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

Okay. Thank you. Good morning, everyone. Again, my name is Bob Hopkins from Bank of America, the medical device analyst for BofA. We're -- obviously, this is Day 1 of our Virtual Vegas Health Care Conference. Next up for a fireside chat is Baxter. We're honored to have Jay Saccaro, I guess, presenting or participating in the fireside chat for Baxter. I think everyone knows Jay as the company's CFO. And then, of course, Clare Trachtman, who runs Investor Relations, is also on the line here today with us. So we're just going to do this entirely as a fireside chat. Jay and Clare, thank you very much for joining us here this morning.

Bob, thank you very much for the invitation. I guess, I probably should have put a virtual casino background and hopefully, next year will get back to Las Vegas.

Yes. I never thought I would look forward to going to Las Vegas as a general rule, but being cooped up in this lovely attic of mine for the last 18 months, Vegas sounds pretty good right now. But anyway, thank you again for joining us.

And Jay, there's a bunch of topics I'd love to cover with you, and we'll just kind of go rapid fire here, not in any particular order. But one that I know is definitely on the minds of a lot of the investors we talk to is, just again, a little bit of looking backwards for a second. With the old long-range plan, we don't need to spend too much time on this because I know those are targets that were given long ago. But just to level set people, just helping us understand the 2 or 3 things that caused those targets to be rescinded. I think it's just helpful for people to have that background. I'm sure code was a big part of it, but I would just love to get your views on what the 2 or 3 things were that caused you to rescind those targets?

Yes. I think COVID was a very significant factor. In fact, it was perhaps the primary factor. And as we sit here today, I reflect back on the last 1.5 years or almost 1.5 years, and I would say that we're so pleased with how resilient our business has been, the ability of our employees to respond to the pandemic, the medically necessary nature of our products, even think about it, we're so proud of the fact that our company is actually filling vaccines that are now being administered to patients. Wow. So as -- we all take great pride in the mission of the company to save and sustain lives. Frankly, COVID put that mission on full display. So many things we're pleased with how the last 15, 18 months has gone. But at the same time, we also acknowledge that the world has been highly volatile as a result of COVID. And our -- it's been very difficult to predict impacts on cost, impacts on sales and unit demand, and so it's become a much more volatile world than we're used to. And we actually suspended guidance last year for the first time, like short-term guidance, because we had very limited ability to anticipate what was going to happen from a COVID impact standpoint, and only reinstated the short-term guidance once we had reliable models that would allow us to predict at least within an acceptable degree impact. So that's the issue with COVID. And now looking forward, we don't know exactly what the sustained changes will be as a result of the pandemic. Will there be lower patients going to hospitals, lower utilization of emergency rooms and so on. It's unclear to us at this point. We have a theory. We have a perspective on both per procedures and volumes and so on, but it's not exactly clear to us how that's going to play out. So COVID was a primary driver. Now having said that, we had stopped really commenting on the LRP, plus or minus, because a lot of time had passed from 2018. And so we had talked about the things like -- we had expected some manufacturing improvements didn't quite materialize as fast as we'd expected, and that was a driver that sort of impacted us. And frankly, COVID definitely delayed some improvements in our manufacturing network. We also had some pricing impacts, like for example, in our fluids business, we made a strategic decision to say, look, we're not going to go -- we're going to try to sign longer-term agreements. And as part of those agreements, one element was supply guarantees, but another element was certain small discounts for multiyear arrangements. Was that the right decision? Absolutely. Absolutely the right decision on both fronts, both from a guarantee and a pricing standpoint, but we did not take that in fully to our 2018 numbers. And then finally, the FX environment is different as well. I would say also that AAKHI is something we did not anticipate when we put together the LRP several years ago. So there were just lots of puts and takes. Some -- but most notably, it came down to the pandemic, which finally said, look, we're having a difficult enough time falling the next 3 months, forget about the next 3 years for now. And once we have a line of sight, what's that going to look like, then we'll have a better discussion around improvements and where we can take this over the longer term.

And then, Jay, what are some of your preliminary thoughts when it relates to some of the potential long-term impacts of COVID on Baxter's business. You mentioned a couple of them, like lower utilization, census pricing. Just would love to get your kind of preliminary views on how that will play out?

We do not have a view at this point that there will be a sustained lower level of admissions to hospitals as a result of COVID. Now, there might be and we are still at depressed levels relative to 2019, for instance, but at this point, from a procedures, and volumes and hospitals, we don't yet have that view. And there could be a scenario that emerges where there was some sort of superfluous or unnecessary visits to hospitals that are sustainably removed as a result of people just being more concerned about going to the hospital as a setting of care. But we're not convinced with that yet, it's something that we're watching. And I think we'll get better data over the next 4 months, 6 months as we emerge from this crisis. And so we'll have a better line of sight then. Will there be a shift to alternate site? I think that conceptually, I get that, it's something that will probably happen, but we were already seeing that understanding that as a long-term driver and one that we need to think about, both from a commercial standpoint and also from a product standpoint. I would add to that the notion of therapies at home. Home is an alternative site as well. I do think that there's going to be a long-term drive towards things like PD in the home as a result of people wanting to sort of stay safe. And I think that's something that I understand from a patient standpoint, why they would want to do that. Have we seen that yet? Well, frankly, PD, as we said on our call, was off in large part because of the patient census being down. But I think that will correct over time, and I think that this will be a tailwind for the PD business, for example. And then on the operational side, look, I think we've learned a lot about use of digital technology, and that's going to have an impact for us on things like travel spending, on things like office footprint requirements. These are all questions that we'll have to address over time, but I think could lead to some savings opportunities for us. So those are a few factors in play, and we'll definitely reflect all of this as we put together our next long-range plan, which we'll share in the second half of this year.

That's great. So it sounds like your preliminary view then is potentially no major change. Do you guys, if a lot of procedures ship to the outpatient, is that necessarily a negative for you? I would assume you sell into the outpatient centers? Just trying to understand that dynamic as it comes up a lot.

It's not necessarily a negative for us. I mean we definitely sell a lot of products at alt site. We have a -- under Heather Knight, in our U.S. business -- I'm speaking principally to the U.S., we do have a alt site team that's focused on sales to that channel. The vast majority of our products are used in hospitals. And when patients are using our products, most often, they don't really have a choice as to setting of care. They're in serious need of therapy or some sort of medication, and it's our products that provide it. So I don't see this as a huge trend for us, but it is something we're watching. And as we think about new pumps and so on, having pumps that work in a less acute setting, those are things that we're developing, like our ambulatory pump, for instance.

And what about on the pricing side, Jay? Do you feel that as a bigger headwind going forward than it's been in the past? Or is it more a onetime set?

I don't necessarily tie COVID to the pricing environment. What I think we've seen is most hospitals in many countries -- and that's not universal, but many countries are emerging reasonably well from COVID with reasonably healthy budgets and reasonably healthy sort of overall economic profiles. And so I don't really tie COVID to a pricing environment. I think there was a concern last year when hospitals were cutting CapEx spending, there was massive pressure on hospital budgets because you just didn't have the procedures. That's going to be a short-term phenomena that folks have to work through, but I don't see that as a sustained change to the pricing environment. Hospital pricing, the pricing is always a factor for us, and even before COVID, we were talking about pricing as something to consider. So I don't think COVID is necessarily related to that, but it's something that we'll contend with for however long Baxter continues to operate, which is hopefully another 85 years. Price is going to be a source of -- a topic of discussion.

Yes. Just to finish the point on outpatient in terms of -- because that -- in certain surgery types, that trend is happening. We can see the numbers. So as you think about the next 2, 3, 4 years for Baxter, do you view that as an incremental headwind or just a manageable fact of life? Just wanted to put it in perspective.

A slight headwind to manageable fact of life. It's not -- and again, this was happening before COVID. And I think COVID was maybe an accelerant, but at the same time, we understand this trend. It's something that -- again, we're addressing with the product portfolio that we have with the go-to-market approach that we have. So I don't think this is a significant topic for us.

Okay. The reason I'm asking these questions, obviously, is that if you're saying that COVID was one of the biggest factors that impacts the old LRP, and now we're kind of trying to talk through some of these -- the impacts of COVID and how that could affect margins. It seems like a lot of these things are manageable. So hopefully, it's just a question of time.

So let me be super clear because I want to make sure that you walk away and my perspective is out there. I don't know what the final impacts of COVID are going to be. And so we can nibble around the edges and say, "Hey, we think this is okay. We think this is okay. We think this is okay." We need more data before we make any final determinations. And I'm hopeful that things work out just fine as a result of this, and COVID ends up being something that just kind of slowed us down for a period of time. That's certainly my hope. But as we think about ranges of outcomes, it's still fairly wide, and now we've all baked in. Remember, last year, we were very reluctant to reinstate guidance. We were very cautious about what was going to happen in the second half of 2020, and that proved to be kind of a good call by us in terms of just being cautious about the whole situation. Now everybody is baking in full recovery, let's move on. And that's -- our base case assumption is one that basically has infections going meaningfully down, and our business returning to a high level of normalcy by Q4, but that's still an uncertainty. And I think, for us, we're just going to continue to watch this. And we'll try to get as much information as we can prior to our September Analyst Day, and at that point, we'll be able to share with you what our thinking is about the long term.

Okay. It raises a question, though, about this year -- your guidance this year because the way you frame things relative to what we're hearing from other companies, you did seem a little more cautious in terms of kind of hospital missions getting to pre-COVID levels not till late in the year. It's a little different than ordering from some other companies. Is that just conservatism on your part? Or is there a different dynamic?

I think it's a combination of conservatism and -- look, I think we have a pretty good way of forecasting now -- improved, much improved in terms of things like admissions and procedures, and we were within the right tolerance range in Q1. And so I think we have a decent forecast. And hope -- look, I hope it's better, I certainly do. But when we give guidance, it's guidance that we're certainly very focused on achieving. We expect it to be very realistic. And we -- there's no hope in the guidance that we put forth. That's really not something that we try to keep out of in the forecast that we put together. And so for those reasons -- I don't know what other companies are saying, I haven't talk to other CFOs, I've seen some stuff, but yes, I think we've got the right -- I think we've got a decent forecast, and let's see how it goes.

Yes. Yes. I just want to make sure that you're not -- because of something about your business that you would be seeing something structurally different than what others are. People can have different philosophies around how they guide, and that's fine. We just want to make sure that you're kind of not structurally seeing anything different that we're hearing broadly out there.

No, I don't think we're seeing anything structurally different. I mean the one question about we did look at procedure volumes and folks do report different numbers in terms of procedure volumes, what their expectations are and also what they saw. And a little bit of that comes down to the nature of the procedure. I think certain procedures have different sort of acuities and may have different dynamics than others. And so that's a factor in play. But generally speaking, I think we're largely in the same camp as everybody else.

Okay. Okay. That's helpful. One other thing I just -- I'm trying to ask all the companies is about input costs and what you're seeing there? And how much that impacts margins this year?

We definitely had some input cost increases. One of the things we pointed to on the call was around $7 million of incremental operational cost this year. And $7 million relates to a number of different things, but the primary drivers of that were great cost increases because of the supply/demand in the logistics industry and input costs, like resin costs. We're seeing, in some cases, double-digit increases in the price of certain inputs. The shipping costs have gone up quite substantially. The cost to ship a 40-foot container around the world has gone up quite a bit because of intense supply/demand, but also factors like the Texas freeze and Suez Canal, all of these things have created real challenges for us from an operational standpoint. So that's a factor that we reflected in our guidance. I think we've got it correct at this point in time. And we'll have to watch this because what I'm interested in seeing is, how much of this is sustained inflationary pressure versus onetime dynamic based on certain factors that emerge that will self-correct in the future. And so I don't have an answer yet on that, but that's going to be a really important factor as we look at 2022 and beyond. And hopefully, this will self-correct, but it's something that we'll launch it.

How is your ability to pass through higher input costs?

It's very limited. And in part because the agreements that we have signed by and large do not have things like fuel surcharges in them, and by and large, the agreements that we have in place are for a year or more. And so in that context, we have -- it's more challenging for us to pass on things like resin cost as a driver of IV bag cost or freight cost as a driver of total delivered cost. It's harder for us to pass those on than some other industries, which have a more dynamic pricing environment. Look, I -- life is about trade-offs. And as we thought about the approach that we've taken to contracting, our belief is that over time, managing costs in a stable manner against long-term pricing agreements is the best way to maximize long-term value for us, but it does have -- it does lead to some volatility when you're seeing dramatic changes in input costs and freight costs, then you have a limited ability to pass those on.

Okay. All right. One other thing I wanted to get your view on because it's hard for us as outsiders to see this or understand how the flow-through is just on the -- within BioPharma Solutions and the impact of some of the vaccine revenue that you'll be generating. Just remind us of when that flows through your P&L?

Sure. We start to see the impact in Q2, and then Q3, Q4 are larger amounts. Then as we move to next year, we do expect continued revenues from this particular initiative in -- throughout 2022. We'll see what happens in terms of booster shots and so on as we think about long-term sustainability, but we'll start to see the impact now, and then we'll continue for the next several quarters.

Okay. Okay. That's helpful. And then, Jay, what about on the R&D spending side? It's been kind of steady on an absolute dollar basis. Just how should we be thinking about that going forward? Because obviously, you -- revenue growth, I know, is a big priority for the company. So just wanted to get a sense for how you're thinking about R&D spend as we go forward here post-COVID?

Sure. No, look, 2020 was artificial in the sense that we had -- there's just savings everywhere because of lack of travel and lack of meetings and conventions and so on. And so we saw some savings there. So that's a little bit of an artificial number in 2020. But your point is right on, which is we've kind of kept R&D flat in the range of flat over the last several years, and in large part, this was about savings initiatives that we'd undertaken to make ourselves more efficient. And so we moved activity from high-cost locations like North America to India, and that had a real impact on savings. But what we were able to do as a result of that is, by holding R&D flat, allocate much more spending to new product development, which is what we want to do. And you're right, for us, for a health care company, the lifeblood of a health care company is innovation and new product launches. And we've made a lot of progress. We have a lot more to do. And so I would expect to see some gradual increases in R&D over time and also some normalization as we get to 2022 because 2020 and '21 levels are a little bit below what we would expect to be the steady state levels. But yes, this is a really important area for us. And frankly, there are a few more savings opportunities, but the lion's share of the savings opportunities are ones that we've already gotten after and reflected in the mix of spend for R&D.

Okay. That's helpful. And then a couple of other topics I want to touch on before we have to close is: one, Jay, I was wondering if you could just kind of give us some of your latest thinking on some of the important new product rollouts and some of the important new product rollouts to come, and just how we should be thinking about kind of the pace of those rollouts, whether it's NOVUM IQ or Myxredlin or just kind of wanted to get an update on how you're thinking about the rollout of those products?

Sure. Myxredlin is a product in the second year of launch, and frankly, the first year was a disappointment, in large part because of access to hospitals related to COVID. Hard to change practice at a hospital when a hospital is dealing with a pandemic. And so we did not really achieve what we hoped. We're making good progress on Myxredlin this year, and this is one that will continue throughout the course of the year to be a driver for us as far as new products go. But yes, the big one, of course, is NOVUM IQ. We were pleased to get that submitted. And so now we wait guidance from the FDA, we're optimistic that we'll get this to a point where we'll have product sales this year. We've included that in the forecast that we shared. And I think, for me, this becomes a really important driver for -- less for this year, but more for 2022 and beyond. We think it's a great pump platform. First time that we'll have multiple pumps being sold that address patient needs. So I think it's a really important improvement for us, and we've talked extensively about this. But I think we can get that launched into market. It will be a great driver for us for years to come. Now in addition to that, we have a number of pharma molecules that are launching this year and next year as we normally do a steady cadence of those. And I would also say that frankly, while not a new product, a new phenomenon with AAKHI, I think renal should behave in a new and different way over the course of the next 5 years as a result of the legislation change that we've seen. So that's another one that -- I think we've got all the products that we need. We are doing a little bit more development here and there on that, but we have products on the market and incredibly excited about where we can take that business.

Okay. Great. Well, we look forward to more details on that at the Analyst Day. I know we only have a couple more minutes, but I am curious on a couple of other quick topics. Jay, on the tax rate, you guys have an Analyst Day upcoming and you're going to provide some long-range thoughts. Like, how are you going to handle the tax rate? I mean there's so much uncertainty about where things are going. What are some big-picture thoughts you can offer us to help us think through how we should be thinking about that topic?

It really is a good question, and maybe the easiest thing to do is just stop at operating margin at the Analyst Day because I think there is some meaningful uncertainty around tax rate. And some of the proposal that we've seen, it would have a very negative impact on our tax rate. And by the way, every other U.S.-based multinational company. There will be no company that is selling in lots of different geographies around the world that is immune to the proposal as it currently sits. So we're going to have to watch this and see how it evolves and shakes out. I'm hopeful that we get to a good spot. I'm hopeful that we do -- and even with the last round of tax reform under the prior administration, there were moments in that where we're like, gosh, there are things that could have negative adverse consequence to us that we really need to shape. For example, how Puerto Rico is treated. And so we ended up getting to a good spot there and ended up being a tailwind for us. Same is going to be true here. And so how multi net -- how profits in other countries are treated as far as the GILTI global intangible tax, how that's all treated and things like how Puerto Rico is treated, all of these things are very substantial wildcards that -- I don't know how we're going to treat it in -- at the Analyst Day. And we may have to -- we may, in fact, have to be a pre-tax discussion and a range of outcomes on the tax rate, but it's something that we're going to work through. And hopefully, we get a better line of sight by September. I think that's another good reason why it will be helpful to have it a few months down the road because we should have a better sense of what's going on with tax rate at that point.

Yes. Yes. Challenging. Last question for me is, if you wouldn't mind just giving us an update on your thoughts on buyback as a priority in capital allocation right now. And how should we be thinking about that?

Yes. Buyback has been a priority for us. We did suspend the buyback last year because of uncertainty. But Q4, I think we bought like 500 million in shares. Q1, we bought 300 million in shares. It's -- look, buyback is a great vehicle to return capital to shareholders. We like doing it. We don't have a pre-prescribed amount in terms of how much we deploy. It really comes down to how attractive the shares look to us relative to our intrinsic value and then also how the state of the M&A pipeline looks. And so we always want -- we raised the dividend. We were pleased to do that. At our Annual Investor Day, we raised it. I think it was $0.035, and that's an important way to return capital to shareholders. But smart M&A that drives the returns, that's one key area for us, but also buyback has been a great us and we've deployed billions in capital to buyback over the last several years, and we expect to continue to buy shares.

Great. Well, we'll have to end it there. We're out of time. But Jay and Clare, thank you very much for participating. I thought that was a really helpful discussion. We appreciate your perspectives.

Bob, thank you.

Yes, absolutely. Enjoy the rest of your conference. Thank you.