on THERANOVA, and you're confident you'll be able to address CMS' concerns. You just published in a peer-review journal the randomized controlled trial. You're, I think, also conducting a meta-analysis. What's your confidence that you're going to be able to convince CMS to give you an add-on payment?