Welcome, everyone. I'm Robbie Marcus, the med tech analyst at JP Morgan. Really happy to have our next session with Baxter International. Gonna bring up Joe Almeida, the CEO, for a presentation, and then we'll do some Q&A after. Joe?
Good morning. Thanks for attending the Baxter JP Morgan conference, presentation. Please read our safe harbor statement. This is also in our website. This presentation is gonna be posted there as well. About a year ago, we set forth a transformation mission for Baxter, and we've been very active in pursuing that. I'm gonna give an update where we are today, and tell you how much progress we've made now, and how excited we are about the future in 2024. Baxter touches about 350 million patients a year across the globe. It's one of the largest healthcare companies in terms of interaction with patients, not only in the home, but also in acute sites, hospitals, every ward in hospitals.
We are four segments: our Medical Products and Therapies, our Healthcare Systems and Technologies, Pharmaceuticals, and our Kidney Care. We're present in more than 100 countries. At Baxter, everything we do is centered around the patient. Our mission is to save and sustain lives. We are engaged, 61,000 people, engaged every day in making patients better once they're in contact with products that we make. We have a very strong ESG agenda, and I just wanna highlight to you that by 2040, we will be carbon neutral. We're working very hard at the moment, implementing strategic water programs. As you know, Baxter is a very large consumer of water. It's the largest IV infusion company in the world. Also, integration of our energy systems into a sustainable way of continuing to operate. We have several of our plants today with cogeneration.
Our plants in the Caribbean are self-sufficient for the most part, with cogeneration on site, implemented one in Aibonito, Jayuya, and the next one is down in Guayama. We also are very focused in our patients, as I said. We've got to continue to improve our process and capabilities to ensure patient safety and quality in everything we do. We have invested over $275 million in underserved communities across the globe during the period that we're speaking about, and diverse representation is very important to us. More important, actually, is the inclusion factor. Baxter has made significant progress, and ESG has been a tradition of the company. We're gonna continue to charge forward. If you think about where our mission meets our commitments, we are in markets that grow 3%-4% a year. The three...
Well, what I will call the Baxter businesses, ex kidney, 3%-4% a year, are the expected growth between 2023 and 2026. We are from anywhere, hemodynamic monitoring, IV therapies, infusion pumps, compounding systems in hospitals. Also, in our Healthcare Systems and Technologies is our Patient Support Systems, our general surgery systems that we have, surgical lighting, surgical equipment, as well as the only integrated surgical table to robotic systems in the world. As we continue to progress in our injectables, we had a real period where Baxter had headwinds in price erosion. We have diminished due to our innovation. Our innovation has been significant in bringing new molecules to market using Galaxy technology, which is very strong for Baxter. Baxter has grown, you know, 5%, 6%, 7% this year.
We've seen the growth in our pharmaceutical business, and I'm very excited about the management of that group today, because we've made significant strides in offsetting what has been the most remarkable price erosion that we've seen before 2023. All these products have a significant amount of diversity. There's no one product that has more than 2% or 3% of sales in the company. We have diversity of geography, diversity of products, and a lower risk due to the variety and mix of our products. We continue to enhance our supply chain, which has been an issue for us, and I was here last year speaking about the challenges. We're able to turn that around.
We have a much more resilient supply chain at the moment, and we've been able to make significant progress towards our objectives of reducing our cost. We have significant amount of innovation. I heard today from an investor asking questions about what is innovation at Baxter? Baxter has increased its spending in R&D in some of our categories. We have more than 22 new products launching in 2024. Some of them are on the screen. These are pipelines of products that will be launched in 2024, 2025, and 2026. You can see from every single product line we have, we have technology. As you know, Baxter had to restart its research and development function for medical devices when I came to the company, it was inexistent, and we were able to build now centers in India.
We have centers in Northern Illinois, and we're putting a center in Boston to be able to continue to enhance our ability to create software-driven alternatives for improvement in flowing hospitals. Software drives everything we have. Integration, the software, of software is very important to Baxter, so having different sites and different locations that can bring together the software integration for Baxter is extremely important. We continue to invest in our reformulation of generic drugs, that we make them two-year shelf life, ready for use in hospitals using technology proprietary to Baxter, and pharmaceuticals continue to launch a significant amount of new products. Matter of fact, in the next two years, they're gonna have 15 new products launched. When we go into our Kidney Care, now we're divided in two different businesses: a Chronic Therapies and Acute Therapies.
The chronic therapies, we have a very large footprint in our peritoneal dialysis business, as well as our HD or hemodialysis business. The growth of this business expect to be about 3%-4% between 2023 and 2026. Just I want to point out that our product offering is very comprehensive and truly global. The United States is about 25%-30% of sales of this business, so it's one of the most global businesses that Baxter has today. In terms of near-term opportunities and new products, we are very focused in telecare. Telecare is where we think the enhancement of outcomes of PD is gonna come from.
We have noticed after our launch of our telecare business with our Sharesource application, that we can get up to 50% retention of patients on therapy once they start using this, this technology. So this allows us to keep the patients on therapy, which is beneficial for them, and then instead of shifting from PD to HD. We have made significant progress in acute therapies. This is a business that's been grown significantly during COVID, has been a business that has significant amount of margin opportunities, continue to increase, and is a very global business. We have the leading technology in continuous renal replacement therapy, and that is supplemented by other therapies such as liver, as well as sepsis and CO2 removal in our portfolio.
It's a very exciting technology, was, as I said, key during COVID, and it is even more important going forward as the portfolio of our Kidney Care business. If you think about what we came down last year to present, three things were said: We're going to finalize our operating model into transforming the company into segments and decentralize what was originally a long-term Baxter way of operating. We also said that we're going to complete the sale of our BioPharma Solutions business, and we were going to spin off or separate our kidney business. And we're. I have to say that we made tremendous progress in complete both the reorganization of the company, as well as the sale of our BioPharma Solutions.
We sold for a significant amount of premium and has been a great opportunity for Baxter to pay down debt and put money in the balance sheets to be able to deploy against debt repayment in the future. The progress is being significant in the separation of our renal business. We are in process today with already going live in many different regions of the world, so we are progressing towards the spin at the end of July 2024. So how do we think about value creation for Baxter and for our shareholders? You think about three different, very important pillars and levers we have. Commercially, we are a large company. We have the ability to negotiate contracts at a large institution.
Baxter shows significant advantage when it's in contract negotiations with specific institutions to be able to provide value to them. Commercially, we have the footprint, we have the products. We also have the innovation. You look our ExactaMix Pro, launched and is doing very well in the U.S. We have our new Novum platform, large volume parenteral, launched in Canada. It's currently with the FDA in the U.S. We're in active discussions with them, hopefully to have that approved in 2024 and launch. We already have in the U.S. our new pump, that for syringe pump, the first in the history of the company, is launched in the U.S. and doing well. Innovation in Front Line Care has been significant. We've been growing our cardiology business in the upwards of 37%. It's doing extremely well.
It is a business within our HST portfolio. We also did significant launches this year in the PSS, our Patient Support Systems, with the new Progressa+ bed and the new and the Centrella, a workhorse, a great product for Med-Surg that we just added lateral rotation to it this year. So several different launches. Also, the ability to avoid significant price erosion in our pharmaceutical business was due to innovation, significant innovation, and launch of molecules like Zosyn and other things. Operations, we streamline our operations in Baxter. This was a long-term coming, history of great manufacturing operations, but at the moment that we were faced with supply chain challenges became a significant hindrance to the company. We transformed that. We have a new team in operations led by James Borzi, who joined us about three years ago.
And we were starting to see the cost reductions, which are in between $300 million-$400 million a year, is starting to offset inflation headwinds and starting to drop to the bottom line. I feel much more comfortable with our supply chain today and the changes that we've been making to make sure that we have resilience in supply chain. It's not only the ability to produce product capacity, it's patient safety, quality, and resilience. We see that day in, day out in the U.S., with our competitors not being able to produce products, and we come in and we supply those products. For instance, in products as basic as IV bottles, which are sterile water that is used in hospitals for several different procedures. We're number one competitor.
We're increasing capacity and putting more products on the market because our competitors cannot keep up with the demand. So there's great, great things happening in Baxter. Expanding the commercial footprint, accelerating innovation, and making sure that our supply chain is resilient and repeatable in everything we do. If you think about very same themes for Kidney Care, and Kidney Care has done a great job in terms of managing the portfolio of the company. As you know, we shut down one of our factories in the U.S. making dialyzers. We did this to be able to enhance our ability to produce the product effectively and profitably. That was done in a way that did not impact the market at all, and also positively impacted Baxter.
So it's a win-win because the market did not need that capacity, and Baxter was able to take that out without any consequences. Innovation, we are accelerating the R&D, and if you talk to Chris, Chris is, Chris Toth, our, our, CEO appointed for Kidney Care, and his CFO, Matt Harbaugh, will be with us during the one-on-one. So, you'll be able to ask more questions, answer more questions about the portfolio, work that they are doing. So for me, as the commercial expansion of that business continues to show, progress, innovation with new, PD Telecare, as well as in operations, making sure there's resilience across the board to be able to produce the products needed every day in people's homes. So if you wrap this, there is good momentum in Baxter. We've been, executing every single quarter.
The company is optimistic about our growth rates in 2024. We are executing in everything that we promised to do. We are hosting an investor day later this year. There will be two different segments. One is gonna be Kidney Care in separate. It's gonna have its investor day, and then Baxter is gonna have its own. We are convinced the separation of Kidney Care from the rest of Baxter will generate value. Those are two very, very different businesses. They operate with different end customers and different profitabilities and ROIC. They are not similar to the rest of Baxter. Despite the fact, for many years, they've been part of the same company, they are completely different, including the go-to market and how we distribute the products.
They're extremely different, and I think there is value in separating them and creating opportunities for both companies to invest well in the key levers and drivers of value for the shareholders, that together we will not be able to do it because just the use of resources. I wanna make sure that you know our first priority for capital allocation is to pay debt. We're gonna pay debt until we get to the ratio that we wanna have, and then we will deploy capital in share buybacks and in the small tuck-in acquisitions, but only once we get to the debt level that we want. This is our priority number one. So with that, we will... I will ask for Joel Grade and Clare Trachtman to join me on the stage.
I think, Robbie, you're gonna be asking us questions and the audience.
... Well, great. Joe, 2023, I feel like was a bit of a transition year for Baxter. You announced the spin, you sold BPS, you executed some good quarters, you were able to beat and raise consistently. Coming into 2024, we don't yet have full, 2023 numbers, but how are you feeling about the health of the business and the direction that Baxter could go in over the coming year?
Our businesses are executing well, as you could see, for execution for second, third quarter. I have no doubts that we'll be able to execute on our promises on the fourth quarter as well. We have, with the change in organization, made a significant improvement in how we operate our markets, how we go to market. As a matter of fact, separating segments made us stronger going to market than we had before, being by regions of the world. The allocation of resources and capital are going well. The execution of our divestiture of our BioPharma Solutions was excellently done.
As you and if you are aware of the price that we sold the business for, it was very important for Baxter to be able to recapitalize and be able to pay the short-term debt. You're gonna see the benefits in the fourth quarter with reduction of interest expenses. So there's quite a bit going on in Baxter, but more remarkably, I wanna underscore the transformation, the supply chain, the ability that we put together a team that now has integrated systems to manage a very complex supply chain.
We are a medical technology company that has pharmaceutical business and medical devices with significant worldwide footprint, and that management now today, the centralization and the ability to obtain our cost reductions at a $300 million-$400 million a year, has been great for us. So our team is executing well. So good execution, 2023, expecting even better in 2024.
Great. Joel, maybe I'll toss one over to you. You know, and I, I realize we're gonna probably be getting updated long-range targets for Remain Co and Spin Co, which I'm restricted on, so I'm gonna stay away from Spin Co for this presentation, later this year in the spring at an analyst event. But how do you feel about Remain Co's ability to reach or get close to the previous targets for Baxter, which just a reminder for everyone, was 4%-5% constant currency, revenue growth, 350-400 basis points of operating margin expansion through 2025, and greater than 80% free cash flow conversion by 2025?
Yeah, so I feel good about that. And as you said, certainly as a reminder to the group, there will be an updated outlook at an Investor Day later. So in terms of that type of detail, you'll get that then. But our goal is to have growth that's over and above our end market growth, and I feel good about our opportunity to do that. And in addition to that, it will be growth, but profitable growth, and so growth that's gonna not only continue to accelerate growth beyond that of our end markets, but also do so in a way that expands our margins. And so I feel good about those things.
Things as you heard Joe talk about, the things we're executing on, across the enterprise, certainly give me that confidence as I've come into this company. The other thing I would just say in terms of the... Just as a reminder, once the, the spin does happen, you will see margins at our company that are actually higher than the WholeC o that you see today. And so that's, that's, it's an advantage for us, obviously, both from the perspective of having a bottom line that is expanded, but as well as the opportunity to then continue to, to put some of that money in for reinvestment, which certainly is obviously part of the what we see as part of the key strategy is the spin and, and the opportunity that we see to create value.
Generally speaking, I feel good about where we're at, and I think, again, this company is at a place we just continue to execute better and better.
You touched on weighted average end market growth in around 3%-4% for the RemainCo component. You know, I think everyone would probably like to see that move up over time as it's, you know, it's easier to grow higher revenues if you're in faster growing end markets. So maybe speak to how Baxter can do that organically, and is there an inorganic component that you're looking at as well?
The innovation and sites of care are how we're gonna be able to surpass WAMGR. Add to the WAMGR, if you think about sites of care, things like ASC are new opportunities for Baxter. We always served ASCs, always did through IDNs in the U.S., but there is a very large group of ASCs which are not connected to hospitals, which are independently owned and operated by physicians, and that is an area that Baxter had very little penetration in the past. And with our HST business, with the beds, if you think about what we offer, we offer from this furniture coming into the ASC, to the beds, to the pumps, to the sets, to the anesthesia anesthetic gases, medicines, monitors. So we have very complete offering.
So for us, it's important, and we put together a brand-new group that will be calling on the ASC with a different portfolio. So important to us is that to get to a higher WAMGR, it has to be some of that organically, and once we pay the debt to the level that we want, we then with tuck-in acquisitions, primarily in Front line C are, in our Care Communications and parts of MPT, we'll be, we'll be able to expand the WAMGR. And it's important to us, we'll be focused on that, and it's something we're gonna do once we get into 2025.
Great. You know, just maybe staying on the longer-term outlook here, costs have been something that's been an issue at Baxter, particularly with inflation over the past few years here. You've put into effect a number of projects to help overcome that, improve your margins, and I think, you know, we're set for 2024 to see pretty substantial operating margin expansion, which we could get into in a few questions here. But for this question, specifically, just maybe talk to the projects you're doing on the operating margin expansion continuum, and, you know, where in the life cycle of those you are.
Sure, I'll start with that. And I think it starts around our integrated supply chain work, with work that we're doing to really call it optimize our network, optimize our distribution, optimize our logistics. There's a lot of automation work that's being done that is again further enhancing that opportunity. You know, from a purchasing and procurement standpoint, one of the things that we're looking to do is to continue to figure out how to leverage our again this Joe talked about scale and the ability that we have to leverage that in terms of how we procure how we procure products both on the direct and the indirect side. I think those are some of the areas that are truly focused on on the in the COGS area.
One of the things I'll say, and I've said this before, we're not going to SG&A ourselves away to prosperity, but nonetheless, there are still opportunities on that end as well, areas like shared services, other areas that we continue to enhance our overall operating margins in the company. Joe, anything you want to add?
Just adding that new product launches will enhance that profitability. So if you think about when we're able to launch our new pump platform, that has opportunity for improvement of margins. When we look at our Progressa+, new monitor. So all the products that we launch have opportunities to provide better margins than our current products. So the growth comes not only from optimizing our cost structure, our what I call our OpEx, but it's also the mix of new products that will bring the margin up.
Robbie, if you—I could just go back to one of the things you asked about, even on the free cash flow side. All these things are also going to contribute to our ability to generate... We target an 80% conversion ratio for our cash. And so when you combine that with some of these things that also impact how we manage inventory, how we manage working capital, the combination of those things ultimately attributes both from a P&L perspective and from a free cash flow perspective.
Okay, great. If I look at 2024 and realizing you haven't fully reported out fourth quarter and full year of 2023 here, you know, I think everybody's looking forward and trying to get their model set for the coming year. Maybe I could run a few numbers by you. The way I look at 2024, I have your, your, Remainco component around your weighted average end market growth of 3%-4% or so in 2024. Renal, you have China VBP, and you also have the exit, as you talked about, the dialyzer plant as headwinds in the year. We're at around -1% in our model, puts you at around 2%-3% constant currency growth for 2024. Is that a fair way to think about the business?
So I'll take that one. So, Robbie, what I would say is that, I mean, we haven't provided our guidance for 2024. Our expectations, we'll provide that on our fourth quarter earnings conference call, which is scheduled for February eighth. I think directionally, what you're saying, and this is aligned with some of the commentary that we had on our third quarter call, that it-- that, you know, I think we've had some momentum, as Joe referenced earlier, for this year, that we see continuing into next year. I think with kidney care, there are some headwinds that they're facing, but the underlying momentum within that business, particularly with our PD patient growth, in markets outside of China, is doing really well.
I think that we're starting to see some traction across all of our businesses that we believe will carry us into 2024.
Maybe same sort of question down the P&L for 2024?
Mm-hmm.
I know there's currency to think about. There's debt paydown and interest expense.
Yep.
There's global tax regulations, which are pushing up tax rates around the world. How should we think about some of the puts and takes down the P&L?
Yeah. Again, we're not going to give specific guidance, but I do think that we are anticipating a level of margin expansion next year, driven by a lot of the programs that both Joel and Joe referenced within our integrated supply chain, that will help contribute to driving that margin expansion next year. Our interest expense will go down, given we were able to utilize the sale of BPS to reduce our debt load. So we do expect that to come down next year. From a tax rate perspective, we do expect our tax rate to increase next year, probably by about 100 basis points, driven by, primarily by the Pillar Two, the implementation of Pillar Two. So I'd say, you know, all of those factors that you referenced are there.
This will lead, you know, our expectations to some level of earnings growth, but we'll provide the specific guidance, you know, in the next month.
... Specifically on interest, some of the debt you're paying down, May timeframe, I believe, is probably a little lower rate than the interest you're earning on the cash. So is it fair to assume first half, lower interest expense, second half higher, but total year lower than 2023?
That's exactly a fair assessment. We're holding cash right now. By the end of 2023, what we'll have done is paid out some low coupon debt, but also paid down our 2024 term loan. With the remainder of the cash, we'll hold that till our European bond that's due in May. We'll pay that off. We will pay a portion of our 2026 term loan, but in the meantime, we are earning cash or earning interest income on that cash. That will lessen as we pay down the low coupon debt, so it will, interest expense will pop up a little bit in the second half of the year, but to your point, we'll be down pretty meaningfully year-over-year.
Yeah, and I guess the only other add to that is on the 2026 term loan, that's also some-
Yeah
... a floating rate debt.
Yeah.
So in the event that interest rates do mitigate to some degree, there may be some marginal benefit-
Yeah
from that as well.
Just scan the room. Any questions? All right, I'll keep going. As you think about some of the different business lines and product launches, any updates you could give us on Novum IQ, where it stands? Is 2024 the year for approval?
We're in active discussion with the FDA. I preface my comments that I do not speak on behalf of the FDA. I do not have insights of their process. But I tell you, our relationship with the office that is evaluating the product has been dynamic, and we have discussions with them, and this is an active review. So I'm cautiously optimistic we'll be able to launch in 2024.
And I would just supplement that. You know, in the meantime, as we have done this year, we're showing tremendous progress with our Spectrum IQ pump. So we'll continue to focus on, you know, accelerating growth with our infusion systems business next year, with further placements of the Spectrum IQ pump.
We continue to take market share with our current pump, which is doing well. We just took one mid-December, very large account in the Midwest, so we continue to do well with that. So the addition of a new pump platform, Novum, to the U.S., we already have, by the way, the syringe pump approved, and that is going well as well. Will be a great deal for us. So, we'll look forward to have that approved in 2024.
Novum not being on the market today isn't necessarily hindering your growth or your ability to drive market share. It's not hurting you versus your competitors who had recent approvals, but when it gets approved, it should help with sales growth and help you gain even more share.
It's a missed opportunity, right? Not having that in the market, we could do even better than we're doing today.
Great. Sort of in that business line is where it gets the most attention for pricing, and, you have some big GPO contracts coming up for renewal later this year. Maybe walk through your process on how your contracts were structured previously, what you hope to add to them, and how much it can add to Baxter growth in 25?
Our contracts were always, designed to compensate for some form of, inflation erosion, always, but not to the extent that we saw back in 2021 and 2022. So we made changes to the structure of the contract to be able to accommodate those, very large swings in... When we have labor going up 15%-20% and raw materials went up 25%. So we had to restructure the agreements to accommodate for that. The second thing is, we also have invested quite a bit of money in manufacturing reliability. We're the largest, producer of IV solutions in many countries in the world, so we wanna make sure that our reliability is paid for, as well as the quality and patient safety of our products. So we do have price increases there.
Remember, GPO contracts are the first step, then you need to negotiate all the independent integrated delivery network systems for individual system contracts. But I feel that now we will have more structure and a realistic type of contract in place that will prevent what happened in the past from happening again.
Is there any way to size what the lost margin has been from not being able to raise your prices equal with where it should be for your costs?
No, we have not sized that, Robbie. I mean, I'd say, you know, you have seen erosion across all of, you know, the Baxter portfolio, really driven by the inflationary impact, which has impacted most of Baxter's businesses, including this one.
We talked a little bit about inorganic and how you think maybe, you know, there are certain parts of the business that could benefit most from selective ads. Tuck-ins, I think, is the word you used. Are you done with maybe exiting businesses? Do you have the right portfolio at Baxter today, post-spin?
For the most part, yes. I think any company needs to continue to watch very carefully their portfolio for two things: Should you really own that business? Is that strategic to you? The second question is: Is that accretive to margins, and can you replace that with something else that is better for your business? So we always gonna ask those questions, and I think there's some small adjustments continue post-separation of kidney. We're gonna continue to look after. Either it's a geography that is less profitable and more costly, or a product line that needs probably it can find a better owner someplace else, and we can get something else into the company that under us will be a better business.
So, we're never done when it comes to portfolio management, and we'll continue to dynamically manage the portfolio for better ROIC and earnings return.
Yeah, and I think just to add to that, I mean, as Joe said earlier, from a capital allocation perspective, you know, as we get through 2024 and get our debt ratios back into our targeted areas, I think this focus on both organic and inorganic opportunities is gonna be part of how we think about growth in general. And so I think that that active portfolio management is gonna be an important piece.
Well, and it leads into your question on the WAMGR, because this is all designed to increase the WAMGR.
Yeah.
Absolutely right.
Yeah.
Dynamic portfolio management, organic expansion into adjacencies with new products, commercial expansion are organic ways driving our WAMGR, and that's exactly what we're gonna do. Beyond tuck-in acquisitions, as Joe mentioned, once we get to the point that we are in better shape in terms of debt ratio, the way we want it.
Maybe probably the last question with the time we have. Joe, how do you view the state of the U.S. and outside the U.S. healthcare systems? It's-
Mm.
Essentially all your end users are in the healthcare systems. So how do you feel about their ability to purchase new capital equipment and their ability down the PNL, that help to continue to pay for innovation?
It's very difficult to answer a question with so many different places in the world we do business. I'll focus in the U.S. Large hospital systems in the U.S., I think we are in stable position right now and improving. I think not all systems are created the same, but in general, I think the healthcare environment is stable to a slight positive. Outside U.S., we see good growth in Europe, in many, many countries of Europe and parts of Latin America. We always, now with the VBP, a little cautious when it comes to China. I think China is a market that continues to be worth investing. 1.2 billion people, we just need to find out how to invest well, and how to have the technology that really makes a difference there.
So Baxter in the future will be very small in China. Most of our business in China is actually owned by the Kidney Care company.
All right. Well, we're just about out of time. Thank you very much for joining us today.
Thank you.
Thank you, everybody, for listening.
Thank you, everyone.