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

Good morning, everyone. This is Suraj Kalia, Senior Medical Device Analyst at Oppenheimer. Glad everyone could join us this morning, and we are pleased to have Jay Saccaro, CFO; and Clare Trachtman, VP IR of Baxter International this morning with us. Jay, Clare, welcome, and I do appreciate you taking the time this morning.

Suraj, many thanks for the virtual invitation to your conference. It's nice to see you. And hopefully, we will get to see you at some point in person.

Likewise, hopefully, fingers crossed. I know it's been a tough year for -- all around to say the least.

So Jay, in no particular order, I'll just kind of throw around. And again, just informally speaking, let's start most the 2 key announcements recently. I'd love to get any additional details that'd be good. One is your manufacturing agreement with Moderna, and just saying subsequent after that is the AK 98, if you could just jump into that. That would be great.

Great. Yes, the Moderna announcement recently was really exciting for our company and all of our employees. The mission of the company is to save and sustain lives. And every time we -- every day we do that, but not every day, do we get to participate in such a crucial moment in terms of really helping change the trajectory of a global pandemic. And so the announcement with Moderna, along with the other agreements that we've signed, we have 3 customers in total, we're just so proud and happy to be part of the solution. Now from an economic standpoint, we said collectively, these opportunities represent roughly $50 million, $45 million or so this year. And then there will be some residual opportunity next year. So -- of sort of $100 million total opportunity. We'll see what happens with Booster Shots and how this evolves in an ongoing nature. But we will be ready to support that to the extent that, that becomes a requirement in the future. Now interestingly enough, I think one of the things that has gone underappreciated by many folks, even some folks at our company, is this jewel of a business that we have in our BioPharma Solutions business. We have 2 world-class manufacturing facilities: 1 in Halle, Germany; and 1 in Bloomington. They are outstanding and really bring to bear so many of Baxter's competencies, namely our manufacturing systems, our quality systems, our supply chain, and so this has been roughly $0.5 billion business for us. The economics of the business are good. While the gross margin depending on the product may be at or below the corporate average, because of the very low SG&A requirement, this is a business that carries a higher-than-average operating margin. And so these deals are just a great illustration of the many facets of Baxter that we have in terms of long-term value drivers. And -- but I think most of all, I get back to where I began with, we're just so happy to be part of the solution here. As it relates to AK 98, this is an incineration monitor. And for us, it just complements the portfolio in the U.S. We have had -- we haven't really had a high-quality monitor for sale in the U.S. and bringing in AK 98, which is really a widely available outside the U.S. platform which has supported the HD business for many years outside the U.S. Bringing that to the U.S. just gives us another feature and allows us to complement the portfolio and add a more robust cell that is not just focused on dialyzers or solutions or something like that. So again, and this is -- what I would say is it's kind of interesting because this is an example of, in some sense, this is geographic expansion. We've always talked about having an incredibly robust portfolio. And one of the things that we like to do is where we do not have registrations for products that we know are successful in other geographies, achieve those registrations in other -- in those geographies that don't yet have the benefit of that product. More often than not, what geographic expansion entails is smaller, emerging markets or markets and smaller markets in Europe, those kinds of places. But in this case, it's actually a reverse of the normal paradigm, taking product available outside the U.S. and bringing into the U.S. So a nice complement to the portfolio, allows us for a more comprehensive HD cell and something we're looking forward to watch as we go through the next several years.

Jay, if I remember correctly, you all have not talked about it. And if I could just go back to the Moderna agreement. I know in the bigger scheme of things, it's a small piece, incremental piece. But how should we think about the incremental margin from this agreement within that business segment? Is that something that you're comfortable just at least directionally giving us some color?

We are incredibly sensitive to the confidentiality around these agreements. And you can imagine how sensitive this matter is. And so what I can tell you is the general business is above the corporate average margin. And so -- and that is because of the limited SG&A requirements. In many regards, there was not a lot of SG&A associated with these deals that we've signed. But beyond that, it's hard for me to get into any details.

Fair enough. Fair enough. Jay, let's just go back to COVID, right? We were talking before we went live on COVID. I mean, COVID has impacted everyone in different ways. So when Baxter, you were confronted with a changed landscape, positively or negatively, right? Do you hear from a number of companies that they have adjusted both tactically and strategically? Some have made inventory adjustments, some have made manufacturing adjustments, some have gone virtual marketing. So specifically for Baxter, obviously, you guys are exceptional in terms of your profile, squeezing outs. But what has COVID done we you all said, you know what, COVID has forced us to think differently. These are the changes we're going to make tactically and strategically, and how should we think about it as we move forward over the next 12, 24 months?

It's an excellent question, and we talk about this all the time. I think over the last year, we answered some different questions in relation to COVID. We had to protect against the worst-case scenarios in terms of liquidity crisis, if that were to have emerged challenges in terms of our supply chain. So we were really focused on higher inventory levels than normal. So there was a whole host of questions, which was about fulfilling the mission of the company to consistently, save and sustain lives. But then as things settle down, we started to ask ourselves a whole host of other questions. And frankly, like you said, I actually think they're much more interesting questions, and they're both tactical and strategic. Tactically speaking, I think we have radically adopted technology in ways that we simply didn't even know beforehand. I had never been on a Zoom call prior to March of last year. And yet, not a day goes by without a Zoom, Webex or Teams interaction, which have, generally speaking, replaced phone calls for me. And so one thing is, as we think about our back-office operations and our own operations, we've talked about a digital transformation of that operation taking place. And COVID has simply accelerated our expectations. We've done virtual closes for every month since the pandemic began. And what that means is you have to think about automation. You have to think about communication via new met vehicles and so on. And so I think that the adoption of digital technology, tactically speaking, will be accelerated. And the result of that will be lower travel from a back-office standpoint, more automated processes. Now as it relates to real estate, I still think we have some open questions. It's not clear that we will need 100% of the real estate footprint of the company going forward, and that's something that we grapple with regularly. But at the same time, we are a company that will be going back to the office. There's no question about that. But like I said, I think there are nuances that we now appreciate about the effectiveness of remote workers that we did not previously understand. Now from a selling standpoint, what's been really interesting is we have, in many cases, effectively sold our products while not visiting hospitals, using tools like Salesforce, tools like Zoom and other vehicles to really manage effective interactions. Now there have been some cases where we have had challenges as a result of looking to change behavior in hospitals and the lack of access that has been presented by COVID. But at the same time, we've been really effective in many areas, and it's been really cool to see this adoption. And so I think the notion of the go-to-market exactly how you go-to-market, what is the footprint of sales rep, what does the territory mean for a sales rep as a result of this, I think these are all questions that, tactically speaking, we will make some modifications to. Writ large, I do think that this has taught us about some new cost opportunities in terms of operating more effectively through the use of technology that we'll look to take advantage of through the digital transformation really as a conduit for allowing that to take place. Now -- but the most interesting becomes the strategic questions presented by COVID. And I think for us, as we look longer term, we have to ask ourselves questions about what does the -- in a world where -- a world that has been educated by COVID, what does the product portfolio need to look like to best support the needs of patients in that world? And like, for example, we have always been in the home and we have always been focused on telemedicine for many years through our Sharesource platform. But if you think about it, as a renal patient who is critically ill, the desire to conduct your therapy in the home, is something that as a patient has probably meaningfully changed over the last year. And so what that means for us is, are we pushing hard enough on developments with respect to Sharesource? Are we pushing hard enough on other things that could be in the home or the alternate site where there may be a migration to some that setting over time. And then finally, as we think about further opportunities, even within the hospital, dynamics will change. And I'll give you 1 example. We had a product which we were having trouble getting people to convert back to MINI-BAG Plus. And the nice thing about MINI-BAG Plus is that a nurse can very quickly administer a drug to a patient without standing next to the bed. And so after the hurricane, we had had a shortage. We had seen some dynamics change as a result of that. And we were having trouble converting that because actually, the nurses were finding it beneficial to be so close to a patient for such an extended period of time. Well, all of a sudden, COVID hits and hospitals now rethink safety measures and the notion of having extended period of time between patient and caregiver becomes really concerning. And so now all of a sudden, MINI-BAG Plus booms. But the question is what changes do we need to make to our product portfolio along those lines and all of the other lines of changes that are emerging within hospitals? Can we have devices that are resident outside the room or far away from the patient? These kinds of questions are questions that are now richly informing our R&D process. And I think you will see some shifts in terms of allocation and our focus going forward. So we've learned a lot, but we're still in the process of learning.

Fair enough. Jay, going back to COVID, especially on your Renal Care business, okay, how do you all quantify and qualify the pull-through from COVID? More importantly, how much of it is going to be, as you all see it, more a bolus onetime in nature versus a sustainable shift, just given your ubiquitous presence in the hospital setting?

Suraj, it's a very good question. And I think there's a couple of different pieces here. There is a short-term phenomenon, which I think a number of Renal Care providers pointed out and is something that we're cognizant of and mindful of and will impact us to some extent, too, which is the higher mortality rates of ESRD patients. They are a highly vulnerable patient group. And so what a lot of folks pointed to over the last several months is the onetime impact of higher mortality rates, so unfortunate amongst this group. And so that's 1 factor in play that impacts things in the short term. What I would say is I believe that longer term, this is not a onetime thing. This will be a multiyear event as patients start to think more about the setting in which they want to conduct their therapy. Because if you think about it, setting for most patients may have been a secondary consideration. But as we think about some of the things that we've learned, setting actually becomes a crucially important, a crucially important element as you think about effective Renal Care. And so we believe that this will be a longer-term phenomenon. Now, of course, it has to be supported by the right reimbursement, the right nephrologists connections and so on. So it's a renal patient decision is really a holistic decision made by a group of individuals. And you can't really identify 1 factor. So there's a lot of different factors in play here. But I think this is an important one, and it's going to be -- in many markets, it's an buttress by the correct reimbursement or sort of reimbursement that does favor the home as we're seeing in the U.S. And I think when those conditions are present, you'll start to see a gradual and long-term uptake in PD penetration.

Got it. So going back to PD, Jay, I'll just tee off on that. Obviously, there is the American kidney initiative, right, which is we all know what the -- at least the stated goals are. Walk us through the dynamics in the PD market. And you and I have talked about this in the past. It has always struck me that on demand, it should be a great driver. But just kind of lays out, what are the structural dynamics in the marketplace right now on the PD side also. It seems like the U.S. relatively is somewhat of a state of homeostasis and all U.S. seems to be increasing. Any color there that we should look at over the next at least 12 months?

Yes. I think -- so what are the keys to increasing PD rates? Well, you have to have the right technology. You have to have the right manufacturing competency with consistency of supply. You have to have not only the right technology, but also the right software to support interaction between patients and clinic. And then you have to have the right reimbursement paradigm. And so one of the things, I believe that we have proven over the last several years is our commitment to getting supply to patients and doing so consistently, so their therapies are not interrupted. It's been a tremendous area of focus on it. We stress about it. We are focused beyond belief on the effective supply of product, check. As far as the cyclers that we have and the technologies we require, I believe we have outstanding technologies in place. Check. As far as the software application and the ability to communicate, we continue to advance Sharesource. It's incredibly powerful in terms of helping patients manage their therapy and helping clinics manage patients. And so I believe we've got the right platform there. Check. So you put those 3 things together, all the conditions for PD adoption are in place. Now the question comes to reimbursement. In the U.S., what I would say is, over the last 8 years, we've taken penetration from 8% or 9% to 12% or 13% in the home, which is not bad. But to your point, it's not 25%. By adding 2 things, one, AAKHI and a reimbursement dynamic, and two, a patient desire to stay in the home. I think we now finally have all the ingredients required to move this meaningfully over the next 5 to 7 years. Now the only thing I will say is, Suraj, this is not a 1-year blockbuster. It's just not how it happens. The patient population turns over every few years. And so you add new patients, you subtract old patients. And so the rate of addition versus the rate of subtraction becomes the key to increasing penetration. And so it's not something that happens overnight. It's a gradual change, but we expect to see that gradual change over time. And we are very optimistic, and this should be a solid growth driver for us for years to come in the U.S., and then we've seen solid performance outside the U.S., as you pointed out.

So Jay, 1 last question on the PD, and then I'll move on to other topics. You guys have a huge presence, right? People watch what you guys do pretty closely on the dialysis side. And it's -- I think it's fair to say you'll have not made any moves on the whole hemodialysis front. There is so much of excitement on Wall Street. And sometimes, we miss the forest for the trees, right? We have like attention span of a gnat. So you guys are seeing something on the HHD side that we don't. If you could briefly summarize for us, this is why we are not really, I should say investing, but this is not a core focus for us relative to PD, what would that be?

Yes. It's a very good question. It's something we've looked at very carefully. I think from our standpoint, there were really 2 things in play. One is we really like the PD opportunity, our ability to lead in this space, the attractiveness of that therapy in the home, the economics of that therapy. That's piece A. Piece B is, as we looked at the adoption of home hemodialysis, the challenges with respect to conducting that therapy in the home and the economics of it, we simply could not make it work. And so for me, I look at the cost of the device, the cost of serving the patient for a year versus the likely reimbursement levels, and we were upside down. We could not find a pathway to making that a profitable therapy at any point in a reasonable period of time in a 10-year horizon. And so for us, it was always going to be so challenged from an economic standpoint. And then when you think about adoption, it is one thing to inject fluid into the body in the home. That's obviously daunting enough challenge that patients do so but do so very cautiously. It's quite another thing to take blood out of the body, filter it and then put it back in. Now you're talking about something, because at the end of the day, if your PD therapy fails in a night, that's unfortunate. But you know what, let's get back at it tomorrow night. But if HD therapy fails in a variety of different ways, we just felt like that psychological barrier was another thing that gated adoption in this regard. And so we didn't see the adoption rates triggering to a meaningful extent as we looked at it. And so for those reasons, basically, we felt like we had a winning platform in PD. And then on the HHD side, economic speaking, from a patient psychology standpoint and just from an actual operationalization of it, it became something that looked a little bit too much of a stretch for us, which is why we canceled our VIVIA program years ago and chose instead to double down on PD.

Got it. So Jay, let's move on in the interest of time. How should -- obviously, you guys are -- and I don't mean to say this loosely. You guys are always a work-in-progress, right, always looking for squeezing out that incremental 10 bps or whatever. How should we think about the OpEx profile of Baxter when we look out, let's say, over the next 12 to 24 months? You have so many manufacturing facilities, so many moving parts. What would you advise investors to say, these are the areas we are focused on and expect this, this, this to flow over the next -- this much period, whether it's by business segment, whether it's on a global scale? Walk us through the nuts and bolts of operationally, how you think through and what should we look for.

Sure. I think operationally, there are a lot of opportunities. And we're excited. We have a new leader in place, Jim Borzi who joins us most recently from GE Healthcare, and previously, he had been at Becton, Dickinson. A very talented leader who understands manufacturing and operations. And basically, we've identified a number of areas. Now look, we have about 55 or so manufacturing facilities around the world, and I don't necessarily see a big manufacturing facility consolidation opportunity. Having said that, we regularly do look at this. But I don't see that as being a key driver. What I see as being the key driver is optimization within manufacturing facilities, big opportunity there. I would say, furthermore, we have a big opportunity in our logistics and distribution network. We still have quite a few facilities -- there are decisions that we can make about how we effectively get our product to patients in the most economic way. I mean over $1 billion in logistics and distribution is meaningful and a meaningful opportunity for us to address. And then outside the plants, there is still some opportunity as well as we think about more effective utilization of resources. And then I would say finally, we've done good work in terms of factory of the future and things of that nature. But like the rest of Baxter, while I think we've done a solid job on cost improvement over the last several years, a lot of that has been unlocked without the benefit of technology adoption, and manufacturing is clearly in that area. So technology will provide another vehicle on the cost of goods side. So as I think about the opportunities for us to drive improvements going forward, there's definitely a mixed piece and an innovation piece. I am really excited about the category that you just referenced, which is the more efficient manufacturing, sourcing and distribution of our product, driving a better outcome from a cost of goods sold standpoint. And then I also am somewhat excited about the digital transformation of the company, which is something we'll continue to focus on, on the back office. Because in areas like finance and other functions, there's still real opportunity there. But maybe that gives you a little bit of flavor for the areas that we're focused on.

Jay, to the extent that you can -- obviously, you'll have given guidance, so I won't harp over the numbers. But as you see the year shaping up for your different segments, Renal, Advanced Surgery, Medication, so on and so forth, where do you see -- again, with your kaleidoscope, your vision right now of how things are shaping up over the year, where do you think you would say, you know what, starting -- beginning -- at the beginning of the year versus now, there's relatively more upside or downside, structurally things are changing. How would you characterize that for your individual business segments?

Yes. I mean, I think I would take a step back from that and say something more along the lines of, we had important assumptions in our plan around first half, second half and the nature of the COVID recovery. And that had implications not only for sales relative to the pre-COVID level, but it also had implications for manufacturing costs, absorption, PPE, things of that nature. And so the real fundamental question for us, and I think every other company is, what is the trajectory of the virus and how is that going relative to expectations? Because for us, that impacts things like patient admissions to hospitals, which is a crucial driver, surgical procedures, which is a crucial driver for numerous of our businesses, and renal patient starts, renal patient mortality. So that question is the central one. And what I would say is, on the question of COVID, it's essentially been -- as we put forth the assumption, we said kind of more normal state in the second half of the year, it's generally trending towards that. I think that we've been really impressed with the vaccine rollout in the United States and the impact that, that has had. We're hopeful and optimistic that we get to a herd immunity standpoint at some point in the next 6 months, and at which point, we start to feel quite good about the U.S. and normalcy. And then we are seeing some concerns in Europe. So I think one of the things that we're watching very carefully. So what's going on in Europe because that has been a more challenging market than we originally expected. And so can that get to a place where second half is more normal? That's something that we're watching, and we need to understand. I -- we, like every single company in America, had a lot of trouble with guidance last year, in large part because of volatility around COVID assumptions. And so for us, getting an understanding of what COVID is going to look like, that's what we need to focus on for the next few weeks, and then we can sort of update our guidance as appropriate.

Jay, we are almost up in time. Just quick fire a couple of questions. What are the key products over the next, let's say, 12 months from your pipeline that we should pay attention to? And any quick comments you could make about your acquisition outlook?

Sure. So for us, we are really excited long-term about the new pump platform that we're launching. So the large-volume pump, the syringe pump and then some incremental follow-on pumps following that. So excited about this for a lot of different reasons, but it's going to be a great value driver for us for the long term. And not necessarily because it's the pumps, but also the sets that are right along with that really represent a wonderful opportunity for us. So that's a real one. We'll have a number of pharma launches more in '22 than '21, but the pharmaceutical business will be another important growth driver for us. And then I don't want to lose sight of, and we talked about this as an existing product, AAKHI and Renal business and PD, that's just going to be a nice source of growth for us for the coming years. Now looking at it from an acquisition standpoint, what we're finding is acquisitions are high-priced today. And so for us, you have to find a real reason why you are the logical owner. Otherwise, you won't be able to pay premiums required in today's market. We're financially disciplined buyers. We walk away from a lot of stuff on account of things like IRR not meeting the hurdle rate that we expect, things like ROIC not coming to the right level. So what I would expect we look at a lot of stuff. We'll close more things that are tuck-ins than larger deals, just naturally speaking, because we can drive better synergies with those transactions. Do we rule out large transactions? We don't. They're just harder to come by in today's environment. So I think we may be at time, but we really appreciate the dialogue and the interaction, Suraj. It's nice to see you.

Likewise. Jay, thank you very much. And Clare, we do appreciate you coming and, yes, talking to us about the outlook for Baxter. To everyone...

Excellent. Thank you and see you.

Thank you.

Thank you.