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

Good morning. I'm Larry Biegelsen, the MedTech Analyst at Wells Fargo. It's my pleasure to host this session with the management team from Baxter. With us, we have Joe Almeida, the CEO; and Clare Trachtman, Vice President of Investor Relations. In terms of format it's going to be fireside chat, Joe and Clare, thanks so much for being here.

Thank you for having us, Larry.

Thank you, Larry.

So Joe, let's start with the state of the business at Baxter. There's obviously several moving parts with the BPS divestiture, the Vantive Spin and the search for a new CFO. Talk about your vision for the remaining Baxter and the growth strategy going forward, please?

Baxter going forward x the kidney business is a company that is still very much acute center, acute care setting centered. So we're going to be moving into 2 or 3 different vectors of growth. One is the ASCs because the products that we have today between the former Hillrom and the current Baxter fit extremely well for partnership with the other companies and be a complete partner to the ASCs. That business grew 7% to 9%, it is where the growth of the acute set is going to be going and it's going in the next few years. So sites of care growth in that direction, which is now permitted with a much more focused product line from integration of OR tables and OR suites, pump sets pharmaceutical injectables beds, also in aesthetics. We have a full suite of products that will fit very well in contract not only for orthopedic or ASCs, but also other types of ASCs. The second vector is the ability to connect our devices to provide data, the minimized burden on health care providers, primarily nurses. We spent only 20% of their time on the bed side. So that is already happening with the integration of our products. Our current SIGMA SPECTRUM pump is a 2-way communication with the EMR already has a winning drug library communicates with a bed and with the med search monitors that we have. Second. And the third is to explore more growth from the former Hillrom products outside the U.S., which becomes a good avenue for us. As you know, our outside U.S. sales are mostly focused on renal. So we have the opportunity to increase there. As we're doing those 3 focuses of growth, we're not going to lose the ability to continue to renew our portfolio pharmaceuticals, which we've been doing. If you noticed, our growth rate has improved quite a bit. That has to do with product launches and in areas where you have less price erosion.

That's helpful. I know it's early, but is there any way to talk about kind of how you see the financial profile of RemainCo?

It is a little early for us to talk about that. We're going to come out in the first quarter of next year but it's a company that will be able to provide leverage to the bottom line while still investing in research and development in the company. If you notice our research and development this year has increased quite a bit. Most of the money has gone into our HST business, which is the former Hillrom business, most of them into products that will be launching in '24 and '25. So I think as the company separates, it has to have growth rate on the top line that is attractive and potentially continue to grow with our new initiatives. We're going to deliver leverage to the bottom line but invest some back into research and dev. So we'll hit the 3 areas of growth, leverage and reinvestment.

That's helpful. Excuse me, AV, person, Kevin, I think, the clock has not started. I mean that. Thank you.

Starting now, so I got 10 more minutes.

Bonus time.

I don't think so.

Joe, so what's the latest on the CFO search?

We're progressing quite well. And by hopefully the next earnings call, we're going to have a new CFO on board. We're very happy with the interviews. As I said to many of you in one-on-ones, we're looking for an operational CFO, somebody with not only experience in the CFO business, but somebody who has run some businesses not necessarily from the same industry, but with the ability to actually operational because Baxter is an industrial company that has an SG&A profile very different than our competitors. So you need somebody who has more experience in that area as well as understanding our business, great learning agility and maturity to get there. Most importantly, we have a very good finance group that needs to continue to be developed for the next generation of CFOs. So we don't need to go outside for a CFO replacement.

That's helpful. So switching gears, macro headwinds were a big issue for the medical device industry and Baxter last year but seem to be improving. On the Q2 call, you talked about the inflationary environment being more stable. Can you talk about the macro -- which macro headwinds remain for Baxter? What's getting better? What's getting worse?

We've seen an improved in all dimensions of the macroeconomic situation. We see the chip, the semiconductor crisis quite alleviated. Now we placed 2 years of committed POs for everything that we buy. So we now have good visibility into the future. And our backlog has come down quite a bit back quarter is the lowest in the last 2 years. So we'd be able to catch up a lot with that. Don't think about backlog going down as a bad thing, it's a really good thing because a very high backlog actually leads to order cancellations and frustrations. So we need -- we have a pretty healthy level of backlog today. We had a very unhealthy level of backlog last year. There's a little bit of increase in the cost of diesel, as you can see right now, has gone up. But our people can offset one way or the other, that doesn't concern me. The resin price is much more stable. So going into the selling portion of the business, we see a much more stable hospital admissions level we also see good growth on the ASC. We see the overall macro conditions for capital, which is quite varied by type of capital and hospital systems, but we see that improving in the second half of this year and large hospitals got better in terms of financing, the finance situation this hospice, you can see the public ones. I think there is a group of hospitals in the middle of the PAC rural hospitals, smaller hospitals, primarily squeezed between large centers. Those are the ones where the labor has been more punitive and probably finance, the financial condition. It's a little different. But overall, we see that as an improvement. So not in day from last year.

That's good to hear. You touched upon supply chain component issues were a challenge for all device companies last year. And it sounds like your back orders and log are getting better. Can -- some companies, we've seen some catch-up. I could think of some companies where we've seen above-normal growth in the first half of the year. Do you expect any catch-up in your business?

Well I think depends a lot upon what happened last year. So last year, one of our business, our bed business. We had a significant amount of rentals and large orders. So we saw in the first half of this year until the launch of Progreso reduction in growth -- negative growth year-over-year. Now overall, what we see is a healthy level of backlog in all of our business. We need to continue to watch the long term. So this capital that is placed and sold within the quarter. That is pretty straightforward, doing very well. Product that is placed within the quarter maybe goes a month or 2 later to be delivered. And you have long-term capital that is dependent upon construction of new hospital, hospitals having time to take beds, rooms down to be able to wire new communication systems. This is what we watch very closely because that's more long term, there is more civil construction, more architectural work into this. So this is okay for now, but you keep watching because that's the one that indicates if interest rates or other things are affecting the appetite for investment. We still see hospitals invest in new areas, primarily large hospitals and capture market share. So everything looks normal to us right now, but not all capital is created the same.

But you don't expect like a bolus or something like that.

We -- if we look at our Frontline Care, we had a bolus.

Yes. That is Frontline Care.

Frontline Care had high single digit, double-digit growth, which is -- which bunches about almost twice as much as their market growth rates. And we saw that we continue to see a little bit of that. And now it's up to us to make sure that we're growing to 5%, 6% that business and minimal. Do you want to add?

That's exactly right. Frontline care.

Got it. Joe, people are very interested in price in general, but especially for Baxter, historically, you've seen price erosion at 50 to 100 basis points per year. How are you thinking about price going forward? Any updates? I think people are also interested in visibility you have on the GPO agreements that will come up for renewal in late '24 and '25.

So pricing in general for Baxter this year, we see newcomers like positive. One of the headwinds for Baxter in the last 2, 3 years has been our pharmaceutical business, the injectable pharmaceutical business, we saw significant pressure in newcomers that disrupted some of our most profitable molecules like cyclo and beta block in TDS. But then we are starting to see the catch-up of our strategy, which is very simply, we offset that. So you saw pretty good growth quarters, first and second quarter with positive numbers. You don't see -- you didn't see that before. That was really a drag on our pricing. So then we think we'll have addressed by changing how we are launching new products. We cut the tail. The tail is the problem. We have products of $2 million, $3 million a year, and you spend a lot of money and time to launch them and they end up having the significant amount of competition. So we cut a lot of those out. Our new Head of Pharmaceutic -- pharmaceutical business, Alok Sonig, has 10, 10 and 10. 10 products submitted, 10 products approved, 10 products launched a year. We do this cadence with a little bit of tuck-in acquisitions post 2024. You'll see that business maintaining its growth rate and its price erosion, a bay, keeping a bay. This is one portion that affect us in the past. What happened last year is input cost goes up significantly, and we have a limited ability to raise prices to the end customer on contracts to have 4, 5 years long. So a couple of these contracts are coming due for the U.S. Medication Delivery and Nutrition Administration sets. Two of them are '25 and January and February '25. We're negotiating those. So what are the levers that we have. We certainly need to make sure that the indexes that we use for raising prices are adequate and reflect more the input cost that we have versus just the consumer price index, which is quite different. The second thing is we need to make sure that we balance price increases with a facility that is 100% filled. So we have facilities that make products. We are the lowest, if not one of the lowest cost producers in the IP solutions and set to maintain that, we need our plants full. So we're going to have to make sure that when we do the tiers, we got people who are not committed to Baxter to pay much more than the people who are committed. I'm talking about not GPO. I'm talking about IDNs. IDNs is what we can work to group products versus GPOs, which are very specific by category with that you can't -- you bid the category. I believe we're going to be able to do both, get a little bit of price, get better conditions of how to raise prices in case of what we had last year and also hopefully maintain the volume at our plants, which makes us very, very efficient. We today have the ability to produce a large volume for the U.S. in interrupted no matter what happens where they're doing COVID. We had no product shortages. We are today facing huge product shortage in the market with something called [ poor borders ]. Baxter's 120% producing that product. We have invested more money. Products like this, we deserve better pricing for people who are not committed. So we take price at that level. But we are very committed to be able to invest in areas where we see the efficiencies in the market that we serve.

Clare, do you wanted to add something?

So I just got a note that the webcast keeps going in and out. So I don't know if you want to check that.

AV, Kevin?

Blame me for many things. That's not my fault.

Okay. Kevin, is there someone who can look into that? Okay. Perfect. Thank you. The -- typically, Joe, how are in advanced these new contracts get renewed. If it expires at the beginning of...

More than a year in advance, people start negotiating looking at terms and conditions, primarily with so much disruption that happened in '22. So this is already in progress as we advance progress that we see today.

So we'll -- I'm sure you're not going to disclose the details of any new contracts, but something should happen in '24, you'll have something renewed before those contracts expire.

Well, of course. Of course, we're not going to go into '25 with some thing unfinished. It's going to happen with '24, right.

Okay. And there'll be something you can communicate to investors maybe not the details.

If it's mature, yes.

So what I would say is, yes, the renewals will happen in 2024. So we'll know of it. Joe mentioned this earlier, our expectation is to do a Capital Markets Day for both Kidney Care and Baxter RemainCo sometime in the first half of next year. And so at that point, we would go into some of those details regarding what we think believe the future outlook would be inclusive of these contract renewals.

That's helpful. The other hot topic here is China.

Why is that?

And the main new -- I know you're joking. There's a lot of crosscurrent VBP, macro concerns, made in China, I know initiative is actually affecting Baxter. And now the new one is the anticorruption policies. Joe, I'd love to hear you address kind of just Baxter's business in China. I think people are interested in all of those, actually. But anticorruption is the newest one. So your thoughts on that would be helpful too.

Let's talk about VBP, MIC and close with the corruption. We take all the 3 of them. So the VBP...

Maybe add COVID too.

Yes. But as -- so let me frame the business. Thank you, Clare. I'll frame the business for Baxter. Baxter is about 70% of its business in China is renal, is PD dialysis, CRT and hemodialysis. The rest of the business is a mix of all of the rest of the business of Baxter. So you can see Baxter co ex renal is much smaller in terms of exposure in China. VBP. VBP affected the Renal business, we have communicated and we factored that. By the way, all those things are factored in our forecast that we, our guidance that we have given in this, that's correct. That's all factor in. There's no new thing to be added or to be removed. The VBP was regional. Now it's going to the national level. What we have observed and people have observed is there's a higher rate of peritonitis with the new suppliers that they have introduced in the market. As we always said to the government and to all of you, PD is not a therapy that is all about the set and the bagging has to do with how you surround the patient with training the physician, training and everything else. So it's important to know that maybe depends upon the outcome of the research that's coming out 1 or 2 or 3 weeks, if I'm not mistaken, that this therapy may be excluded from the national VBP because the health data doesn't work -- is not working that well. The -- now let me bring the corruption into this. So what is the corruption cracked down as portrayed by the government in China has done to the market, has interrupted all the live interactions with physicians. We continued 2 things: live service and therapy management. So those continue to go on. Training for new physicians, we are doing via virtual avenue. So we continue to do it. We just went from live interactions to virtual interactions, okay? So if you have a product that is highly sensitive to promotion, and physician interaction becomes more difficult. Our products are a therapy, then you need to train the physician, helping insert the catheter, those things because safety continue to go on. We just transferred to virtual. So the corruption crackdown is a real thing. It has significantly changed the interactions. We believe this will be alleviated going forward once the crackdown gets to the message, I think, that the government wants to give to the sector. Hopefully, later this year, early next year, we start seeing return to a more normal interaction. For Baxter, we have not seen any material change in our business that would warrant us change what we had given to you at this moment in terms of guidance. Any comments on that?

I agree. Exactly.

Made in China, which I didn't speak. It is a real thing. We are putting more capacity in China for CRT. This is under renal that continues in replacement therapy to make the product in China bring kids and have a partner assemble for us or we assemble ourselves as well as bad in some other products that Hillrom sells. I know Hillrom had before -- the acquisition had a significant amount of plans for China, we continue to have, but we're putting the infrastructure in place to be able to make the products there. Those are a very small portion of the...

I don't know if mic is working. Is Clare's mic working?

Is it. So what I would say, Joe is exactly right, Made in China was a bit more of an impact for us actually in 2022. And I'd say value-based procurement. So what we have reflected is more of an impact this year. But again, still that and the impact from the excess mortality is included in our guidance for 2023 for China.

It sounds like I'm PD, that Baxter's PD may be excluded from national VBP. So could that be upside, if that's the case.

Longer term.

Long term, yes. Because whatever happened to the region already happened. So the national was going to be something for the future. This may -- if this comes the other way, it is a positive for the long term for Baxter because it's excluded is easier to the business.

Okay. That's helpful. All right, switching gears to Medication Delivery, Joe, I think some of your comments, as I think you probably know, on NOVUM IQ on the Q2 call, I may have confused people when you talked about Canada -- updates in Canada potentially affecting FDA approval of NOVUM IQ in the U.S. Can you clarify what you meant and give us an update of the status, please?

As far as I know, the U.S. FDA does not work with other governments to concurrently approve or disapprove products. So that was not the intent. The intent is we because we have products launched in Canada, found a couple of changes that we need to make to software and hardware to the pump that we're currently undertaking the software we're finished, although we're doing a final review of software wise to make sure there's nothing else and hardware, there's a change -- 2 changes that we had to make when it was made already. The other one is in process that we need to complete. We want to do it and its ongoing conversation with the agency. I don't comment on their reaction or how long it's going to take. We have remain optimistic on the pump is a great pump works today is working on the market today. We just need to get our process finished with the FDA. And I can't predict the time to get that done. But eventually, we're going to get there. I can't give you timing because I'll be guessing what they're going to do. From our perspective, we put a lot of resources into this. We put more resources that you can imagine to make sure that this product is absolutely what needs to go into the U.S. market. It's a product that has good precision, better than some products on market today in the U.S. and has also a very good interface with the rest of hospital systems to ways. I want to qualify something because I've heard the other day that our pump works. Our current SIGMA SPECTRUM, Version 9 is a 2-way communication. The updates, the out annotate, you remotely program the drug library. It communicates with the EMR back and the pump. That pump is doing well. As a matter of fact, we just sold and convert 50% of a very large hospital in the U.S. from our competitors. So that pump does well, and we will continue to do well. We are making sure the pump component obsolescence gets elongated because we need to have this pump on the market for many years as customers who bought the pump today would like to replace or add more, they will not go to a new platform.

Joe, I just wanted to make sure I heard you correctly. So in Canada, software change that's completed?

Not implemented yet. We completed for the U.S. platform. I think we have not completed the recall corrections in Canada. We were working with Health Canada to have that done.

And 2 hardware changes. One is completed, one is in process, that's the U.S.? Or is that Canada?

It just works for both.

For both. And so -- and then I heard you mention agency. I think when you said agency, you're talking about FDA. So I guess what I'm trying to understand is these changes you're making to the U.S. pump and that...

Eventually needs to go to Canada as well. So they will be corrected there. But the U.S. product that is presented to the FDA has those corrections already. We'll not present...

One is in process though?

One is in process.

And so what's the -- any broad structure on time lines?

No, I don't want to give you any broad structures on time line.

Or even when that second correction is going to be made.

We will plan to do as soon as possible, put a lot of resources to do it. We want to get it done as soon as possible and we're going to keep you guys posted if anything changes on that. But I want to make sure that you -- we want to have this pump approved. The current pump is doing a great job, by the way. Continue to grab market share and growing. So do we need the new pump, of course, we do because there's much more capacity, we can expand the market. We're doing everything we can to get that through.

Right. I understand you don't want to predict FDA approval, but you're not willing to say when you can have that second...

No. I don't want to do that because it's a strategic as we don't have so much detail. But you just know that, that significant amount of resources going in to correct what we found that needs to be correct in Canada as well as the pump that is submitted for the FDA.

I understand. Clare, did you want to add something? .

No. Nothing.

Okay. So switching gears in the time we have left here, I just wanted to -- just a few more questions, just one on the second half outlook. Top end, top line as well as the margins. You had a strong Q2, 4% organic growth. The guidance implies a deceleration in the second half. Help us understand -- today, we've heard you talked about things getting better in general, why we might see things slow in the second half?

I think I'm going to ask Clare to answer that. There is everything in Renal. Renal is the reason why there's deceleration that's what we already had spoken to about the VBP and the excessive mortality that we saw once 0 COVID policy in China was removed.

Joe, that's exactly right. So the biggest driver of the deceleration in the second half of the year from what we saw in the second quarter is Renal. So Renal in the first half of the year was up around 3%, and that does go to a kind of low to mid-single-digit decline in the second half of the year. The other -- and that's driven by the factors that Joe mentioned. We're also anniversary about $40 million in payments that we received last year, and we have some market exits that are specific to the Renal Care business that impacts the second half of the year. So those are really the drivers. And again, a lot of -- some of this is really also in advance of setting up the business for the spin. So we are continuing to optimize our in-center HD business. And so those are some of the exits that we're making. The other business that does decelerate a little bit, but still growth is our Pharmaceuticals business and that's primarily driven by our hospital pharmacy compounding business outside the U.S., where we had double-digit growth in the first half of the year, that does slow a little bit in the second half. Primarily, it's just because there are some drugs that we compound there that are going -- they are more biosimilars. And so we reflect that lower price in our sales in the pass-through entity. So while the margins actually improved slightly, we do see that impact on sales. Now we'll see. I think the demand for our services remains high. But those are the 2 drivers. The rest of the businesses continue along their same trajectory in the second half of the year. The biggest one that was that Renal coupled with pharma.

That's helpful.

Ex that the business, the markets look pretty good.

That's good to hear. And the margin ramp, 300 basis points of improvement first half to second half?

Yes. So the biggest driver is really just the incremental sales, which leads to better absorption and better leverage over the P&L. The second piece is really, as Joe was mentioning, the improvement in our overall supply chain network. So as you've seen, some of those benefits accrue to us in the first half of the year, they start to roll out and impact the P&L in the second half of the year. We also, as we've talked about, have a number of initiatives in terms of our value improvement program, our margin improvement initiatives that we have. And those continue to build over the course of the year as well. The last piece is that we'll obviously see some better leverage on the SG&A line. R&D, as Joe mentioned, we'll continue to make investments but on the SG&A, we have a number of savings initiatives some that we have targeted this year will continue to benefit us in the second half of the year, along with just the overall better leverage on that line as well. So that's really the drivers of that $300 million. It starts. So was just -- a lot of our sales really do accrue in the second half of the year. So even though the growth rate is not as high, the actual dollars are significantly higher, and that's what leads to the better absorption.

That's helpful. Just last one is, any framework how to think about 2024 when the BPS Spin is complete and before the Vantive Spin been?

Yes, it's a great question, Larry. And one we have discussed and we'll continue to set as a management team. We do and you started with that. We have a lot of things going on. So the BPS Spin, we do expect to complete this year. And so we will reflect that. One, we have reflected it in our outlook for 2023 already in terms of the continuing operations. So that should be complete. But obviously, we'll also be able to see the benefit from lower interest expense because we'll have -- be able to retire and address some of the debt load that we have. The Vantive Spin, the Kidney Care Spin does make it a little bit challenging. We expect that to occur kind of by the middle of the year. So we'll try to frame it. I think this is what -- why this Capital Markets Day is really kind of critical to be able to give the long-term guidance because there are so many moving pieces with that. So we'll have to grasp what kind of guidance about outlook we give next year, but we'll try to give as much information as possible.

I mean, so you've given -- so for earnings, $254 million to $262 million for continuing ops for '23. You have the interest expense benefit. I think you've quantified that $100 million.

So it will be -- so if the deal closes at the end of September, it's about a $40 million benefit this year and should be around an incremental $100 million benefit next year.

$0.15. And so we can add that to the $254 million to $262 million, and then we just have to decide kind of on the base EPS, how much to grow that next year.

In a hypothetical non-spin world, yes.

Right. Okay. Any kind of high-level thoughts on kind of just puts and takes for next year?

Not at this point. I mean, obviously, there's a lot of things, I'd say that you've addressed kind of the biggest one. But I think in terms of the positioning is really the Kidney Care spend.

Okay. And Joe, we -- I wanted to give you the last word. There's a lot going on at Baxter. You've certainly been through a lot the last few years, like all medical device CEOs, challenging macro environment. I'm glad to hear things are getting better in general, but I wanted to give you the last few minutes to make any closing remarks.

We are -- as we see the future Baxter pinch on the innovation, connectivity and the ability to continue to deliver leverage through a lean cost structure. So those things will feed us going forward. I'm excited about the future. It is a lot of work that we're going through. Last year was a really tough year in terms of supply chain, they really outset of the company in terms of how we think about how things are. We are automating our plants to no end. We're taking a reliance on the most fragile part of the supply chain, which is labor turnover in some of our plants. We're making sure that the organizations need the accountability that we put into segments has worked tremendously. People are really owning those segments and their P&Ls, their CEOs of their segments and made a difference even in the innovation path that we have going forward. So it's innovation, the ability to connect our business and continue to leverage the P&L. Thank you.

Joe, and Clare, thanks for being here.

Thank you.

Thank you very much. Thanks, Clare.

Thank you very much.