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

Amazing. Thank you, everyone. You've got Patrick on the U.S. Medtech team. I'm obviously delighted today to have Jose Almeida, the CEO of Baxter; and Clare Trachtman, who runs the IR function to join us for what should be a fun chat. Before I get started, we've got the delightful disclosures, Morganfamily.com/researchdisclosures and then also you can reach out to your sales rep if any of you feel -- on and need to do so.

Thank you so much for joining us both and Joe, maybe if we could start with sort of a bigger picture question for Baxter. Innovation and driving growth up to that mid-single-digit range is kind of a key focus. How do you feel the pipeline of innovation is looking and what are you most excited about?

I think we look at the growth story for Baxter in 3 different vectors. The first vector is acceleration of commercial execution. So going to areas of health care that today we cover, but we are not focused on. ASCs is one of them. We're very much a complete company when it comes to ASCs, the ability to partner with great companies that can come in and do business with us. We're accelerating that as we never focused. So that is a market growing 7-plus percent a year, and the growth has been incredible in terms of the multiplication of sites and the transition from acute care into the ASC is starting, and they're going to see probably 5 years. More sick patients in acute care centers and much faster turnaround in procedures that can be done in ASC. So we have everything that you need to cover the ASC and with a partnership with a couple of different companies in the orthopedic space is one example that can get us there. The second factor is acceleration of innovation. As you said, we're launching 20-plus products this year. We are planning to accelerate that. We have a large exercise that we're doing right now where we do it every year for the LRP is what is the unfunded activities that we need. So we see that accelerating spend in R&D by not a great deal, but a few dozens of basis points will get us there. The third is Connected Care. So not only making our products ready to connect, which they are from our current pump to a new pump is connected to the EMR, also our beds, our monitors and several of our devices which are connected in the ability to now get insight. So acceleration of that the 3 vectors of growth that will put us on a mid-single-digit trajectory.

You mentioned, obviously, Connected Care and Hillrom was a big part of accelerating that strategy. What do you think within the health care system overall is the roadblock today to stopping faster adoption of real data analytics and connected care?

It's actually -- one of the interesting things is who owns the data. So to give an example, if you have a data lake that has significant body infusion data and safety data, so you can actually mine that and learn with learning algorithms official intelligence, leadership generation, safer thresholds for delivery of a drug. The question is, it depends upon the country where that data may not yours. Where is the data resident? It's in your machine? Is in the cloud? Who owns the cloud? So every different hospitals, a different agreement that you've got to have or different IDNs, different agreements. So I think the ability to understand who owns the data. It makes a clear path but also how do you monetize? The second thing is the monetization of those insights. In the past, those insights are more of an adjunct to get more sales of the basic products so they're more giveaways. And so we're trying to change that. So we have -- Baxter has over $250 million in sales of connected care devices we need to accelerate and get multiple times that. We have the form to do it, but you've got to get it right because for hospitals to pay subscription fees on data insights, it has to be well proven, and the ownership has to be there. So I think in the past was more nebulous how do you follow the money, who pays for second, who owns the data.

And then obviously, supply chains and cost inflation have been extremely volatile over the last 18 months or so. How are things looking today? And how do you feel about the next sort of 12 months?

As all of you know, the inflationary pressures last year were really, really difficult on the company. We see a much different scenario now. There's inflationary pressures that came in such as labor cost, material cost inflation ex resins. Resins are oil-based, but the stuff that was components going into our boards, going into our devices. Some of this cost is space, we are on a $300 million year journey and taken it away. And also with price action in different parts of the world continue to work to offset eventually that. So -- but how it is today is a much better situation. We have rolling orders there 24 months in most of our electronic component semiconductors that has made a huge difference for us. We are in a much better position today. We're still resolving several issues of dependency on single supplier. We're diversifying our base wherever we can. We have a transfer of office, well staffed inside the company that is transferring products from supply to supply getting not only best deals, but also back up. So a tremendous amount of learnings for Baxter and actually for our industry in terms of how dependencies, but the situation of supply continue availability of components has been all be mitigated at this moment. And we can see that our backlogs, for instance, starting to come down to healthy levels. We need to have backlogs. But last year, the backlogs were unhealthy to a point that I was concerned about people canceling orders. And so this year is a much different situation for frontline care for our patient support systems, our beds and for our pumps as well.

Joe, maybe flipping on to the injectables business. Baxter took a strategic redirection to refine the portfolio a little bit fairly recently. And recent growth has definitely been quite a bit quite a bit more than I thought it would be. Maybe some comments on that market, pricing and volumes that sort of thing would be very helpful.

So that market is all about timing and choice of portfolio. The timing is when you see more entrants in a specialty space, you've got to have more specialty drugs that go from a vial into a bag. So if you know Baxter, a portion of our portfolio is premixes. And the premixes are stable APIs in solution, either sodium chloride or dextrose and they are either room temperature, refrigerator frozen, but those are ready to use in hospital. So there's no need for compounding at a hospital that does compounding almost every drug that they have to administer either via a pump or via a trip. So we did made a portfolio choice. We eliminated from our portfolio, some of our very low end, very low sales and tail. We also accelerate the innovation to be able to offset the] price erosion, but we're offsetting that with new products such as Norepinephrine, new solutions such as Bendamustine and a couple of others, Zosyn that has made a difference, and we'll continue to make a difference. So you could see a robust results for the last 2 quarters how we came out versus the past. So we have a new head for that business, new segment President called Alok Sonig, and Alok has a very simple execution philosophy, 10 products filed, 10 products approved, 10 products launched a year, and has done a great job of shaping that group and what you have today is more of a pipeline. That business always welcome some tuck-in acquisitions of molecules ready for launch into a different form and they will continue to look past '24 to continue that tuck-in. But until then, this business continues to do organically extremely well.

I mean a few of your competitors filed Chapter 11, and it seems like the drug shortage list has gone up a little bit. And then at the same time, trying to accelerate ANDAs. How much of that growth do you think is a function of sort of the market environment versus the sort of expansion for you into different form of factors?

Yes. So let me address one of the questions we get all the time, which is which was the Rocky Mountain Pfizer plant that had a Fortune tornado hit the distribution center in the plant. Our ability to supply those products, we said this year is $10 million to $15 million. So if you look at the size of the business, this is very small. So while our focus was more into transforming your current vial or ample injectable into a specialty generic, which is the mix that we do with our proprietary Galaxy product in the United States. So all the trucks are done state side, by the way, they're in Northern Illinois, and those are pretty most part. Those are very, very well-designed processes. So the ability to get those ANDAs on the current drugs reformulated and stable for direct use in hospitals is one made a difference for us. So resulting that made a difference, we formally done many years ago. Our 2 or 3 drug launches this year, we have more next year, that allowed us to do this. It was not on the back of truck shortage, but was on the back of innovation get this now. We also have a compound business outside the U.S. does pretty well. We are a very reliable source with tremendous quality. We don't have that business in the U.S., but we have a very successful business in Canada, U.K., Ireland, Australia and New Zealand.

Then maybe flipping to PSS. You mentioned last quarter the order book was improving and growing nicely sequentially. How has been the market uptake a progressor? How are things looking at that market overall?

It's doing well. The uptick in orders have been well within our estimates and is a little bit above that. The backlog of quotations and conversion from quotations to orders has been extremely well positioned and that product is doing well. That product actually been converting competitive accounts, we just had conversions in Canada and U.S. of competitive accounts, we like that. Also the one to diminished effect that we launched a new feature of our Centrella, the best-selling bed in the United States with a continuous lateral rotation that is doing well as well. So that business, one of the things that [indiscernible] sort of the present in that segment is the rate of innovation is to be a little faster. So as I say, accelerate innovation is our second vector in growth is to be able to get the cycles a little faster because it tends to be long. They tend to be 8 to 10 years, and I think we used to be a little shorter. We did a little bit with Centrella now with the lateral rotation, continuous rotation is a good way of getting that cycle revamped. So we've got to do a little faster, either with the smarter surfaces. One of the things we are seeing how smart surfaces are picking up momentum. So versus just a regular surface on the bed. This is a surface with sensors. So we look like that business is picking up good momentum now. And the situation in capital is alleviating as we can see in the third and fourth quarter this year. Like we've said before, is picking up turning itself around versus what we had last year.

Just the -- I mean, you mentioned earlier before, obviously, the shift towards ASCs in some cases, becoming day cases. Does that change the type of bed because presumably the residual patients are sicker, if you know what I mean, that are doing the inpatients, does that change the product upfront over time?

We have -- the configuration of the debt will change. But if you think about the ASC, that is important. The ability to have the pumps and the medicines and the aesthetics and the sets and the tables in the OR, the video systems in the OR and the software to manage that. So that is something that we bring to the table. But the beds are differently configured. They need to be comfortable to be utilitarian and is a configuration of a possible Centrella to a different level for the ASC.

And then I'll mention of pumps. Any update on Novum?

Yes. There's no better interest to get the Novum proved than ours, more than yours. So what we see with the pump today is we are still working with the FDA. We have one hardware issue to address. We're working through that. While this is progressing, I don't want to take the spotlight from our SIGMA SPECTRUM. We see volume on a unit basis between 2023 and 2024 growth. So we still have a demand, a strong demand for our core SIGMA SPECTRUM, which is, by the way, fully connected to the EMR, two-way communication and thus describes on the EMR and vice person, great drug library, but we want to have Novum because Novum opens more volume for us. in a better platform in terms of integration with the rest of Baxter products. That pump is -- will automatically integrate to Canexus to our Baxter gateway, and that connects with our [bands] or monitors and everything else that Baxter has. So we will do that for our current pump that we integrate that will take 12 to 18 months, we're more focused on getting the issues resolved that we need to get resolved and have an approvable pump with the FDA.

I mean the pump in full base because the pulp markets just had recalls from peers and all sorts of issues, presumably, the installed base, particularly in the U.S. is a little old. How much is -- and you might have had some customers waiting -- no waiting for Novum, is there a catch-up effect that could happen next year?

Possibly,if once the approval happens, possibly. The replacement rate for pump is about 10%. If you take the last 8 to 10 years, it depends upon the institution, how they used can be a little faster, maybe 12%, 13%, 14% depends upon the year. So -- but there is a bonus and there's a significant amount of work that needs to be done by competitors not paying their data configuration is a lot of pumps to upgrade. So there is so, believe me, all hands on deck, a lot of efforts putting in to get this through.

And then maybe shifting to China. I guess the 2 topics, there's BBP and then as the anti-growth corruption side of things, I don't know, you know the question on both.

No. I haven't received those questions in the last 3 weeks. That have been with most of you. The corruption is -- it is what it is. They will do what they need to do. We, as a company, are seeing that we shift from in-person to virtual very quickly. We have -- we sell a therapy. We don't sell a product, a technology, but a therapy. Therapy is a little bit more than the product. It's also how you get the patient to be followed up at home. So all those phases are being done virtually. We also have technical service and clinical services going to hospitals that has not stopped. One has changed. If you're launching a new product, you'll see that the ability to interact with physicians take a toll in the speed of launch. So we don't have many of those at all. We have one drug that we have very low sales expectations for this year. We saw a little impact, but that is the minimus even worth talking about, but we saw that. So if the business has a lot of launches, a lot of interactions with physicians you can see a reduction on that. We're very cautious and concerned. The other thing, the BBP that you have asked, we -- so if you know, BBP was provincial last year before and now went to the national level. We did not get caught on the national level. We were excluded from the national level. We have some data that indicates that at the provincial level, competitive products are creating more cases of peritonitis than ours do. And as I said, we don't sell a product, we sell a therapy, a system. So we hope that, that becomes more clear in the next months, and we can have a constructive discussion about this, but we're happy that for this cycle, we were excluded for the national BBP, not the provision we were part of it.

Peritonitis thinking of PD and then renal. You obviously reached the strategic decision that spinning was the best thing for both the renal business and for the parent. Maybe as PD is a good business, but maybe you could give some color to the audience about why you felt that was better as a stand-alone entity for the Baxter?

So when you make a decision like that strategically, and then you have to look at who benefits from that and what is the amount of work that needs to go through to get it. So we did a more extensive amount of work. we are now confirming that the work we've done in terms of cost of separation. Agreements between the companies would be done how we planned. But if you go back to the strategic reason, is they're 2 very different businesses. The go-to-market is completely different. The cost of serving is completely different and how the reimbursement works for the most part, is a capitated market. even in the U.S. with private insurance, eventually that gets blended into Medicare and the blended cost is capitated. So it's a business that there's no DRG, there's no innovation gets paid more. Innovation doesn't get paid more in renal, where innovation does is -- has to reduce cost of care. So when we are designing this new cycle, the first objective is deliver equal or better treatment of PD, which we do extremely well. However, the cost per treatment has to be lower. Why? Because unless there's significant changes in terms of reimbursement, we've got to do that. So the whole process of innovation, of serving your customers and your customer base is very different. Baxter's an acute care company ex renal, we are a hospital company, we're a doctor's office company, and we're now moving more specifically to ASCs with the purpose of being ASC company. We are not a therapy company, the rest of Baxter. So the strategic decision is these are companies with very different ROICs, very different operating income as a percentage of sales. And because of that, when you try to optimize your cost more money. Now, we need to make sure that as we're going through this and putting together the actual case that we verify all the separation costs and other things together makes sense for the company. So we are marching down that path, but we want to make sure, as always, that is an advantage for the shareholders not only strategically for the company, but we can see on the other end that the shareholder can benefit.

I knew Chris from the [indiscernible], great guy. What was it that out of the candidates made you feel like he was the -- right for the job?

Chris worked his whole career with a product that had to retain reimbursement per treatment. So it's a very specific -- is a therapy, it's radiotherapy, very [indiscernible] a phenomenal job Dow and the folks there now that brought the business and his predecessor. So they create a business that's similar to what we do today. That's 100% captive. It's different than the business. The margins are very different. Chris understands how to stay with the cost envelope and how to create the next chapter for that business. So he will be talking to you about TeleCare, his expansion of our share source. It's the creation of water system for the home that is that is feasible also they will create the ability to deliver technology to enhance and also trim portfolio to exit markets and business like we just did for shutting down our facility in the U.S. for when the product is not feasibly profitable. So he brought all those components, Chris is a phenomenal leader as an individual has impressed me quite a bit. He brings that -- it's not about Charisma, it's about the assertiveness and followership. So he got followership quite quickly within Baxter, and he brought some people who worked with him in the past. So he's building a great team.

And I guess on the topic of management, other than being good with numbers for yourself and the Board, what are some of the key criteria for the ideal CFO candidate?

CFO. It was just about closing the books and doing the work, we have phenomenal people in the company, strong people in SB&A accounting to every part of the financial organization, very strong people look on my left here, Clare, it's been in this business for a while and knows the business, especially about our company. So what we need more than that is an operational CFO who is my right-hand person, who understands the strategy, but also understands the environment. We operate in a different margin level the most med tech companies. They operate different than we are. We are a mix of pharmaceutical injectables, medical devices with some disposable and equipment. So we are a different company, I've got to get somebody who has the ability to quickly learn, understand how to always keep the strategy being filled by lower cost base and also be a partner to our segment presidents in bringing them into a growth on the top line but responsible growth where you also don't spend every dime you have for 5 years to fund an initiative. So I think we're almost there.

I'll come by resume there. Obviously, it's kind of one of those unanswerable questions for both Clare and to you, Joe. But your guide implies a slowdown in the back half of the year after, I think, faster growth than most of us were expecting in the first half. It's the inevitable, it's this conservatism a question that you called obviously because if you did, then it would be invalidating the question, but that question.

I'm just going to -- I'm stuck and I want Clare really to elaborate on this. It's not conservative. It's how you see it at the moment you're doing. So it's not a [ truck ] lines so this is how we see it today. I will tell you that the markets are healthy. the capital market is recovering. Utilization is good. So when people call conservatism, I call you prudent at the moment and very truthful to the moment and you're doing it. So when things change into quarter, we don't communicate, but we want to make sure that we have the ability to foresee things that maybe you don't see because every business is very specific.

Yes. No. So one, I think in top line, you are right, it does decelerate a little bit. The primary driver of that is our Renal Care business, and it's the factors that we've talked about. We're facing some difficult comps from the prior year. We had about $40 million in onetime payments. We also have some impacts from China from both BBP and also just excess mortality, the impact from that. In addition, the pharma business, there's a little bit of an impact there in our hospital pharmacy compounding business. So we've reflected that outside the U.S. -- that business is all outside the U.S. So the injectables piece will continue to kind of on that same trajectory. But those are the factors that really drive that. And again, I say the largest of it really does come from renal. The rest of the businesses, I was there steady on that trajectory going forward with improvement, notably within our HST business, which is the former Hillrom business, we're going to see a marked improvement in the second half for that business. Now on the flip side, I will tell you, while we do see that on the top line, some deceleration. The margin expansion, we're expecting about 300 basis points of improvement from the first half to the second half. So we are seeing some nice progression across the rest of the P&L there.

I think probably people who haven't worked in industry may not realize how astoundingly time conceiving a spin and things like that can end up being. How is it going? How are you managing juggling that and the base job? And do we have any updated vision of when we might get to a more final place around that.

Well, we will -- we're still on time for July 2024. It is significant time consuming. We have a Baxter, a phenomenal group of very talented people and has been and we have no shortage of talent coming to the company. We attract -- we have a good brand and we attract good people. It's been tough, of course, people working a lot. I am, Clare is, everybody is but we're working with an objective in mind. We've got to make sure that we got all these costs in place. We understand what they are and then we progress on to our potential form can and then this been again July 2024.

And then it doesn't affect your business tremendously, but it's the hot button topic I have to ask GLP-1s view of the world?

This reminds me of statins back 20 years, years ago. We -- I think there will be an impact in medical devices. They are dependent upon either surgery or other things. For Baxter, the long-term impact, the issues that cause acute kidney disease in chronic kidney disease are somehow related but not necessarily 100% related to diabetes. The other factors that cause dialysis patients to go into dialysis, which is a chronic as a chronic disease that doesn't reverse. So I don't think that impact in that business in the short and near term or midterm will be there need to see the effects of the drugs in the patient population with large volumes, large cohorts over time. But we can see the peritoneal dialysis, if you think about peritoneal dialysis is about [indiscernible], and we'll continue to be a fast grower within the dialysis patients because there's modality, there is more convenient for the patient. We are seeing there are technologies better than what is in the market today. We have indications on that. Our competitors in the U.S. who are not doing well in PD, and we are. So I want to make sure that we do not lose perspective, the debt technology and debt space is a x. The mortality of COVID is a business that grows 5-plus percent.

Clare perfect timing. Thank you for joining us today.

Thank you.

Thanks.