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

Thanks, everyone, for joining us this afternoon. Very pleased to have with us, Baxter International; Joel Grade, EVP and Chief Financial Officer; and Clare Trachtman, VP of IR. Thanks again for joining us.

Thanks for having us.

So I wanted to maybe start with -- there's a bunch of topics folks have been asking about. Obviously, you have a CEO search underway. I will just say, there's a concern over hospital budgets. And there's a bunch of things that -- I don't know if those are the best things to spend our time on, but we'll try to come back to them if we have time. And by all means, if anyone has a question, please raise your hand and we'll get a mic out to you. But I thought, given this kind of turning the page or new chapter feeling that seems to be underway at Baxter, it might be helpful to sort of touch on what some of the limitations were, what some of the challenges were that -- and I'm thinking of things like -- I don't know, there's a whole bunch of things, all that you -- things like pricing, things like distribution, things like shipping, things like flexibility in the P&L or investment and R&D. What were some of those challenges? What were some of those things that were before the sale of Vantive may be a little bit more of a constraint? And how are they -- people might associate with old Baxter? And how are they changing here as you begin this new year?

Absolutely. So I'll start with a couple of things that I think are part of the new Baxter and then I'll sort of tie that back to this a little bit. I think one of the things that was a key strategic reason for the separation and one of the benefits of this for us is why I would start with capital allocation, okay? The Kidney business was about 50% of the return on invested capital of Baxter as a whole. And so it's very capital-intensive. And so one of the biggest benefits that we start with is our ability to actually make targeted investments on those projects that are generating higher returns, and again and focused really on accelerating growth and obviously, ultimately, margin expansion. So our ability to allocate capital in a way that is more efficient and effective for us is really a key start...

And just before -- sorry to interrupt. But when you say a 50, 5-0 percent?

So the ROIC for Vantive was 50% of total Baxter. So it's significantly less is or half of total Baxter.

Got it. Okay. Right. The level of returns on a [ ROIC ] basis were half, right, which is not far off of like just -- if we say op margins, right, op margins were significantly below...

They were. So this -- so again, this allows us to focus and concentrate our investment dollars and higher return projects. The second thing I would say is from an operational simplicity perspective, and again, I'm never going to go all the way to simple for us yet. But what I would tell you is the exit of Vantive allows for us, from the vertical segments that we have today, to have a lot cleaner view from end to end where we're not integrated or we're not intertwined, if you will, at the Kidney business. And so our segments have a much cleaner operational execution perspective that is, again, that allows them to focus very much on the end-to-end in each one of the segments. So operational simplicity and ability to consistently execute is another part. And I'll give you an example of that. You mentioned distribution, for example. We -- one of the things as we work through this disentanglement is -- our distribution network complexity significantly reduces over time with the exit of Vantive. We had kind of, I would say, close to 50 distribution centers in the United States with Vantive. And the reason for that is because a lot of that business was home delivery. So there was certainly a very different model, if you will, and a different density of distribution warehouses that was needed. Now that, that has been, again, sold, we have the ability to really refine our network. And again, I don't have the exact number there, but maybe you need 1/3 of the centers that you needed prior to that, which not only allows for the simplicity of less roofs, but it also allows us to better manage our inventories in terms of the way it moves throughout our system. So that's just an example of a couple of things, again, from -- just from an operational perspective. And so I think what that translates to is a company that is more focused, again, and more able to consistently deliver, again, new product introductions through innovation, to consistently deliver our growth targets, to consistently execute on our targets, at our ability to not only to grow, but over time, expand our margins as well. And so I think that's maybe the kind of in a nutshell, what I see as the opportunity now post separation.

Okay. And then there were some things that may not necessarily be directly associated with the separation, but they were associated with the structure of the business, contracts in the business, inflationary periods that affected Baxter over the last several years, the pandemic, which are kind of now different. And so one of the things that comes to mind is pricing contracts. That was one thing where you were kind of unable to move on those. Maybe talk a little bit about how that's...

Sure. Yes. I think one of the biggest things that's different today in terms of [indiscernible]. Most of you realize, we negotiated 2 out of our 3 large GPO contracts. And some of the things that are different there, as you referred to, some of the flexibility around being able to pass along input costs in a different way than we had in the past. Previous contracts have been, in fairness to Baxter, have been negotiated at a time when inflation was at a much more modest level. And so the CPI increases on a year-over-year basis were fixed and not necessarily very large. And so during the time period post-COVID, we end up really holding the bag, so to speak, of a lot of costs that came through. The new contracts were negotiated in a way that actually had a lot more flexibility in terms of passing on input costs. Again, that's, I think, another example of sort of what's a new Baxter. I think the other thing I would just say though, too, is really this focus on product launches. Again, there is about -- there is a time period through COVID, through some of the supply chain challenges, where we had not rolled out as a company, a substantial number of products. And that focus shifted towards other things that were somewhat fighting fire and everything that was going on. I think where you see us today is in a place where, again, we're focused on what we refer to as customer-centric innovation, that basically says we're not innovating for science project reasons, but for the purpose of how do we drive innovation that really matters to our customers. And again, the introduction of Novum pump is a perfect example of that, where we have a product now that has advanced features, that drive simplicity, that can talk to, if you will, connect with other devices in our own ecosystem. That's -- that launch has gone extremely well and is an excellent example of that. And so part of the new Baxter also is a company that is much more consistently driving product launches into the marketplace, and I think that's another key element.

Okay. And then sort of connected care, sort of digital products and assets, for a lack of a better word, things like the new Novum software backbone, but also things like Voalte. So I think this was -- this had been, since the contemplation of the Hillrom deal, and before, kind of this like we want to lean into connected care. We have these relationship with hospitals. We understand the problems they're trying to solve. We think we can bring the technology solutions to solve them and make them more efficient. Maybe talk a little bit about how those are either product launches are underway, what we can expect to see in terms of where does that affect your growth model and what, if anything, you can talk about those kinds of products over the next 6 months, 12 months, 18 months?

Sure. So maybe what I'll do, I'll start with just generally product launches across our business, and I'll certainly touch on the connected element. I think again, back to the product launch, clearly, Novum being a key one in MPT. But Pharma, also in our Pharmaceutical business, we've talked about the fact that double-digit numbers of product launches here is a key target. We achieved that in 2024. We're looking to achieve that in 2025 and then beyond that. And these are products that are differentiated products in the injectable space. So something that is, again, driving margin accretion as well as growth opportunities. And as you've seen in our Pharma business, we had a strong year last year. We guided to 5% to 6% growth again this year in Pharma. And again, certainly an element of that is the product launches that we have had and we'll be having here in 2025 and then obviously beyond that. So that's certainly a key focus. On the HST side, and I would just say in general, again, I look at connected care is it's not a strategy in and of itself, but it's a key focus of the products that we have that fit into a connected ecosystem. So the way that you described it is to make life easier for hospitals who have staffing issues who are trying to manage more patients with less staff. And so there's an element of this that when we roll products out in [indiscernible] and others that really incorporates the connectedness into it. And so products that we have coming out in HST certainly have an element of that. We've got a number of them coming out in 2025. And certainly, even in the furniture space, I'll say there's other things that we're also excited about that we haven't given specificity to, but we feel really good about is coming out in '25, '26 and then beyond that.

Okay. So post the deal, you've talked about, and you have paid down a certain amount of debt already, I think, on the transaction, targeting 3x leverage or less by the end of the year. And then you've already adjusted the buyback, and I say that -- I'm sorry, the dividend. And that was a bit of an overhang leading up to this. I think there was some question, are you going to be able to keep people holding dividend? Ultimately made the decision to rightsize the dividend. So that's kind of like, that's, I guess, you could say, adjusted and behind us now. The question is, is at what point along the way do you do you start becoming a little more acquisitive strategically? And then what areas should we start to see that kind of activity?

Sure. Yes. So just from a broad capital allocation perspective. To this point, we certainly have been focused on paying down debt to the 3x ratio that you talked about. We're confident in our ability to hit that by the end of this year. And so -- and then from there, again, it really does come down to how we start thinking about investments in our business, both organically and inorganically. And I'd say one of the things that the 3x does for us and combined with our ability to generate cash flow, is it certainly does free up capacity for us to be able to start thinking about those type of fold-in tuck-in deals. Again, this is not a signal for, say, some material large acquisition. That's not the point. But the fold-in tuck-in deals in areas like pharmaceutical injectables, in areas like -- possibly in the -- maybe the ambulatory pump space, things like in advanced surgery, those are areas that have kind of just jump out as sort of obvious opportunities for product adjacencies that could continue to benefit our portfolio. But again, those are considerations once now that we -- once we achieve our target. We do remain committed to a dividend. I want to be clear on that. And obviously, as you said, we rightsized it down, but that's something we remain committed to. And we also look forward to reestablishing a buyback program. I think there's -- certainly both in terms of basically absorbing the dilution that's happened over the last couple of years from that, but also having over [indiscernible] a recurring buyback program that makes sense for our company. And again, really balances out the capital allocation. Again, I do want to reiterate, we wanted -- that will be something that would happen after we've achieved our 3x leverage target. But again, I'm very confident in that. And this is a company that, over time, will generate -- I think there could be a very good cash-generating business, and really look forward to those things we just talked about.

Sounds good. Yes, I'm glad you mentioned pharma because I get the question sometimes like pharma, injectables, how is this -- and I think you got this question from the very beginning when you did that deal and got into this business a little more depth is how is this a good business? Like why is this a good business? And so maybe if you could explain which you said there's products that are kind of differentiated, unique, even though they're in kind of a space that we might call sort of generic injectables. Yes. So how is a product like that good for that? What kinds of opportunities are attractive to fold in or tuck in to that business?

Yes. So I'm going to start and then Clare can kind of chime in here. I think the key thing I would say here is, again, it's -- yes, they are generics. But again, they fit nicely within our portfolio because they -- again, we have solutions. We have products that generate solutions, and we have drugs that then, obviously, are utilized in the space. And so much of how we think about the differentiation around it is packaging and sort of how these things are able to be presented and utilized through our ecosystem. And so those are -- that is part of the way we roll these out and have rights to these molecules and what we acquire are these different ways that we can differentiate ourselves to make it easier, again, back to this point, for hospitals to administer those types of products. Is there anything you would add to that?

That's exactly right. I think it does come down to the proprietary packaging technology that we have allows us to put these products in ready-to-use format, which then obviously drives efficiency at the hospital system. So you have labor efficiency there. You also have -- if you think about medication errors, potential for reduction in medication errors because you're not having to reconstitute those. And we tend to go after those molecules where there is risk of that happening. So we're continuing to broaden the number of molecules we bring to the market in the ready-to-use. So we're really focused on that differentiation. So we kind of look at it as complex, whether it's from a formulation, packaging, how can we differentiate ourselves within the market because there tends to be less competition and customers are willing to pay a premium for that as well.

Right. And this is where it does come both to an organic and inorganic opportunities because, again, there's certainly -- there's some of that development that would happen in-house and internally, but also, again, as far as there's a development time line on those. And so there's always kind of a choice between is it a build versus buy, and those opportunities to actually bring in external businesses or licensing that actually allows us to do that in a more -- in a quicker way.

Got it. So sort of like core expertise, competency and sort of like different containers, injectors, sort of like premixed delivery.

It's exactly what it is. It's premixed, ready-to-use.

So like a Myxredlin type of opportunity. The ready-to-use insulin product. And so has that been the success for you? We kind of lost track of it with everything that's been going on in the last couple of years. But is that something you'd hold up and say this is a good example? Or is this more -- should we think more like generic injectables that are -- because your sterile fill or your manufacturing capacity, you're especially able to get after like an injectable pharma opportunity?

Yes. I guess I think about it as a broader, it's the portfolio impact versus one specific. The more we launch, what we're seeing is the more pull-through we're getting for the overall portfolio in general as well. Because when you have some of these hospital systems convert over to the ready-to-use, you tend to find them buying more of the overall portfolio. So for us, it's about increasing the number of molecules that we have in this presentation. So I wouldn't say it's one particular mix. Myxredlin's doing fine. I mean I think that [indiscernible] is another one. We have a lot of the antibiotics and anti-infectives. That's probably an area. Another, I guess, [indiscernible] there would be oncolytics. So between those 2, those are probably the 2 areas in terms of classes of pharmaceuticals and specialty injectables that we would be looking at, to bring into, again, whether it's from a complexity of manufacturing or being able to put into a proprietary packaging system.

Okay. So we're about 5 minutes left here. If anyone has any questions, please feel free to jump in. But -- so maybe -- and one -- those are -- that's the area of interest, but is the -- do we wait until you get to 3x before we start seeing increased strategic activity towards the end of this year and into next year? Or are we going to see something before then?

Yes, I think you should really expect us to get to the 3x. I think it's -- I've always been a strong believer in our -- to live up to our commitments. Obviously, there's been some stress on our balance sheet over the last couple of years. And we've had a lot of communication with the rating agencies and worked well together with them. I think it's the right thing to do to achieve the targets we said we're going to achieve. And then from there, we start the opportunity to process being able to take additional opportunities.

Okay. So one of the criticisms of the company in the past, again, this is sort of like old Baxter or new Baxter opportunity is that where is -- I'm sure you've gotten this over the years, it's like where is the sort of shiny object? Where is the growth driver? Where is the thing, the innovative thing that we can get excited about behind as an investor? Novum is obviously a powerful launch with a couple of years of replacement cycle in front of it, and that's up 50% last year, which is pretty amazing. But I guess, when -- first of all, what about the separation positions you to do more there? And when -- what's the timing of cadence of those kinds of additional growth drivers, not that they're going to be like Novum, but additional growth drivers that we can -- what we should start to expect to see?

Yes, I look at that as part of what we think about as part of our growth algorithm going forward. And when we talk about this 4% to 5% growth level, we've said that, certainly, it was for 2025, but we said, hey, this is the way to think about this as a basis to think about our company going forward. And so a lot of that does have to do with driving new products out into the marketplace. And so I think you should expect us to have a consistent theme of new product introductions really across our portfolio. And again, so many of the areas we've touched on here and that certainly in the pump space and again, obviously, not only the LVP pump, but there's a syringe pump that we talked about, again, over time, [indiscernible] the ambulatory pump space. I think the -- both from a nutrition standpoint, again, from advanced surgery, and we talked about those -- where those are areas to be able to potentially not only develop in-house products, but to bring other products potentially in through inorganic means that allow us to grow. Certainly, in Pharmaceuticals, I think we've touched on is a -- we anticipate this sort of double-digit product rollout to continue to occur on a consistent basis. This is -- as you know in that space, there's margin implications, products get launched and there's margin declines that happen, but that's why it's so important to continue the new product launches in order to continue to maintain and expand our margin base on that, and that's something that you should expect from us. And then -- and again, really, and again, in HST, it is both the -- again, the sort of devices and as well as, again, over time, some of the products -- I'll call them broadly, furniture space, where we should continue to expect to see that. And again, so much of this is driven by our ability as a new Baxter to actually make those types of investments that are very targeted and focused on high-return projects. You'll see our -- over the next -- in 2025, I mean, our R&D spend did tick up 10 basis points-ish. And when you back the MSA revenue out, it's over 5% from an R&D perspective. And so I think it's just something that should become a common theme about how you think about our organization. It's something that we're really striving to consistently execute.

Okay. So in terms of cadence, if I'm hearing what you're saying, the new structure positions you to kind of deliver on the margin commitments you've made this year without maybe some of the cost-cutting and internal stresses that you faced in the past to get to those margins, you're investing for more in R&D.

That's right. The only caveat I'd throw to that is that we did have stranded costs that is a residual from the separation. So we've talked about the fact that we have $240 million of stranded costs by -- at the end of 2024. That is something we're going to need to work down. And what we said in 2025, about $125 million of TSA income is going to offset some of that. And what will be -- and as well as cost containment activities we're working on. We'll be -- what we'll be left with is about a 40 basis points impact for 2025. And then as we head into '26 and '27, those TSA income will start to move down, but our cost containment measures will continue to elevate. And so by the end of '27, you should expect that we will have -- we should -- we won't have PSA income. And also, we will be through our stranded costs. So that's the other -- the one element. I agree with what you said, but I'd just caveat it with the need to remove the stranded costs.

We're still working through some of those -- the cost transitions from the sale. All right. Well, we're out of time. So we'll drag into the next session here. But thanks so much, Joel and Clare, for coming.

Thank you. Thank you very much.

Thank you, everyone.