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

Okay. Great. So welcome to our next session here in person with the management from Baxter. We've got Jay Saccaro, EVP and CFO of the company; and Clare Trachtman, VP of IR. So Jay and Clare, thanks for making the trip. Welcome to the live stage, the first time in a couple of years, so it's very exciting, and looking forward to the conversation.

So let me come and sit down with you. So first, I just wanted to start with a high-level question for you, Jay, and maybe just talk about your vision for Baxter over the next few years. Without giving away the Analyst Day takeaways, could you talk at a high level about how you see the evolution of Baxter post-COVID?

Sure, Matt. And it's great to see you in person here. I know we've seen you a couple of times through Zoom screens, but wonderful to be here in person. And I'm very hopeful and optimistic about where things are going, so very, very, again, appreciative of the invitation. Yes, a lot has changed over the last 1.5 years, but if I think about what our company is about, the notion of saving and sustaining lives, I think never for me has it been more prevalent or evident the role that we play in terms of supporting health care systems around the world. And it started early on in the pandemic with our acute business, which was so essential in terms of providing continuous renal replacement therapy to patients. And then more recently, over the last 6 months, we've been filling vaccines, hard at work doing that and absolutely thrilled with the progress that we're making with our partners to support, hopefully, at some point, ending or at least leading to the subsiding of the pandemic. So that all has been essential. And I think one of the things that I've realized, as we've looked at performance over the last couple of years, is there are always puts and takes, but the durability of the business has been on full display. We saw growth last year, we'll see growth this year, again, very durable end markets that have withstood a pandemic shock. And so what does all of that mean, getting back to your question, in terms of where we go from here? Well, I would say a few things, and really, these are the hallmarks of the areas that we focused on over the last several years. It starts with innovation. Over the next several years, we expect to be launching a number of important products that allow us to grow in excess of our end market growth. That really is a core foundation and a principle. We've seen that over the last several years, and we'll expect to continue to see that going forward. And then, in addition to that, there's a few things as we think about margin performance that we'll be focused on. First, manufacturing optimization. We've withstood a lot in terms of the pandemic, in terms of inflationary pressures in the short term. But our strong belief is there's a great opportunity over the long term to really optimize some of our manufacturing footprint, the cost structure that we have in that area. And that is a core area of focus. We'll spend some time discussing that with all of you in September. And then, in addition to that, we think there's a tremendous opportunity from a digital standpoint. And digital comes in a number of different forms, but one form relates to how we optimize our back-office operations, how we optimize the support that we provide to our businesses. And really, this idea of digital transformation of our own operations will enable a G&A transformation, along with support, some of this manufacturing optimization that I just described. So I'm very excited about the future of the company, more so than it's just throwing to be part of such a great company. We've got a lot of work to do. But we look forward to outlining that for you all at our upcoming Investor Day.

Great. So maybe I could just double-click on a question on growth and margins going forward. Could you maybe just remind us what you had envisioned in the prior long-range plan? I know that's been kind of put on hold for now, but talk about the growth of your end markets and the goal to outgrow them. What does that mean for the ZIP code of growth that we could see in the future and then some of the margin opportunities that have really come into focus here with the pressures that you've seen in the pandemic?

Yes. I might -- I'm going to hold off on talking about historic growth rates just because we're so close to our unveiling of where we're going to go from here. So I'll hold off on that. But the simple premise is, look, we have end markets. We understand the nature of those end markets. And importantly, they're durable end markets. I mean there are puts and takes in, for example, in the renal business. We did see some mortality, unfortunately, for PD patients that impacted the short-term growth rate in that particular end market. But generally speaking, the end markets are fairly durable markets. And when you couple though -- that with innovation, the growth profile should be okay. So I'll stop short of getting -- comparing and contrasting to the prior LRP because literally, so much has changed since then. We've -- most notably, we've had a global pandemic. But what I'll say is we're still committed to -- very much committed to driving innovation to accelerate growth. And we're also committed to this idea that we can improve bottom line performance through more efficiency in terms of the middle part of the P&L. And that's going to be through a number of different vehicles that I just described. But like I said, we look forward to discussing that more.

Okay. You've talked about innovation a couple of times at -- here at the conference. So maybe we could talk about some of the more innovative products that Baxter has launched over the last couple of years. And you referenced an upcoming slate of some innovative product launches, too. What are some of the things that we should be looking out for?

Sure. Let's talk historically first because I think there has been a lot of progress that we've made. If you think about the suite of cyclers that we now bring to market around the world, a PD cycler is a critically important engine for growth for the company. Having the right technology, we have found, is a really important aspect to driving growth. If you don't -- if the technology is not correct, if it's not working well, that's going to be a barrier to adoption. And so around the world, we've launched 3 cyclers. We've launched AMIA in the U.S. We've launched CLARIA really worldwide. And we've launched KAGUYA in Japan, which is a critically important PD market for us. And so interestingly, we added to that this idea of telehealth, a telehealth platform, Sharesource, that sits on top and allows 2-way communication with clinics. This is -- this becomes incredibly important because it allows clinics to have oversight to patients in ways that they previously did not have. Previously, it was once a month when the patient came in or once every few weeks. Now it's daily management of the patient, which is a really important enhancement in terms of renal patient management. But then, in addition to that, think about this, and this is where we're on the cutting edge, is this idea that the more data we gather, we start to be able to really analyze and optimize patient outcomes, understand with predictive analytics what the best way to drive outcomes is. So that's cutting edge, and that's an area of work that we're very focused on. But over time, that becomes an important driver for us. So as we think about renal, we've launched 3 new cyclers, all with the telehealth platform in Sharesource, tremendous avenue for growth. In the case of Medication Delivery, we'll talk about the NOVUM pump in a second, but Spectrum IQ was an awesome improvement for us because what it had was all of the great features of the Spectrum pump, most notably, the drug library that prevents error, the simple interface. But it adds to that 2-way wireless connectivity, allowing for integration with the EMR in a very seamless way. And so Spectrum IQ has been a great growth vehicle for us for the last several years. We've launched a number of pharmaceutical products. And then we've also launched PrisMax. And PrisMax is a really interesting product for us. And I think the acute business, it's hard to separate, delineate what would have happened absent PrisMax. But what I can tell you is the product has been very well-received. And we've integrated some new analytics, and maybe we can talk about that later in terms of our TrueVue offering, which supplements PrisMax. So it's also -- it started to come together over the last several years. I think we're very proud of that progress. We've got a lot more to do. There's no question about that. And so looking forward, I'm incredibly excited about our new pump platform with our -- because what happens now is we launch a large volume pump. We launch a syringe pump. Following on, we launch a PCA pump and then following on, an ambulatory pump, but those are a little bit later than the first 2 offerings. But the large volume pump and syringe pump, for the first time, allow us to provide to hospitals a comprehensive offering in ways that we previously did not. It used to be, if you wanted a Baxter large volume pump, you were confined to using, minimum, 2 systems, 2 different platforms in the hospital because we did not sell a syringe pump or PCA pump. Now we start to offer a more comprehensive offering. And we also link it with intelligence from a software standpoint that helps minimize safety errors, that allows for other things like auto documentation. So really big improvements, gets me incredibly excited about what the Medication Delivery business can do going forward. We'll launch a number -- we've launched a number of Pharma products over the last year. We'll launch a number more in the coming years. And that's -- again, not all of these will be heavily differentiated, but they will all supplement the portfolio, expand the offer and allow us to bring more to market. So as I look forward, I get very excited about all the offerings and the notion of adopting and attaching digital elements to the offerings that we have to make them more effective at managing patient outcomes.

Great. Okay. There's some product questions I want to follow up on there a little bit later in the conversation. But the other thread I wanted to start on was you've talked about this focus on IT integration, digital health, connected care and doing a lot more in connected health. Maybe speak to some of the Baxter offerings in that area today and talk about how you're going to expand the ecosystem there in the future.

The easiest example of this integrated offering is really around the cyclers. And I'll use that as a jumping-off point for some other areas. But if you think about what Baxter is truly good at in a unique way, we're good at manufacturing solutions in very high volumes in a very high-quality manner, putting those solutions in flexible containers with proprietary intellectual property. We're good at having disposables that allow those solutions to be connected to the human body and then an electromechanical device to support the delivery of that fluid or solution to the patient. If you think about what Baxter does, that is what we do. We do it in Medication Delivery. We do it in PD. We do it in HD. We do it in our acute business. You run down the portfolio, and the majority of our revenues relate to a system that is built on a proprietary competitive advantage that we have. What we started to ask ourselves years ago is how can we make this system better through the use of technology. And in the case of renal, the answer was extremely clear, and that's when we embarked on Sharesource, which we now continue to enhance. Sharesource started with this idea of, "Hey, how do we simply connect?" But then the question is now you have all of this data, what do you do with that data to enhance outcomes and how can you apply analytics to enhance outcomes. And so that's -- so we layered on top of this simple system that I've just described, this digital analytic capability, this platform, to make the system smarter. Let's transition to our PrisMax business. PrisMax is the same -- our CRRT business. It's the same model that I just described, electromechanical device, concentrates, disposables, all working together harmoniously, manufactured in high volumes. What have we done? We've added TrueVue to this offering. TrueVue is a digital capability that we have that does essentially 2 things. One, it allows for wireless connectivity to the EMR, allowing for auto documentation, allowing nurses and practitioners to spend more time with patients and less time documenting the therapy. Okay, that's it in a nutshell, layman's terms. But then, in addition to that, it provides data to the cloud where we have -- where we work with specific health care institutions, protected data, but it allows us to start to analyze the therapy to drive better outcomes. So again, what I described to you is a Baxter system, now injecting on top of that a digital offering to make it smarter, to more intelligent. Let's talk about Medication Delivery, the same exact concept. Dose IQ software comes with NOVUM IQ. We have now a layer of intelligence that sits on top of NOVUM IQ, that allows for wireless connectivity, a platform where we're going to be able to analyze data to better enhance outcomes for patients. So that, to me, is what we're trying to do across the portfolio. And when we think about our innovations, our improvements, areas of focus, it really is how do we make these systems smarter to drive better outcomes. I would add to that, if you think about the Cheetah acquisition. What is Cheetah? Well, Cheetah sits next to this Medication Delivery platform that we have, pump, set, solution, now Cheetah. Well, what if we take the data from Cheetah, which is all about managing and understanding fluid responsiveness, and we inject that on -- into the rest of the system to better drive outcomes? That's simply what we're trying to do. We purchased TrueVue a few years ago. TruConnect, I think...

True Process.

True Process, thank you. True Process a couple of years ago, and now, that forms the backbone of what I've described with PrisMax and it's an intelligent enhancement to the offering that we have. So really, to me, when I think about Baxter's digital offering, it's these kinds of things where I really believe we can differentiate further, layering on top of this core competency that we have to drive a better outcome.

Okay. Great. And I want to go further on that. I have an audience question related to it that I'll kind of paraphrase. But basically, you mentioned Cheetah. I'm glad you brought that up. And it seemed like on the last earnings call, Joe was talking a lot more about investing in connected health. And so, I guess, maybe pull all that together in context and talk about the needs to be able to do more in connected health with your portfolio in the future and ways to gain scale in that business.

Look, I think that this idea of adding IT, analytics, smart, digital to our offering will only further enhance the growth that we have across our portfolio. And I guarantee you that our PD business would not be doing as well as it is without the Sharesource platform. It's a meaningful improvement. And now, how do we take that and either through inorganic or organic, add intelligence to that further so that we can better drive outcomes. That -- the nice thing about the Baxter portfolio is, as I described earlier, really durable end markets. The mission of the company is to save and sustain lives. And so what that means is that our therapies, in many cases, are the last line of defense or at a minimum, an essential line of defense. And that's not going to go away. But the real question that we can ask ourselves is how do we supplement with organic investment improvement and inorganic to further accelerate the growth through enhancement of outcomes. That's really what this is about. And I think as we think about Cheetah, for example, how do we really intelligently link that to the pump to enhance options. It's a great question, and it's an important one. And these are the kinds of things that we're so excited about as a company as we start to see -- we recently had an announcement with -- we had a press release, which describes some of our digital transformation offerings. We're so excited because the base is sturdy. And now, the question is how do we amplify and accelerate, and that's -- it's a real and exciting question for the whole company. And again, I look forward to talking more about it with investors and folks in the future.

Yes. Let's touch on the digital transformation more and talk about where you are on that journey. And how much of that can you do, I guess, organically versus inorganically?

So there's really 3 components of the digital transformation. The first one is a digital interaction with our customer. And frankly, I think Baxter has improvement opportunities in terms of how we interact with our customers. We are not the easiest company to deal with. We're not the hardest company to deal with either, but we're not the easiest company to deal with as we interact with our customers. And so one of the real questions that we are addressing is how do we simplify that interaction with our customers through the use of digital technology. And we're hard at work. Things like a simple portal for interacting with Baxter in a comprehensive manner, that's the kind of work that we're doing in this digital customer thread. The second piece is this idea of digital health, and I've talked extensively about this. how do we inject digital and technology to our products to enhance our outcomes. That is, in a nutshell, what we're trying to do. And this idea of digital health, we've been at it a long time. We started to talk about it as a thematic element in this idea of digital health more recently. But we've been at it a long time. There's a lot of opportunity here. There's a lot of organic developments that we can make. And then there's tremendous inorganic opportunities, things like Cheetah, other opportunities, things like the True Process that we acquired, which provided a tremendous foundation for us to build. And so I think in this idea of digital health, yes, certainly, there is inorganic opportunities. But also, when you hear us talk about the pipeline, a lot of it will relate to improvements that will layer on to our products through this idea of enhancing analytics, enhancing interaction with EMR, all of those kinds of things. And then the third, one area which I'm tremendously excited about, is this idea of -- we call it digital core. But what it really means is, look, we still have too many manual processes at Baxter, too much complexity within Baxter-to-Baxter communication today in every function, too much paper-based. And it's a very cumbersome way that we operate. We have jolted that over the last several months, and we are radically transforming back-office functions also in our manufacturing and supply chain, how we operate. And this idea of digital core is one where, look, I really believe that we can radically improve how we operate through the adoption of technology. And most of that can be done by ourselves. Now certainly, we'll need a little help here and there, but the technologies exist. And there are companies in other industries that have perhaps done a better job in terms of adopting some of the technologies that we're looking at, but things like robotic process automation, things like predictive analytics, all of those things can be embedded to significantly enhance how we operate as a company. So that's the third vector that we've talked about and I think was included in the press release. But I'm excited about all 3. I'm personally most invested in the last one because of the area -- my span of control and my area of focus. And I can tell you, years ago, we embarked on a margin improvement plan, which I've discussed extensively with investors. And we're taking the same approach, the same methodology in terms of program management to this digital operations aspect. And I'm really excited to see what we can do with it.

Okay. Great. So you started to tie that back into simplification and margin opportunities at the company. So maybe we could transition and talk a little bit about margins. One of the things that you've had to deal with lately is inflationary pressure and on top of that, some COVID-related manufacturing pressures. Can you talk about how those start to burn off and what that means for margins as you go into '22 and in the future?

Sure. I mean we did have fairly extensive COVID-related manufacturing costs certainly in 2020 and through the first half of 2021. We've talked about in excess of $100 million sizably in excess of that. And really, what that came down to is, look, we have to ensure the safety of our employees, we have to ensure that our products get to our patients when they need it. And for those reasons, we spent a lot in excess of what we might normally spend. And furthermore, because of demand volatility patterns, we also had sort of suboptimized manufacturing because we were seeing radical -- changes that we had never seen before in terms of product lines, how much was needed versus how much was excess. And so that led to a bit of havoc from an inventory standpoint, but also from a manufacturing cost and absorption standpoint, where some plants were running flat out and some plants were underutilized. And so that's something that we had to grind through in 2020. But to be clear, I believe we made the right decisions. Our priorities were simple: keep employees safe, get the product to patients, we'll sort out the rest later. And so that runs through, and through the first half of 2021, that's part of the reason why the margins are where they are in the first half. And you start to see a decent-sized change in terms of margin in the third quarter and the fourth quarter of the year as some of those costs subside. Now interestingly, as we approach this year, we saw, in the first quarter, a substantial spike in certain input costs and freight costs. And the result of that was we actually had to highlight roughly, I think, $70 million in the first quarter. We highlighted that on the earnings call, about a full year impact. And then we had some incremental impacts that we highlighted in the second quarter as we saw some raw material inflation, along with freight costs that we had to be mindful of. And the real -- one of the fundamental questions that we have with respect to this is how sustained will these inflationary pressures be? What I will say is that in the first quarter, it was severe and then less severe in terms of escalation. It sort of moderated a little bit as we went through the second quarter. But this is a real area that we're focused on. And what I don't know yet is there were certain exogenous shocks that led to the inflationary factors that occurred in Q1 and put pressure all the way through Q2. Notably, the Suez Canal, the freeze in the South and in Texas put severe pressure on resin suppliers, for example. A number of these factors came into play. And so what I don't know yet is how sustained this is and how much of a drag this is long-term. And that's what we're watching right now. The good news is we have a lot of improvement opportunities in manufacturing. The team is incredibly focused on driving these. But what we don't have a sense of yet is how much of an offset there will be to those improvements related to inflationary pressures. And that's one of the things that we'll have to watch as we go forward. So really, that is the story in terms of the short-term margin factors, right? You have the COVID factors. They start to subside in the second half, although with the Delta variant, we'll have to watch that, but they start to subside in the second half. And then you have the inflationary pressures, which we believe we've accurately reflected in the financials forecast that we've shared. And -- but the question is how sustained is that and what happens into the future, and that's what we'll watch.

Let's finish that margin discussion. We talked about the short-term swing factors. What are the other things longer-term that we should be watching out that are going to help you grow margins in terms of mix, new products, cost reduction programs, those kinds of things.

So that's the deal. That's exactly it. You kind of hit it on in a nutshell. One is mix. As we launch new products, typically, they command a higher margin than the products that we have on the market today. Oftentimes, they will come with some sort of added element that generates incremental revenue at a high margin. And so new products is one component. Item number two, from a margin standpoint, relates to all of this work in the integrated supply chain, manufacturing and operations organization that we're hard at work on. And there's tremendous opportunity here in terms of what Jim is identifying to drive improvements and enhancements going forward. And then the third relates to what I just described, and it's not related, for the most part, to COGS, but it is related to SG&A and R&D spending. It's this idea of, look, how can we revolutionize through robotics, through technology, through simplification the back office, and that still will yield benefit. What's remarkable to me is that we were able to take the margin of the company from roughly 9%, doubling that over a 5-year period, but still have good opportunity in terms of taking advantage of digital technology. We knew that, that opportunity would still exist, but I'm very hopeful and optimistic and excited about where we can push this in the coming years.

Okay. More to come on that next month. With the...

Stay tuned.