For joining us.
Thanks for having us.
I wanted to maybe start with, you know, there's a—there's a bunch of topics folks have been asking about. Obviously, you have a CEO search underway. You know, I will just say there's a—there's a—there's a concern over hospital budgets, and there's a bunch of things that I—I don't know if those are the best things to spend our time on, but we'll—we'll try to come back to them if we have time. By all means, if anyone has a question, please, raise your hand, and we'll get a mic out to you.
I thought, given this kind of turning the page or new chapter, feeling that—that seems to be underway at Baxter, it might be helpful to sort of touch on, you know, what some of the limitations were, what some of the challenges were, that—that—and—and I'm thinking of things like, I don't know, there's—there's a whole bunch of things. I'll let you, like, things like—things like pricing, things like distribution, things like shipping, things like, you know, flexibility in the P&L or investment in R&D. You know, what—what—what were some of those challenges? Sorry.
Just fly, fly around up here.
Gary and I think he's just been following me. You know, what were some of those things that were before the sale event of maybe a little bit more of a constraint?
Sure.
and how are they—you know, people might associate with, quote, "Old Baxter," and how are they changing here as you begin this new year?
Absolutely. 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, you know, one of the things that was a key strategic reason for the separation and one of the benefits of this trust is what I'm going to start with: capital allocation. Okay? The kidney business was about 50% of the return on invested capital of Baxter as a whole. It was very capital-intensive. 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, focused really on accelerating growth and, obviously, ultimately margin expansion.
Our ability to allocate capital in a way that is more efficient and effective for us is really a key start.
Just before you—before you—sorry to interrupt, but, when you say a 50—50—50%?
The ROIC for Vantive was 50% of total Baxter.
Okay.
It was significantly less or half of total Baxter. I'll say it.
Got it. Okay. Right. The level of returns on ROIC basis.
Exactly. Half.
We're half. Right.
Right.
Which is not—not far off of, like, you know, just op—we'd say op margins. Right? Op margins were significantly below that.
They were.
That we remember.
They were.
Okay.
This allows us to focus and concentrate our investment dollars in 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, with the kidney business. 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. Operational simplicity and ability to consistently execute is another part. I'll give you an example of that. You mentioned distribution, for example.
We, one of the things as we worked through this disentanglement is, you know, our distribution network complexity significantly reduces over time with the exit of Vantive. We had, you know, kind of, I would say, close to 50 distribution centers in the United States with Vantive. The reason for that is because, a lot of that business was home delivery. There was a—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.
I don't know the exact number there, but maybe you need a third of the centers that you needed prior to that, which not only allows for the simplicity of fewer roofs, but it also allows us to better manage our inventories in terms of the way it moves throughout our system. That is just an example of a couple of things, again, just from an operational perspective. 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 that are our ability to not only grow, but over time expand our margins as well.
I think that's maybe the—it's kind of in a nutshell what I see as the opportunity now post-separation.
Okay. And then there were some things that, you know, may not necessarily be directly associated with the separation, but they were associated with, you know, the structure of the business, contracts in the business, you know, the inflationary periods that affected Baxter over the last several years, the pandemic, which are kind of now different. And so.
Yeah.
One of the things that comes to mind is, you know, 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 changed.
Sure. Yeah. I think one of the biggest things that's different today in terms of, you know, you'll—most of you will realize we negotiated two out of our three large GPO contracts. Some of the things that are different there was, was you've referred to some of the flexibility around being able to pass along input costs in a different way than we had in the past. The previous contracts had been, in fairness to Baxter, had been negotiated at a time when inflation was at a much more modest level. The CPI increases on a year-over-year basis were fixed and not necessarily very large. During the time period post-COVID, we ended 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 along 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 a—there's 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, you know, fighting fires 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, you know, the introduction of the 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 launch has gone extremely well and is an excellent example of that. Part of the new Baxter also is a company that is much more consistently driving product launches into the marketplace. I think that's another key element.
Okay. And then, sort of connected care, sort of digital, you know, products and assets, for lack of a better word, you know, things like, like the new Novum software backbone, but also things like BOLT.
Yep.
I think this had been since the contemplation of the Hillrom deal, and before, kind of this, like, you know, we want to—we want to lean into connected care. We have these relationships with hospitals. We understand, you know, the problems they're trying to solve.
Right.
We think we can bring the technology solutions to solve them and make them more efficient.
Right.
You know, maybe talk a little bit about how those are either, you know, product launches are underway, what we can expect to see in terms of, you know, where does that affect your growth model, and, you know, what, if anything, you can talk about, those kinds of products over the next, you know, six months, 12 months, 18 months.
Sure. Maybe what I'll do is I'll start with just generally product launches.
Yeah.
Across our business, and I'll certainly touch on the connected element. I think, you know, again, back to the product launch, clearly, Novum being a key one, and MPT. But pharma also in our pharmaceutical business, we've talked about the fact that, you know, 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. These are products that are differentiated products in the injectable space. Something that is, again, driving, you know, margin accretion, as well as growth opportunities. As you've seen in our pharma business, we had a strong year last year. We guided a 5%-6% growth again this year, in pharma.
And again, you know, certainly an element of that is the product launches that we have had and will be having here in these up, in 2025 and then obviously, beyond that. That's certainly a key focus. On the HST side, I would just say in general, again, I look at connected care as it's not a strategy in and of itself, but we—what is—it's a key focus of the products that we have that fit into a connected ecosystem. The way that you described it is, you know, to make life easier for hospitals who have staffing issues or are trying to manage more patients with less staff. There is an element of this that when we roll products out in HST and others that really is, incorporates the connectedness into it.
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. 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 as coming out in 2025, 2026, and then beyond that.
Okay. Post the deal, you've talked about, and you have paid down a certain amount of debt already, I think, on the transaction, targeting, you know, three times leverage or less by the end of the year. You know, and then, you know, you've already adjusted the buyback. I'd say that—I mean, I'm sorry, the, the dividend, you know.
Right.
That was a bit of an overhang, leading up to this. You know, I think there was some question of, are you going to be able to keep people holding the dividend?
Right.
You know, ultimately, you know, made the decision to right-size the dividend. That's kind of like—that's, I guess you could say, adjusted and behind us now. What the question is, is, at what point along the way do you—do you start becoming a little more acquisitive strategically? And in what areas should we start to see that kind of activity?
Sure. Yeah. Just from a broad capital allocation perspective, to this point, you know, we certainly have been focused on paying down debt to the three times ratio that you talked about. We're confident in our ability to hit that by the end of this year. From there, it really does come down to how we start thinking about investments in our business, both organically and inorganically. I'd say, you know, one of the things that the three times does for us, 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.
The fold-in, tuck-in deals, in areas like pharmaceutical injectables, in areas like, you know, possibly in, you know, in maybe the ambulatory pump space, like 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. Again, those are considerations once—now that we've, you know, once we achieve our target. We do remain committed to a dividend. I want to be clear on that. Obviously, as you said, we right-sized it down, but that's something we remain committed to. We also look forward to reestablishing a buyback program.
I think there's, you know, certainly both in terms of, you know, basically, you know, absorbing the dilution that's happened over the last couple of years from that, but also having, you know, over time, 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 to be something that happened after we've achieved our three times leverage target. Again, I'm very confident in that. And this is a company that over time will generate, I think it could be a very good cash-generating business and really look forward to those things we just talked about.
Sounds good. Yeah, I'm glad you mentioned pharma, because I get the question sometimes like, you know, pharma injectables, you know, 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, you know, more depth is how is this a good business? Like, why is this a good business? You know, and so maybe if you could explain, you know, what—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.
Generics.
Yeah. How is a product like that good for Baxter? What kinds of opportunities are attractive to fold in or tuck into that business?
Yeah. I am going to start, and then Clare can kind of chime in here. I think the key thing I would say here is, again, 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. 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. Those are—that is part of the way we roll these out and have, you know, the rights to these, you know, molecules. 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'd add to that?
That's exactly right. I think it does come down to the proprietary packaging technology that we have.
Yeah.
Allows us to put these products in ready-to-use formats, which then obviously drives efficiency at the hospital system. You have labor efficiency there. You also have, you know, as you think about medication errors, you know, potential for reduction in medication errors because you're not having to reconstitute those. We tend to go after those molecules where there is risk of that happening. We're continuing to broaden the number of molecules we bring to the market in the ready-to-use. We're really focused on that differentiation. 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. This is where it does come both to organic and inorganic opportunities because, again, there's certainly some of that development that would happen, obviously, in-house and internally, but also, again, as far as, you know, there's a development timeline on those. There's always a kind of a choice between is it a build versus a 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. Sort of like core expertise, competency in sort of like different, you know, containers, injectors.
Yep.
You know, you know, sort of like premixed delivery.
It's exactly what it is. It's premixed ready-to-use.
Like a MYXREDLIN type opportunity.
Yes.
The ready-to-use insulin product. Is that—has that been a success for you? We kind of lost track of it with everything that's been going on the last couple of years. Is that something you'd hold up and say, "This is a good example," or should we think more like generic injectables that are, you know, because your sterile fill or your manufacturing capacity, you're especially—you're especially able to get after like an injectable, pharma opportunity?
Yeah. I guess I'd think about it in the 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. For us, it's about increasing the number of molecules that we have in this presentation. I wouldn't say it's one particular mixed—MYXREDLIN doing fine. I mean, I think that ZOSYN's another one. We have a lot of the antibiotics and anti-infectives. That's probably an area. Another, I guess, swim lane there would be oncolytics.
Between those two, those are probably the two 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, you know, complexity of manufacturing or being able to put into a proprietary packaging system.
Okay. We're about five minutes left here. If anyone has any questions, please feel free to jump in. Maybe, and one—those are—that's the area of interest, but is the act—do we—do we wait until you get to three times before we start seeing, you know, increased strategic activity towards the end of this year and into next year, or are we going to see something before then?
Yeah, I think you should really expect us to get to the three times. I think, you know, I've always been a strong believer in our, you know, 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. Then from there, we start the opportunity to process being able to take additional opportunities.
Okay. You know, one of the criticisms of the company in the past, again, this is sort of like old Baxter, new Baxter opportunity, is that, you know, where is—I'm sure you've gotten this over the years—is like, where's the sort of shiny object? Where's the growth driver? Where's the thing, the innovative thing that we can get excited about and behind as an investor? You know, Novum is obviously, you know, 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. You know, I guess when, you know, 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—well, we should start to expect to see.
Yeah, I look at that as part of what we think about as part of our growth algorithm going forward. When we talk about a, you know, this 4%-5% growth level, we've said that certainly it was for 2025, but we've said, "Hey, this is a way to think about this as a basis to think about our company moving forward." A lot of that does have to do with driving new products out into the marketplace. I think you should expect us to have a consistent theme of new product introductions really across our portfolio. Again, so many of the areas we've touched on here and that, you know, certainly in the pump space, and again, obviously, not only the LVP pump, but there's a syringe pump that we've talked about.
Over time, punching into the ambulatory pump space. I think, 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 would allow us to grow. Certainly, the pharmaceutical, I think we've touched on as 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 are margin implications. You know, products get launched, then there are margin declines that happen. That is why it is so important to continue the new product launches in order to continue to maintain and expand our margin base on that.
That's something you should expect from us. Again, in HST, it is both the sort of devices, as well as, over time, some of the products in, I'll call it the broadly furniture space, where we should continue to expect to see that. 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, you know, over the next, you know, 2025, I mean, our R&D spend did tick up, but, you know, 10-10 basis points-ish. When you back the MSA revenue out, it's over 5%, from an R&D perspective.
I think it's just something that should become a common theme about how you think about our organization and something that we're striving to consistently execute.
Okay. In terms of cadence, if I'm hearing what you're saying, you know, the new structure positions you to kind of deliver on the margin commitments you've made this year, you know, without maybe some of the cost-cutting and internal stresses that you've 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 cost.
Yeah.
That is a residual from the separation.
Sure.
We have talked about the fact that we have $240 million of stranded costs by the end of 2024. That is something we are going to need to work down. What we have said in 2025, about, you know, $125 million of TSA income is going to offset some of that. As well as cost containment activities we are working on, what we will be left with is about a 40 basis points impact for 2025. As we head into 2026 and 2027, those TSA incomes will start to move down, but our cost containment measures will continue to elevate. By the end of 2027, you should expect that we will have—we should not—we will not have TSA income.
Yeah.
We will be through our stranded costs.
Got it.
That's the other—the one element I'd agree with you what you said, but I'd just caveat it with.
Sure.
The need to remove the stranded cost.
We're still working through some of those, the cost transitions from the sale.
Yeah.
All right. We're at time, so we're going to drag into the next session here. Thanks so much.
Thank you.
Joel and Clare, for coming.
Thank you.
Thank you very much.
Thank you, everyone.