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

Okay. Thanks, everyone, for joining us. I guess it's still morning, it's not yet the afternoon. I'm Vijay Kumar, the life science and device analyst at Evercore. A pleasure to have with us the original backstreet boys. We have Jay Saccaro, the CFO from Baxter, the CFO; and from IR, we have Clare Trachtman. Jay and Clare, thank you both for taking the time and spending some time with us this morning.

Vijay, it's our pleasure. Nice to see you here virtually. Thanks for the interest in the company.

At some point, hopefully, this virtual way will pass and we can meet in person. But on that optimistic note, I guess, Jay, maybe let's start with something which has been topical. I know I've been asking all the other device companies. What's been the impact from second wave, if any, on the business? I think if I take a step back, your third quarter, you spoke about low double-digit declines in U.S. hospital admissions, mid single-digit declines in U.S. surgical volumes. And your guide at the time had assumed similar trends for Q4. In hindsight, now, it seems like the smart thing to have done. So just maybe perhaps talk about what, if any, impact are you seeing from second wave? And has it been in line with expectations?

Great. Look, overall, the key drivers for us, as it relates to our hospital business, really comes down to admissions and surgical procedures. And when we put together the forecast, obviously, there had been a lot of talk and some signals around the impact of a second wave and an accelerating second wave. And so we tried to be realistic, conservative in terms of the numbers that we put together. Overall, what I will tell you is that admissions are principally in line with our expectations. Perhaps there's a little -- a few more COVID patients than we expected, maybe a few less general ward patients. But generally speaking, at this point, it's hard to discern between the 2. What I would say is admissions is largely in line. And then procedures, we still had lower levels of procedures. We've seen that perhaps we're a little bit better than we expected, but nothing to point out at this stage. We are obviously carefully watching this. And we've talked a lot about 2021. As we look forward, we are really carefully watching what this impact of the second wave has, in particular, post the Thanksgiving holiday, as we'll see in December, January, some impacts there. But as I said, largely in line with what we have expected at this point.

That's great. And I think one of the, I guess, themes that has emerged here has been how hospitals are better prepared to handle the second wave. So despite seeing some pretty big numbers, I think hospitals have gotten better triaging patients and perhaps that's why we haven't seen these procedures and admission trends quite go back to the April levels.

I think that's a great point. We, as a health care system, really have increased our intelligence in terms of how we're dealing with the virus. And so if you think about -- we're seeing a meaningful increase in cases over the last couple of months. But as we think about admissions, those admissions are roughly flat to the prior quarter. So we're not seeing an attendant -- significant increase in decline as a result of this increase in cases. So I -- it's obviously the health care system and the workers and so on have done just an amazing job. But I think one of the things that is most amazing is also how we've improved, how we're treating patients, the therapies and so on.

Understood. And I -- one of the things that's been baffling to me, Jay, is -- I mean the stock has been one of the worst-performing stocks here in Medtech. And if I look at your growth, you guys grew organically year-to-date. Your peers are doing -- being minus high single to double digits year-to-date. But the stock isn't reflecting this and perhaps some confusion around Q4 guidance. And I think where people are going with this is the operation guidance for Q4, ex-COVID. Is that still growing mid singles and there's some confusion, can the base business grow mid singles? How would you address that?

Vijay, I appreciate you not mincing words in terms of stock price performance. But let's just talk about the full year for a second, and then we can talk about Q4. On a full year basis, we've said despite COVID, we're going to grow low single digits on a full year basis. And we've also talked about over a $300 million full year impact related to COVID. And so I'm not one for adjustments, were you to adjust for that, you're solidly into mid-single-digit growth, which is really the profile of the company that we've seen over the last few years and sort of had -- sort of modeled. Now if you think about Q4, Q4 has a couple of different factors in play. One is we will see a bigger impact due to COVID in Q4 versus Q3. There was a $20 million stockpile order that offset -- related to COVID that offset the negative COVID impact in Q3. In addition to that, we're seeing -- we had a little bit of a lower expectation on acute -- an acute tailwind in Q4. And finally, some sales force access issues are another factor that's impacting Q4 performance, not getting any better. In fact, it's challenging for us to sell some of the newer and innovative products in light of the current environment. So we are anticipating a bigger Q4 impact related to COVID. The other thing is, if you recall back to last year, we grew 9% in Q4. Not a normal level of growth for us. And clearly, there were benefits in that, and it was just sort of an extraordinary quarter for us. And so that's a tough comp to grow off of. You put all those things together, and I think the guide makes sense. And I think it makes sense, in particular, as you look at it on a full year basis, where we're proud of the fact that the company was able to grow. But I think more than that, supply the medically necessary life-saving and sustaining products really without interruption over the course of the year utilizing lots of different mechanisms to get our products to patients. So I do think it's a pretty solid story and one we'll continue to drive going forward.

Understood. And that's perhaps, call it, a challenging year. And my point, Jay, was from a stock performance, it is where it is. But if I just take a step back, in your base business, it's done better than peers. And the LRP called for an acceleration in the 2020 to 2023 period, right? So it's just -- it's been hard for us to figure out the way the stocks perform. But perhaps some of it is short-term noise, maybe it corrects for itself. And I think a key part of that is, is that LRP intact when you think about the 2020 to '23 period of 5% to 6%, ex-COVID, right? Does it still make sense to have the 5% to 6%, Jay?

Yes. So this is a tricky one because on both the sales growth and the margins, we've withdrawn the LRP to 2023. We did so very reluctantly because let me tell you what our company's commitment is. Our company is committed to sales performance and acceleration through innovation. Our company is also, and you know this as well as anybody, we are really committed to enhancing the operating margin of our company. And I think we've done a great job over the last several years, notwithstanding the challenges that we've experienced this year. And so those 2 commitments, it starts with patients, employees. But then when we think about financial performance, we are incredibly focused on accelerating sales growth and also improving and enhancing our operating margins. So those are fundamental tenants. The third one, I would tell you, from a financial standpoint relates to cash flow because ultimately, there's going to be noise in the stock price over time. But as long as we continue to maximize the long-term discounted cash flow of the company, I think that will serve our shareholders well in the long term. But having said all of that, we took all of these guardrails off the table, we did so reluctantly. Really, the targets were very stale. They were from 2018, and the world, as you know, has changed quite dramatically since then. So we're very eager to get our Investor Day on the books, expecting sometime in September. Hopefully, we do it in person. And at that point, we'll be able to share some guidance in terms of our long-term expectations for the business. I do recognize, though, that makes it challenging for folks as they assess our company. So that's what we have to live with in the meantime.

Now those are fair comments, Jay, just given the challenges the world has faced with the pandemic. Maybe let's look at some of the individual pieces, right? Maybe there's a way to attack, get some visibility to investors, looking at some of the drivers, right, that you had made in your LRP assumption back in 2018 and how that's shaping up now. So let's perhaps look at -- let's start with how should we think about 2021 from a procedure admissions perspective, right? I think some of your peers have spoken about 2021 being back at 2019 levels. Does that make sense to you, Jay? Or should we perhaps be in the cautious just given the second wave and there's still a lot of unknowns?

So first of all, I will tell you, it is amazing to see the progress that the manufacturers are making on vaccines and the research and development that has been undertaken to get vaccines to the market. We are -- we're so happy about that. And we're also excited that we may get to participate in supporting that. It's so central to our mission as a company. So that's a huge deal. And I think that is an enormous factor as we look at returning to normalcy. Now do I think that January and February will be at 2019 levels? That's not clear to me at all. And so what we said on our earnings call in October is we expect first half to be depressed relative to 2019. Now clearly, Q2, we should see improvements relative to Q2 of 2020, but relative to '19 levels, it's not clear to me yet that we will be able to get vaccines to market swiftly enough such that we have a return to normalcy in Q2 or Q1. I expect that by Q4, it should be a much more normal world, a normal run rate that we're experiencing, and I'm hopeful that Q3 represents the same. But I think maybe -- and maybe we'll be wrong about Q1 and Q2. And I promise that we'll take as much information as we get between now and February 2 when we report earnings for Q4 and put that into our guidance for next year. And if there are changes, we'll, of course, reflect that. But it's just hard for me to see that the world snaps back to normal in Q1, either from a procedure standpoint or from an admission standpoint. So that's -- I think clearly, there's optimism, and there's really good reason to be optimistic about the resolution of this. I'm hopeful that the second half is a normal place for us. But I sit here today and look at the cases and the challenges that we faced and the fact that we are in line with the expectations that we've set thus far, recognizing that the impact of Thanksgiving could be pretty bad in terms of new patients, and we're very cautious about giving guidance on Q1 and Q2. So that's kind of where we sit in terms of our expectations around 2021. I don't think it will be a normal year. It might be, but I don't think so. I do think Q3, Q4 will be much more normal if things go according to plans.

You bring up a good point, Jay, because I think it's important to segregate the supply names from some of the product names. I do think the product guys, there might be some backlog of procedures because these are elective and those do come back. And I think it's important for the market to differentiate. You guys don't necessarily benefit from a backlog. You don't have a backlog benefit. Is that the right way to look at it?

The area that benefits from a backlog is really our advanced surgery business which, you know, is a smaller segment for us. But traditional medication delivery, there's not really a huge backlog impact related to that.

That's helpful. And I guess turning to something that caught my attention. And I've done some work on just going on the tool side for vaccine fill/finish at work. I saw your press release on $50 million of incremental investments in that business. And I don't think a lot of investors have focused on this opportunity for Baxter. How -- I guess, is there a way to characterize what this opportunity could mean for Baxter, Jay?

So Vijay, the $50 million investment that we made in our facility is really related to a specific customer for an injectable drug, not related to the vaccine opportunity. So this is a specific product. We're excited about it. I think -- look, at the end of the day, our Bloomington and Halle contract manufacturing business is really a hidden jewel at Baxter. It carries higher margins than the corporate average. It's been a steady grower for us. It's been a good performer over the last several years. Of course, there's some volatility to it. But the $50 million investment is really a testament to that team and the work that they're doing to continue to expand that business unrelated to COVID. Now turning to COVID, I'm sensitive to talking about the size of the opportunity because we are in discussions with just a few folks. So it's a very, very specific thing. We're working very carefully with certain customers, and we're excited more than anything else to be able to supply this product and support the mission to cure the world of COVID. I mean man, gosh, what a better -- for a health care company, there's nothing better than that. There will be economics attached to that opportunity. I can tell you that our contract manufacturing business has a better margin than the corporate average. And so stay tuned. We're hopeful that we'll have some contracts -- contract or contracts in place in the near future. And as soon as we do, of course, given the importance of this, we'll talk about it.

And one, maybe -- perhaps not talking about specific numbers, but can you talk about what exactly does Baxter do when you think about COVID vaccines? And does the opportunity set change if it's an mRNA vaccine as against a traditional recombinant vaccine for Baxter from a fill/finish perspective?

Clare, do you want to talk about the different components here?

Yes. We do have the ability to do a number of different vaccines. I would tell you, the one vaccine that we don't have the ability to manufacture is a live vaccine. So we do not have those capabilities. And what we would do is the fill/finish coupled with the secondary packaging. So we will be in a position, as Jay mentioned, to be ready to go once these contracts are finalized and signed.

Got you. And just on the $50 million investments, Jay, is that a revenue contributor in fiscal '21? Or should we be thinking of '22?

No, no, no, that's a longer-term opportunity. It's going to take a few years -- several years before we start to see the impact of that. But again, this is good business. We put it in place with a specific partner. So it's predictable, solid and will contribute to the long-term value of the company.

The one thing I would like to add to that, Vijay, is just that the investment is both the combination of Baxter and the customer as well. So they are also contributing towards this capital as well. And the capacity is available in 2022.

Got you. And ROI on those investments, Jay, typically, you guys have done deals like high singles, double digits. Should we be thinking about similar kind of ROI on that $50 million investment?

It's interesting, Vijay. When we do external M&A, it's a very different profile than internal capital investments. When we talk about things like expansion of PD capacity in existing facilities, adding lines to existing facilities, those typically carry a much higher internal rate of return for a couple of reasons. One is you're leveraging an asset that you've already paid for in terms of the facility. And then second is, you really understand the specific economics of the transaction that you're undertaking. So for those 2 reasons, we typically find solidly higher IRRs and ROIs on those internal investments than M&A. M&A is a great vehicle for us. We'll talk about that, I'm sure, and it's important to our long-term growth. But we -- for me, one of the best investments we can make is adding lines to existing facilities, those kinds of things, because it's such a leveraged investment.

Understood. That was my -- perhaps another way to back into my -- in my head the math on what -- if -- what the IRR should be and what the revenue should be. So obviously, I couldn't get past you.

Yes, you ought to do to work on that.

Yes. The other topic that's come up, Jay, has been NOVUM IQ. And I was surprised that you guys gave the number right for Q4. You've put it out, $25 million to $30 million of revenues. Am I correct in making the math here that this is an annual $100-plus million revenue opportunity? And depending on whenever this product -- yes, go ahead.

Yes. It's -- there is -- it's all based on pipeline and when customers need product. And typically, in the fourth quarter of the year, there is, for whatever reason, seasonality, it's the largest quarter of the year with respect to pump sales. So it really does depend on the specific situation. We've seen lots of quarters like that in the past, but it will depend on the opportunity set that exists when the pump launches. We're definitely very excited about this pump. And we believe that -- we'll focus first on our customers that need upgrades, but there's a lot of future customers of Baxter that are going to be available to us because we're going to have a large volume pump along with the syringe and ultimately, PCA pump available. So it's a -- this is a really exciting -- obviously, a little bit of a setback with respect to the news that we heard earlier this year. But looking forward, I think this is a nice long-term driver for us as long as we can get it over the goal line successfully with FDA and commercialized in the U.S.

Understood. I guess, on the topic, the last update we had was submission by year-end. Is that still sort of on track or any sensitivities around timing, Jay?

Yes. We said -- on the earnings call, we said 2 to 3 months, something like that. So it's there or thereabouts. But the most important thing is that we are working collaboratively with the FDA to address any concerns. And we remain very excited about getting this commercialized, getting this to market in the U.S. and having an impact in 2021.

The one, I guess, and that's an encouraging statement, Jay. Because I guess when I think about pump markets, it's not easy, the market has been challenging. Every player in this market has had issues over the past decade or so. Without getting into the specifics, perhaps, is there anything that you can tell the market that the issues you have, I don't even know if issues is the right term, but the delay for NOVUM IQ? It shouldn't be in the same bucket as what your competition or peers are facing, that perhaps this is -- yes.

Yes. So I would say -- make a couple of comments. One is, first of all, we don't speak on behalf of the regulatory agencies. So at the end of the day, it is up to them as to whether or not our pump gets approved period. The second thing I would say is we have had this pump approved outside the U.S. So in Canada, incredibly excited to have it on the market. We believe the pump is a safe and effective medical device. So we're thrilled that we have that on the market, and we'll start selling that imminently. And third, look, if the questions that we -- and discussions that we had received with FDA were incredibly comprehensive or challenging, let's be clear, there's no way we would be talking about 2 to 3 months from the October 31 or whatever it was earnings call in terms of submitting it. We believe it's about -- we believe that we can work carefully with the FDA to address concerns, but we should be in good shape. Now again, there's uncertainty here. And we have to respect that uncertainty, but we are optimistic that we will get through this, get this resubmitted and ultimately commercialized. Like I said, we wouldn't be submitting in the time frame that we were if it were a wholesale challenge that we were facing.

Got you. And so I guess, maybe the last one on NOVUM IQ is margins. I know Baxter has said margin should be above -- it should be incremental, but could it be like 1,000 basis points incremental to corporate? Or is there any way to quantify what the higher margin?

Yes. So on the pump, the actual pump is not wildly different than the corporate gross margin, okay? So that's kind of -- it's not substantially different. But the set, as you know, come in at a much higher gross margin than the corporate average, meaningfully so. And so what I get excited about with respect to this is, obviously, presenting to our customers what we think is a wonderful technology as they look to solve their medication delivery needs. But I also get excited about the fact that as we add new accounts, we have the sets right along, and it's a tremendous opportunity. About 1/3 the sales price of a pump comes in the form of sets annually. And so as you expand your footprint of pumps, it becomes an incredibly powerful growth driver for the company and margin driver long term. All of that is facilitated by innovation and really finally having multiple pumps on the same platform.

And how should we think about share gains within that category, Jay? Because you do have your largest peer out of the market. You're coming in with a new product which is going to be pretty competitive. Are you in any way constrained from a manufacturing perspective when you think about the share gain opportunity?

Look, I think that the largest gating factor with respect to share gain is the fact that there's only a limited number of opportunities that come up each year. If you say, hey, pumps are replaced every 7 to 10 years, what that means is there's 10 to 13 sort of points available -- of the market available in a given year, and we have about 3 of them. And so -- and also the specific cadence of this does a little bit depend on when pumps were sold in the past, how swiftly a hospital wants to move through things. And so I think the biggest gating factor is really availability of opportunities. But the nice thing about that is it makes it a very sticky market. And so you -- as you gain share over time, you tend to protect that share for a long period of time, and you have sets available to you to sell for 7 to 10 years. So it's a wonderful business. I think it's at the heart of what we do. I'm not expecting wild market share or market position changes, I should say, I think that's a better word at -- in the near term, but we will steadily improve over time. And remember, large volume pumps is 1 market, where our position is roughly in the low 20s, but syringe and PCA are 2 great markets, albeit smaller, where our position today is nil. And so I think those represent really a great opportunity for us in addition to the large volume pump. And in addition, the fact that those 2 pumps make the large volume pump more attractive to our customers. So it's a really exciting opportunity. Of course, we do need to get it on the market and do so swiftly.

That makes sense. And the other exciting news was we had the final rules for ETC, that's AAKHI. I mean I -- if I had to step back 12 months ago, when these proposals came out, your U.S. PD revenues were about $0.5 billion. I mean in a bull case, those revenues could have quadrupled. I mean the government wanted to take this to 80% penetration. But even in a conservative base case, I think that opportunity revenue base should double up for Baxter over the next few years. Based on what you saw in the final rules, do you think that those revenues could double up over the next 5 years, Jay? Does it make sense?

Look, we think this is a great opportunity. It really is. And it's -- we've done a lot to get the technology right and optimized to serve patients in the home. We're really excited about the various technology, various cycles we have available. And then also the Sharesource platform. So we've got the right technology. The home is a great setting for this because think about it. If you're a critically ill patient, doing a therapy in the safety of your home versus in a public setting, I think, is something that is increasing on people's minds. And then finally, we add to that a great incentive, which is the AAKHI, I think that's really going to favor the home. And so we've talked about doubling penetration over the life of the demonstration project. Certainly could be. And so we'll watch this very carefully. Does the penetration double automatically? Not at all. Does it take time? Yes, but that's another nice thing. I mean if you think about the growth of the HOMECHOICE business, it went from $0 to over $1 billion globally over the course of like 15 years with steady growth every year. And so we'll expect to see that steady growth now at a little more accelerated pace than some of those HOMECHOICE outer years because of this great incentive that we've put in place along with all the other conditions that we now have. But this is -- I think this is a wonderful area for us. We'll invest with some incremental capacity to support it. But I think we're excited to support the demonstration project here.

And just from an adoption perspective into 2021, is there anything in the ETC model which would perhaps be gating factors for '21, maybe the system needs to be set up in terms of payment models, et cetera? Or are we ready to kick start the program?

No, I think we'll start to see an impact in 2021. Frankly, we've had great U.S. PD patient growth over the last couple of years, in part, maybe some of it was in anticipation or some of it was just because of the technologies and the setting. But we'll expect to see this starting to benefit our performance when it goes into effect in 2021.

Got you. The one that I'm happy that TheStreet want me talking about going forward is THERANOVA. I mean maybe this is me, Jay, like I thought and if I look at ETC opportunity with just THERANOVA, I mean I thought ETC was magnitude of orders above THERANOVA, but yet TheStreet was hyper-focused on THERANOVA. One, would you agree that ETC is a much bigger opportunity than THERANOVA? And two, how should we think about THERANOVA adoption now that CMS has denied reimbursement?

Sure. Obviously, we're disappointed with the lack of reimbursement from CMS. We're very happy with the de novo approval that we received. That's an important deal for us, accessing the U.S. market for critical technologies. It's a big deal. And so we're happy we got that in line with our expectations, but disappointed about CMS. Yes, look, AAKHI is a huge deal on a significant business that we have today. It's proven technology. It's something we know how to do, know how to do well. And so it's important, and it's a good thing. THERANOVA, in its own right, is an exciting product. I mean there are -- it really does do a lot of things, which we believe enhances patient outcomes with respect to hemodialysis therapy. The product has been well received outside the U.S. We've seen nice growth there. We expect to see that nice growth to continue. The challenge, of course, in the U.S. is do you go without incremental reimbursement for this product or do you pursue some form of clinical trial to support reimbursement of this? And that's kind of what we're studying right now. We have a little more work to do before we make any final determinations on that. But like I said, it's a great technology. There will be sales in the U.S. regardless of reimbursement. And then the question is, do we want to make the investment and go for this? And we're still sharpening our pencils on that specific opportunity.

Understood. I mean some of -- when I was looking at the CMS requirements, they were pretty stringent. I mean, especially, I think it's a little bit of a chicken and egg. CMS wants to encourage adoption, but the barriers, the hurdles, I mean these are not easy things to solve for, right? I mean the data that they're asking for seem pretty tough. I mean that's my opinion for what it's worth.

Clearly, there is some work to do here. It's not cut and dry or a simple solution that we have. So we'll have to be thoughtful about how we approach this opportunity in the U.S.

Understood. The one -- maybe switching gears to pharma, Jay. Myxredlin, I know the contribution for the current year was impacted by the pandemic. How should we think about pharma growth over the next 3 years, in general? Should Myxredlin be an incremental contributor in '21?

Yes. So Myxredlin was disappointing this year. And frankly, selling a new technology to hospital pharmacies in today's environment is understandably really, really challenging. And so I kind of look at 2021 as a new launch of Myxredlin. And I think really, as we look at our 2021 performance, that will likely be the largest driver of growth from new products in pharma. And then as we get beyond that, we start to see benefit from some other different products. As you know, we have a rich pipeline. In 2002 and -- 2022 and 2023, there really is some meaningful benefit coming from the pipeline that we've been hard at work to put in place. But in 2021, I think we have a great opportunity with Myxredlin. We're so excited to get our hospital reps working to sell it in front of customers. And so that's the work that we'll be able to do, certainly in the second half of next year, and I hope before that. And it should be a nice catalyst for us because we've talked about this product being a nice contributor to our pharma business and Baxter overall, but really, we were handcuffed in terms of our ability to really commercialize that this year and it showed up in the lack of performance.

Understood. And just on the pharma pipeline, Jay, I know there were some questions around Claris, dealing with the FDA but it seems like nothing's changed on the pipeline front on the pharma front despite the Claris having some of those FDA issues. And when you think about meaningful contributors, is that a '22, '23 kind of event for pharma?

Yes. I think -- look, I think in our last LRP, we had solid contributions from pharma in 2023 and before that. And we -- the Claris has been a challenge, of course, getting FDA back and resolved in today's environment with the COVID, that's a challenge we're working through. But again, pharma will be a meaningful contributor in 2023 with new products. And of course, the base business before that. 2022 will see a nice uptick in sales related to new products. 2021, like I said, fewer launches, less of an impact. The biggest should be Myxredlin as we accelerate that performance.

Got you. And I guess, now getting back to the LRP question, right, Jay, if I look at all the drivers here, I mean it feels like things haven't really changed. Pharma, key products are in line; ETC model, that's incremental, if anything, that helps your business; and NOVUM IQ, vaccine fill/finish. I understand the LRP has been removed and will be updated next August, September. But the fundamental drivers here don't seem to have changed for me. Would that be a fair characterization based on our discussion so far?

Look, stay tuned. We are eager. And Vijay, I hope you'll be in the front row in person at the session in September. There's a lot of good things going on. And there's a lot of variables and wildcards. And we have to see how the whole pandemic finally shakes out, what the pricing environment looks like in 2021, '22, '23, on the back of some of the challenges that governments and hospitals will have experienced as they've looked to get through coronavirus. So a lot of different factors in play, but we're trying to control what we can control. And we're pleased that many of the things that we put in place in 2018 are moving forward nicely, notwithstanding the pump, which hopefully is just a hiccup. We're hopeful that, that's the case. But notwithstanding that, we've moved a lot of things forward. And we'll continue to focus on driving that and bringing new innovation to market that helps accelerate growth. And I've been -- look, I respect that we've taken the LRP off the table. We haven't made any comments, but I'll reiterate. We are still focused on accelerating and driving revenue. We're still focused on driving margin enhancements. Those are core tenets of what we as a company have been able to deliver on and what we're focused on as we go forward. So like I said, we'll reserve the spot for you in September if we're able to do that.

I look forward to that front row seat, Jay. I guess one on the capital deployment front, share repurchase. I know Baxter, I think, philosophically you guys are reticent to comment about share repo intra-quarter. Would I -- for me, like last year, you were buying back stock when Baxter was in the $80s, right? And right now, based on everything we've heard, ex-COVID, fundamentals haven't really changed, and you guys are committed. I just -- how should we think about this buyback versus M&A debate when you think about that authorization of $2.4 billion at current levels?

Yes. So look, I would say that this year, we were very cautious with balance sheet deployment. And I'm referring to up to the last -- when we reported on October 26. And really, we were protecting against some downside scenarios that could have emerged. So we had -- we carried significant excess cash on the balance sheet, neither Joe nor I like to carry excess cash on the balance sheet. We'd like to have the balance sheet working hard through either stock buyback when we think the stock is trading at a discounted intrinsic value or through smart M&A. And so you can expect to see both of those activities from us in the coming months and years. And we'll get back to our normal cadence of those kinds of activities. 2020 was hard, both from a share buyback standpoint. There were -- we would have loved to buy shares over the summer or at various different times during the year. It was not because we felt the shares were not a value, but rather, it was more about protecting the balance sheet in a downside case. On the M&A front, over the course of this year, a lot of companies were not interested in dialogue because they were contending with their own issues. And so until the dust settles a little bit on that, it becomes hard to do M&A. So I see a rich M&A pipeline. We've been hard at work building that, keeping that fresh. And I think there are some nice opportunities in there for us. And then on the stock buyback, stay tuned. February 2, we'll tell you exactly how many shares we purchased.

It's February 4.

Okay. Thank you. February 4.

Understood. I guess one on gross margins, Jay. A couple of your peers have spoken about manufacturing variances as being a factor for '21. When I look at your pre-COVID gross margins, about somewhere around 45-ish. When can Baxter get back to those levels? Is that a back half of next year because based on your comments, first half being below second half, perhaps being normalized, should gross margins normalize by back half of next year?

Yes. So we've talked about like $150 million of impact related to coronavirus in our numbers. And that -- vast majority of that affects gross margin. And we've also said that there will be some residual costs that stay in place for incremental -- I think for the future, if you go to a Baxter plant, people will be wearing masks everywhere. And that's -- we've said the incremental cost of ongoing operations is in the $30 million range. So now the question is how quickly can we recover? And I think we'll have some residual costs certainly through the first half. The way rollout occurs of manufacturing costs, there could be some incremental impact in Q3 of next year. But again, this is so much dependent on when we get back to normal. And remember, part of this, Vijay, relates to our line of sight to demand because if you're producing at like 110% of your normal levels in 1 line, but then you ratchet it back to 70%, well, you might have negative manufacturing cost consequence on both lines. And so a lot of this comes back to a better predictability of our business, which we are getting now. We're getting our hands around what is the dynamics with respect to COVID, how can we expect this to play out into our numbers next year. And so we should start to see some abatement. And like I said, I hope something like Q4 is a clean quarter. We'll have to watch.

And just based on all our comments, it looks like Street's modeling about 6%, 7% of revenue growth over 2019 levels, I mean those seem a tad aggressive where we are based on what we know as of today. Is that fair comment, Jay?

I don't comment on Street models, unfortunately. And it's hard -- and like I said, given the uncertainty around demand in the first half, it's hard for -- we are -- normally, we start to give some sort of color around what the next year might look like this time of year, but it's really hard to do that at this point. And again, I think there's going to be a period of time where this pandemic gets meaningfully worse before it gets better. Exactly ascertaining what that impact is on our business and how sustained that is, it's hard to say before the vaccines come, which will be a great accelerant, hopefully a normalizer for both our company, but more importantly, society at large. So it's a really -- it's very difficult at this point to make solid predictions around revenue growth for next year.

Got you. And just 1 last housekeeping question, Jay. That vaccine comment you made, does it make sense, like when you're in discussion with your customers on the contracts, does it make sense to look at it on a per dose basis, price per dose? Is that the right way to think about it?

I don't want to talk about sort of unit dynamics and pricing dynamics with respect to -- it's not like -- because here's the thing, Vijay, if we're selling IV bags to like 1,000 hospitals, it's one thing. And you can talk about, oh, it's price per unit, that's typical arrangement. But when you're negotiating with 1, 2 or a few customers, it's a little bit of a different -- it's a different dynamic, and we're really sensitive to that dynamic. So stay tuned. We're hopeful that we'll be able to -- I think, like I said, at the beginning, most importantly, support this because at the end of the day, we're all about saving and sustaining lives. That's what we like to do first. And then all the other things, including drive performance for shareholders, those filter down. But I think it's pretty amazing that we will hopefully get to play a role in supporting the cure.

Understood. With that, I think we're at the end of the time. Jay and Clare, thank you both for taking the time, I guess it's afternoon now, this afternoon. And for what it's worth, Jay, maybe I'm being biased, but either look at the year-to-date organic performance for your business versus your peers and how the stock is performing, plus the discussions we've had on some of the drivers here, it makes me feel quite optimistic currently at these levels, but we'll see. I'm waiting for that front seat. I take it in a front row seat for your Analyst Day, but I'll certainly stay tuned. But thanks, guys, for the opportunity.

Vijay, we really appreciate your time and your thoughtful questions. So thanks a lot. And wish you -- if we don't talk to you, wish you a wonderful happy New Year, and then we'll be back at it in January.

Thank you.

Thank you.