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

[ Audio Gap ] conference. My name is Jayson Bedford. I cover medical devices here. It's really our privilege to have with us the senior management team from Baxter. We have the company's CFO, Jay Saccaro; and VP of Investor Relations, Clare Trachtman. So with that, I'm going to hand it over to Jay and he'll give a brief intro on what Baxter is more relevant today and how it benefits society and then we'll jump into some Q&A.

Great. Thank you. And it's really nice to see all of you in person. I think for the first time in a couple of years, in fact, the last presentation that I really gave in this environment was 2 years ago, at this conference, which is quite remarkable. So if I'm off my game a little bit, I apologize. No in-person presentations in the last couple of years. But it's interesting for me because I think the last 2 years has really highlighted a number of important factors about our company. What I've always talked about is the mission of Baxter is to save and sustain the lives of the patients that we serve, and never has that been more on display than it was during the pandemic. The therapies that we provide are, for the most part, not optional therapies. They're therapies that we provide to patients on an ongoing basis. And the result of that is that we have an incredibly durable business. If you look at the growth of Baxter over the last couple of years, we were able to grow in a pandemic year. We were able to grow again the year after that. All of that related to the diversity and durability of our business. Before the Hillrom transaction, we sold in about 100 countries around the world with 60% of our sales outside the U.S. We've added Hillrom, a company that is another wonderful company committed to innovation and serving patients to our portfolio. We'll talk more about that. It was the largest acquisition in the history of our company. and it adds $3 billion in more revenues to our portfolio. So at this point, $15 billion in sales -- $16 billion in sales, I should say, in more than 100 countries around the world, slightly tilted to outside the U.S. Now what the company is about, it's about innovation. We've made incredible strides in innovation over the last several years. It's furthermore about improving the economic profile of the business, which we have done radically over the last 5 years, along the way being smart about capital allocation. So that's really the core story of BAX. As I said at the beginning, it's my pleasure to be here with all of you. Thank you for taking the time and interest in our company. and let's open it up for some questions.

Jay, I think [indiscernible] strength next -- let's just get this question out of the way in terms of your exposure to Russia and Ukraine. If you can just talk us through the potential impact at this point on our business.

Sure. We have roughly between -- the 2 countries, $50 million in sales and a lot of that has to do with renal patients who are on therapy that we provide on a continuing basis. And so we're looking -- we're working very hard to get that life-saving therapy to all of the patients. I mean, priority #1 for us with the Russia-Ukraine conflict is make sure that our employees are safe. Number two, make sure that we continue to serve patients that are in dire need of our product. And then we can sort out the broader implications of the conflict. Look, at this point, it's hard to say. Obviously, it's a devastating humanitarian crisis that we're seeing. It's hard to say what the impact is going to be in a broader sense, right? And the things that we're watching are things like the price of oil, which has surged recently. We -- in our modeling, as we thought about the year, we do have the implications of that are. The challenge is in terms of moving product around Europe, that's something that we're watching very carefully. And then finally, access to semiconductors, right? For us, we have a number of products that do rely on semiconductors. And obviously, this conflict could throw the supply of semiconductors into disarray. We don't see any of that at this point yet. But depending on how sustained this conflict is, those will be things that we watch more broadly speaking. As far as direct economic exposure, it's about $50 million.

That's helpful, that's helpful. Obviously, it's a dynamic situation. So I wanted to dig in a little bit more on Hillrom. It's a business that you knew well and certainly even before the transaction here. I'm going to trust your ability to generate the cost synergies from the deal. So I wanted to dig in a little bit more on the top line growth profile, and specifically, your view of connected care and how Baxter-Hillrom will come together to better serve health care systems out there.

Great. This is clearly one of the core tenets of the deal. It really is. this idea that we can use technology and product working together to better solve patient problems. That's the crux of what we're trying to accomplish. Just one example on the Baxter side because I think it's prominent, and it's something that we recently announced. Years ago, we provided PD therapy to patients. And we did so with fluids and bags with disposables. We delivered that product to patients. Then years later, we launched the first cycler. And then about 5, 6 years ago, we launched a new cycler, which had a wonderful technology interface, along with what I would simply characterize as a telemedicine platform called Sharesource. Now what this connected environment allowed for is better outcomes for clinicians and simpler administration of the therapy because before, patients would have to go to a clinic once per month with their memory stick to get assessed. How do they do in terms of performing their therapy? With Sharesource, it's day-to-day interaction. And I always believe that we would quickly prove that this would have a positive impact on time on therapy. Simply put, this would sustain lives longer. And what we've seen now, and we recently announced this, is in a trial that we did looking at patients in South America. We ended up with a 3-month extension in time on therapy as a result -- as a direct result of Sharesource. This is a -- it's a simple sort of situation, but it's a big deal for us because what this proves is product with technology, with data analytics, all working together can solve patients' problems in new and different ways and drive better outcomes. So now in the future, do we reflect more value for AMIA and Sharesource in terms of pricing? Perhaps. Do we think more about how this -- what this does from a revenue standpoint on a sustained basis? This will have a big impact. So really excited about that. And I hear it not because it's related to Hillrom but rather because it's core to this idea of what is connected therapy about. So now let's take a step back and talk about Hillrom. Between Hillrom and Baxter, we have an enormous fleet of connected devices, pumps, cyclers, hospital beds that are now incorporating more intelligence than they had when I was there, far more, in terms of the monitoring that can take place. So we have this enormous setup of installed devices. In addition to that, we now have a nurse call and communications platform, okay, that we've never had before. So Voalte, with some of the other technology at Hillrom, allows for simple improvements in workflow, more efficient calling of nurses and hospital clinicians to safeguard patients. And then finally, we have not only the ways to monitor and diagnose how a patient is doing, but we also have the opportunity for therapy intervention with the pump that we have bedside, with the acute monitors that we have bedside. So you talk about getting excited about the future of health care. This is it. This is it. At the core, we have great products that work well independently. But what we're focused now on is how can we take the vital signs monitoring that occurs bedside, and incorporate it into the nurse call platform plus the hospital pump to drive better outcomes than we did previously. And I think the example that I shared with peritoneal dialysis and Sharesource is exactly the template that we're looking to apply to other therapeutic areas. I like the Hillrom deal for a lot of reasons, right? Because I felt that on a stand-alone basis, it was a good, solid business with great growth profile. I also felt that from a return standpoint, once you look at the work that we're doing in terms of cost synergies, to your point, disciplined around that, disciplined around capital allocation. I felt strongly that from an economic standpoint, we can drive a great deal. But I get back to why did we do this? And it really comes down to this idea of driving innovation in new and different ways and the connectedness of the hospital environment that we expect to see in the future, and we expect to play a crucial role in. That's really what this comes down to.

Okay. Jay, I'm just -- in terms of the economics to Baxter, is the benefit of integration in Connected Care more of an uplift on price? Or is it more an opportunity capture more?

It's -- it depends, right? It really depends on the product, the environment, the situation. In the case of Sharesource, simply extending therapy has a huge benefit for patient lives, period. But it also has an incremental benefit in terms of revenues to Baxter. And so as we think about the pricing models for these different things, clearly, our product portfolio will be more attractive. If it's working holistically together than it would be, if these are just independent products that solve problems in a rifle-shot manner. And son this connectedness, we can capture more share. We can reflect it in pricing. Those are all the things. For us, it's about first defining what are the big bets that we want to make in terms of innovation, in terms of accelerating growth. Then the question is how do you monetize that, which I do think is a second order question. If we can answer that first question correctly and profoundly, the second order question will fall out, and we'll be able to address that. But the product portfolio will be meaningfully more attractive.

And the runway on Connected Care. My assumption is that this is a long-duration initiative here.

So we will see some impacts in the coming years. I think the more profound impacts are in the 4 through 10-year range, but we'll start to pay off some of this in the next several years, and we look forward to talking to investors about that at our upcoming Investor Day. So we'll lay out the road map or, at least, large pieces of it, so people can understand. But I view this as a transformational opportunity. But I also believe that a transformation always begins with the first product launch. And so we'll start getting some out in the coming years in the next 1, 2, 3 years, and then accelerate from there. Jayson.

Okay. And I know it's early, but can you just comment on the performance of Hillrom so far? Is it matched, exceeded your expectations?

If we were to look at Hillrom in the context of Q3 and Q4 of last year, calendar year, I would say it's very much in line with our expectations. The fourth quarter fell a bit short. And I think Hillrom ended with the largest backlog that they had seen in years, in large part, because of vacancies in their plants along with supply procurement challenges that were -- they were facing. So the demand was outstanding ability to supply was challenging but frankly, that was the same for Baxter. We saw the highest absentee levels that I think -- since certainly since I have been the CFO of the company in December and January. And it clearly impacted our ability to supply [indiscernible] we had an enormous backlog on the Baxter side, too. So from a Hillrom perspective, I would say the 2 quarters looked fine in the context of the [indiscernible], the original thesis that we put up put forth is very much intact.

And I do want to hit some of the backlog questions. But just lastly on Hillrom. I thought there were a few questions coming off of fourth quarter call as to which business really grows faster in 2022? Hillrom or Baxter? Can you just comment on that?

Sure. I think Baxter will be in the 4% operational growth range. That's what we'll share. And I think Hillrom will be mid-single digit so tilting a little bit better than that. Again, for us, it's -- the first quarter is a challenge and you can see that in the cadence of the guidance that we gave. Not because of demand, in large part because of some of the supply constraints that we're facing. We hope those abate and then -- and our expectation is that will smooth as approach the latter quarters of the year.

Okay. Just on that point, I guess. On the back order or backlog, however you want to frame it. What needs to happen for these back order to resolve?

So there are a couple of factors that have contributed to back orders. One is employees in our plants. And second, and I'll group these together -- our ability to procure critical inputs to our manufacturing process. That's really what it comes down to. And in December and January, we had -- as I said, the highest levels of absenteeism ever so we were actually -- the throughput in our facilities was actually impacted. And the Omicron surge was just -- was unbelievable. And then on our ability to procure products, we had severe challenges for the same reason because our suppliers have the same phenomena that we had ongoing with respect to dealing with Omicron and so on. It's interesting because we saw a supply chain environment that was challenging all of last year and then you move forward to the fourth quarter and it's exacerbated by this -- the Omicron variant. So it was very tricky situation. We've seen staffing levels in our facilities improve. And so that's been a huge improvement, an important one for us and it's one that we're counting on. The same has to happen with all of our suppliers. And then as we get through, the situation will improve as we march through the quarters this year.

And so is the expectation that you see a big flush of sales in the second quarter as you exhaust the back order?

So with back order, the answer is it depends because some of the product decisions will be deferred. For example, if it was related to a hospital capital item, you probably still have the opportunity for that sale in a future quarter. However, if it's related to a disposable or an IV bag, for example, that those sales are lost. Now thankfully, we've been able to supply the vast majority of those. But again, those back orders are of a little bit of a different nature. So I think over the course of the year, you will see some improvement as some of that back order is paid off, but some of it will represent lost sales.

Okay. But it's not necessarily bolus in the second quarter ...

No, we're not counting on the bolus.

The second quarter will be their highest for the year. So I think some of it will push more probably more on the Hillrom side with their backlog or side orders, which tend to be more lost sales.

Okay. And Clare, just Q2, that's the highest growth on a Hillrom combined basis?

And on a Baxter basis as well.

Okay. And the assumption, though, is embedded in the 4% organic for the year for Baxter. All of the back order does get exhausted. This is a discussion we'll be having...

So what I would say is the situation is normalized. The 4% represents an improvement throughout the year and a normalization as we approach next year. So that's a stable supply chain, I should say.

Okay. And just, I guess, a similar question on some of the inflationary pressures. Is the assumption that freight comes down, oil comes down in the second half of the year, which allows margins to expand a bit.

There are a lot of factors that help drive margin in the second half of the year. One is the normal seasonality in our business, which tilts to the second half of the year. Second is some of the Hillrom synergies are back-end loaded and improved quarter-by-quarter. So we start to see some improvement there. And then we see a stabilization. Some improvement in expedited freight, for sure, as we come out of this tight supply situation. And then from an inflationary standpoint, it's basically sort of status quo. We're not anticipating further dramatic increases in either wage inflation or material inflation in the second half of the year. So more stabilization in that aspect. All of those things add up to a margin profile that looks quite different first half to second half.

And is that margin profile kind of the springboard for '23?

It is. The only caution is -- the in Q3 and Q4 are always higher than Q1, Q2, typically speaking. And so we'll see some of that natural seasonality. But again, many of the building blocks will be in place to grow from the second half of the year.

Okay. And then last one on supply chain. Do you think we're talking about supply chain issues in the fourth quarter this year? Or do you think they'll largely be resolved?

I think -- so my expectation is prior to the conflict in Ukraine that we would have seen a normalization of the supply chain over the course of the year so that 2023 might not be completely normal, but would have been mostly normal. What I don't yet know is how does this -- how does the Ukraine conflict play into this in terms of things like semiconductors, things like moving product around Europe or ultimately the price of oil. So those are the things that we're watching. I'm optimistic, but it's certainly a wildcard that we look at as we look through to 2023.

Wanted to shift gears a little bit and talk about NOVUM. Arguably, your highest profile, new product approval here in '22 driving a segment that accounts for what, 20% of sales. So can you just talk about NOVUM and what it means for the business?

Sure. NOVUM is a large volume pump, which is really one of the workhorses of ICUs and hospitals in the United States. And we're launching our new product, and we are absolutely thrilled to have that as the first of 3 pumps that we'll be launching from Baxter's portfolio. It's an innovation that we've been working on for years. And really, there are a few things that I think will differentiate it. First of all, it's the first time that Baxter will have 3 pumps on the same platform. Second, the NOVUM Pump incorporates all of our learnings from being in the large-volume pump business for perhaps the last 20 years into this next-generation pump. Things like a drug safety library, things like simple and easy-to-use interface. All of these things have been incorporated into the new pump, and we will be thrilled to bring this to market. And then following that, following on with a couple of incremental pumps. So very exciting for us. And I think it's a -- we've been doing quite well with the Spectrum pump that we have on the market today, and it's a testament to the quality of that pump as well. But I do believe that launching NOVUM gives us the next leg to drive growth for years to come.

Okay. And Jay, historically, I think you talked about filing the syringe in the LVP in the same filing. Now it seems like you've kind of bifurcated that a little bit. So can you just comment as to why you split the LVP filing and the syringe pump?

Sure. Clare, do you want to talk about that?

The FDA did ask us to split the filings between the LVP in the syringe. The LVP market, as you are aware, is the largest market of that. So we will first be filing the LVP. The syringe will follow shortly after that, both of them occurring in the first half of the year.

And the expectation from a timing perspective, I realize that it's dynamic here, but LVP mid-year, syringe 3Q?

So both of them -- once we file, both have a 31-day review period. So I would expect both of them to be filed here LVP shortly within the coming weeks and then the syringe kind of 30 days after that.

And I guess I wanted to ask about the LVP market. Obviously, you've got a big player that's been hamstrung for a couple of years, but you've also had pseuoparalysis with COVID and hospitals understandably not wanting to bring on a new fleet of pumps. So I guess the question is, one, can you just comment on the selling environment right now for LVPs? And two, do you think there's a period of elevated market growth over the next few years because there's been such stasis over the last couple?

So we've had really successful pump sales over the last couple of years, absent NOVUM, which perhaps is surprising, but I think it's a testament to the absolute medically necessary nature of the products that we sell. If a hospital needs a new pump, it's typically nothing that they will defer. Now what I will say is most of our success relates to existing accounts or existing customers. There hasn't really been a lot of jump ball, so to speak. And to your point, I do believe that many hospitals were waiting for the next-generation Baxter pump to be on the market before they perhaps start to start, to consider different alternatives. Furthermore, they -- if you think about Becton being off the market, many of those customers are perhaps deferred decisions apps and a great alternative in the market. So we'll have to see. Like I said, we've had a couple of great years of pump sales. I do expect really strong performance from this portfolio for years to come, again, on the back of the NOVUM launch.

Okay. Just maybe in the last couple of minutes here. I wanted to talk about portfolio management. On the fourth quarter call, I thought you were more expressive about identifying areas of the business that necessarily don't fit with your long-term plans. So I guess the first question is just the criteria you look at to decide whether it stays or goes?

Sure. It's interesting because we were more forthright or forthcoming in terms of commentary around portfolio. And a lot of this comes down to the fact that there are now extremely attractive areas in our portfolio for investment. More so than there was pre-Hillrom. And a lot of it relates to some of my comments at the beginning of this presentation, regarding connected care. And so what we see is the opportunity to tilt investment to some of these areas and really think about what we do with some of those areas that have perhaps historically underperformed. What we look at is what is the market growth of the area that we're in. What is Baxter's ability to win or succeed in that marketplace? And what do the economics look like under those circumstances. And so as a result of that, we'll end up with a series of businesses in different buckets. Our core growth area, those are businesses that we want to invest in to accelerate growth. Our core return businesses, these are ones that we sort of want to manage for profitability, continued strength of profit growth. And then there are some other ones that are in the maintain or manage differently category. And I think these ones will be ones that we look hard at in terms of, do they belong in the portfolio? Are we the rightful owner of these assets? And if not, what should we do about it? I think there's a lot of exciting work that we're undertaking, and we look forward to shining a bit of a light on this at our Investor Day and then more to come as we move through the course of the year.

And Jay, I assume that if you did proceed and sell a business, it's a profitable business to be associated dilution. How do you handle the dilution?

There are a number of different ways to handle dilution associated with the transaction. You really try to manage down stranded costs associated with it. So as much as possible, the business that goes should be the one that you've defined. And then in addition to that, you invest in areas or you acquire businesses that are more profitable, more attractive from a long-term standpoint, really that simply put is what it comes down to in terms of dealing with dilution associated with transactions like this.

Okay. We are all out of time. Jay, Clare, certainly appreciate the time. Thanks for coming down. And the breakout will be in Cordova 4. Thank you.

Thank you.

Thank you.