Hi, good morning. I'm Larry Biegelsen, the med tech analyst at Wells Fargo. It's my pleasure to host this session with the management team from Baxter. With us, we have Joe Almeida, the CEO, and Clare Trachtman, Vice President of Investor Relations. In terms of format, it'll be fireside chat. Joe and Clare, thanks so much for being here.
Thank you for having us, Larry.
So, Joe, let's start with the state of the business at Baxter. There's obviously several moving parts with the BPS divestiture, the Vantive spin, and the search for a new CFO. Talk about, you know, your vision for the remaining Baxter-
Mm-hmm.
the growth strategy going forward, please.
Baxter, going forward, ex the kidney business, is a company that is still very much acute care setting centered. So we're gonna be moving into two or three different vectors of growth. One is the ASCs, because the products that we have today between the former Hill-Rom and the current Baxter fit extremely well for partnership with the other companies and be a complete partner to the ASCs. That business grows 7%-9%. It is where the growth of the acute site is gonna be going, and is going in the next few years. So sites of care growth in that direction, which is now permitted with a much more focused product line from integration of OR tables and OR suites, pump sets, pharmaceutical injectables, beds, also anesthetics.
We have a full suite of products that would fit very well in a contract, not only for orthopedic ASCs, but also other types of ASCs. The second vector is the ability to connect our devices to provide data to minimize burden on healthcare providers, primarily nurses, who spend only 20% of their time on the bedside. So that is already happening with the integration of our products. Our current Sigma Spectrum pump is a two-way communication with the EMR, already has a winning drug library, communicates with the bed and with the med-surg monitors that we have. Second, and the third is explore more growth from the former Hillrom products outside the U.S., which becomes a good avenue for us.
As you know, our outside U.S. sales are mostly focused on renal, so we have the opportunity to increase that. As we're doing those three focus areas of growth, we're not gonna lose the ability to continue to renew our portfolio in pharmaceuticals, which we've been doing. If you notice, our growth rate has improved quite a bit. That has to do with product launches and in areas where you have less price erosion.
That's helpful. I know it's early, but is there any way to talk about how, how you see the, you know, financial profile of RemainCo?
It is a little early for us to talk about that. We're gonna come out in the first quarter of next year. But it's a company that will be able to provide leverage to the bottom line while still investing in research and development the company. If you notice, our research and development this year has increased quite a bit. Most of that money has gone into our HST business, which is the former Hillrom business, and most of them into products that will be launching in 2024 and 2025. So I think as the company separates, it has to have, you know, a growth rate on the top line that is attractive and is potentially continue to grow with our our new initiatives. We're gonna deliver leverage to the bottom line, but invest some back into research and development.
So we'll hit the three areas of: growth, leverage, and reinvestment.
That's helpful. Excuse me, AV person, Kevin, I think the clock has not started. I need that. Thank you.
It's starting now, so I got 10 more minutes.
Bonus time.
I don't think so.
Joe, so what's the latest on the CFO search?
We're progressing quite well. And by hopefully the next earnings call, we're gonna have a new CFO on board. We're very happy with the interviews. As I said to many of you in one-on-ones, we're looking for an operational CFO, somebody with not only experience in the CFO business, but somebody who has run some businesses. Not necessarily from the same industry, but with the ability to actually. Because Baxter is an industrial company that has an SG&A profile, very different than our competitors. So you need somebody who has more experience in that area, as well as understanding our business, great learning agility and maturity to get there.
Most importantly, we have a very good finance group that needs to be developed for the next generation of CFOs, so we don't need to go outside for a CFO replacement.
That's helpful. So switching gears, you know, macro headwinds were a big issue for the medical device industry and Baxter last year, but seem to be improving. On the Q2 call, you talked about the inflationary environment being more stable. Can you talk about, you know, the macro... Which macro headwinds remain for Baxter? What's getting better? What's getting worse?
We've seen an improvement in all dimensions of the macroeconomic situation. We see the semiconductor crisis quite alleviated. Now, we placed two years of committed POs for everything that we buy, so we now have good visibility into the future, and our backlog has come down quite a bit. Our backlog is the lowest in the last two years, so we'll be able to catch up a lot with that. Don't think about backlog going down as a bad thing. It's a really good thing because a very high backlog actually leads to order cancellations and frustrations. So we have a pretty healthy level of backlog today. We had a very unhealthy level of backlog last year.
There's a little bit of increase in the cost of diesel, as you can see right now, has gone up, but, you know, our people can offset one way or the other. That doesn't concern me. The resin price is much more stable. So going into the selling portion of the business, we see a much more stable hospital admissions level. We also see good growth on the ASC. We see, you know, the overall macro conditions for capital, which is quite varied by type of capital in hospital systems, but we see that improving in the second half of this year. And large hospitals got better in terms of financing. The finance situation, these hospitals, you can see the public ones.
I think there is a group of hospitals in the middle of the pack, rural hospitals, smaller hospitals, primarily squeezed between large centers. Those are the ones where the labor has been more punitive and probably the financial condition is a little different. But overall, we see that as an improvement. So, night and day from last year.
All device companies last year. It sounds like your backorders and backlog are getting better?
Yes.
Can the... Some companies we've seen some catch up.
Mm-hmm.
You know, I can think of some companies where we've seen above normal-
Mm-hmm.
-growth first half of the year. Okay, do you expect any catch-up in your business?
Well, I think... Well, production-
[audio distortion] of backlog in all of our business. We need to [audio distortion] within the quarter. That is pretty straightforward, doing very well. Product that is placed within the quarter, maybe goes a month or two later to be delivered. And you have long-term capital that is dependent upon construction of new hospital. Hospitals having time to take beds, now, rooms down to be able to wire new communication systems. This is what we watch very closely because that's more long term. There's more civil construction, more architectural work into this. So this is okay for now, but you keep watching because that's the one that indicates if interest rates or other things are affecting the appetite for investment. We still see hospitals invest in new, in new, new areas, primarily large hospitals, and capture market share.
Everything looks normal to us right now, but not all capital is created the same.
You don't expect, like, a bolus or anything like that?
If we look at our Frontline Care, we had a bolus, you know? Yeah, that's what I was gonna say. Frontline Care. Frontline Care had high single digits, double-digit growth—which is what you expect, which punches about almost twice as much as their market growth rates. And we saw that. We continue to see a little bit of that, and now it's up to us to make sure that we're growing to 5-6%, that business at minimum. [crosstalk]
It is exactly right. Frontline Care.
Got it. You know, Joe, people are very interested in price in general, but especially for, for Baxter. You know, historically, you've seen price erosion of 50-100 basis points per year. How are you thinking about price going forward?
Mm-hmm.
Any updates? You know, I think people are also interested in visibility you have on the GPO agreements that they'll come up for renewal in late 2024 and 2025.
Mm-hmm. So, price in general for Baxter this year, we see neutral to slight positive. One of the headwinds for Baxter in the last two, three years has been our pharmaceutical business. Our injectable pharmaceutical business, we saw significant pressure in newcomers that disrupted some of our most profitable molecules, like Cyclophosphamide and Brevibloc and TDS. But then we are starting to see the catch-up of our strategy, which is very simply, we offset that. So you saw pretty good growth quarters, first and second quarter, with price erosion at bay, keeping at bay. This is one portion that affect us in the past. What happened last year is input cost goes up significantly, and we have a limited ability to raise prices to the end customer on contracts that are four or five years long.
So a couple of these contracts are coming due for the U.S. medication delivery and nutrition and sets, administration sets. Two of them are 2024, 2025, in January and February 2025. We're negotiating those. So what are the levers that we have? We certainly need to make sure that the indexes that we use for raising prices are adequate and reflect more the input costs that we have versus just the consumer price index, which is quite different. The second thing is, we need to make sure that we balance price increases with a facility that is 100% filled. So we have facilities that make products. We are the lowest, if not one of the lowest, cost producers in the IV solutions and sets.
To maintain that, we need our plants full. So we, we're gonna have to make sure that when we do the tiers, we got people who are not committed to Baxter to pay much more than the people who are committed. I'm talking about not GPO, I'm talking about IDNs. IDNs is where we can work to, to group products versus GPOs, which are very specific by category. With that, you can't- you, you bid the category. I believe we're gonna be able to, to do both, get a little bit of price, get, get better conditions of, of how to raise prices in case what we had last year, and also hopefully maintain the volume at our plants, which makes us very, very efficient. We today have the ability to produce a large volume for the U.S. uninterrupted, no matter what happens with that.
During COVID, we had no product shortage, shortages. We are today facing huge product shortages in the market with something called Pour Bottles. Baxter is 120% producing that product. We have invested more money. Products like this, we deserve better pricing for people who are not committed, so we take price at that level. But we are very committed to be able to invest in areas where we see deficiency- deficiencies in the market that we-
Looks like, Clare, you wanted to add something?
So I just got a note that the webcast keeps going in and out, so I don't know if you want to check that.
AV, Kevin?
Okay.
Blame me for many things. That's not my fault.
All right. Okay, Kevin, is there someone who can look into that?
Okay, so I think he's here.
Okay. All right, thank you. Typically, Joe, how far in advance these two contracts get renewed? If it expires at the beginning of 2025
About more than a year in advance, people start negotiating and looking at terms and conditions. You know, primarily with so much disruption that happened in 2022. So this is already in progress as advanced progress that we see today.
I'm sure you're not going to disclose the details of any new contracts, but-
Correct.
Something should happen in 2024. You'll have something renewed before those contracts expire.
Oh, of course, of course. We're not gonna go into 2025
No.
with something not finished.
Right.
It's gonna happen in 2024.
Right. Okay.
Okay.
And there'll be something you can communicate to investors, maybe not the details.
If it's mature, yes. Yeah.
So what I would say is, yes, the renewals will happen in 2024, so we'll know of it. Joe mentioned this earlier. Our expectation is to do a capital markets day for both Kidney Care and Baxter RemainCo sometime in the first half of next year. And so at that point, we would go into some of those details regarding what we think believe the future outlook would be inclusive of these contract renewals.
That's helpful. Thank you. The other hot topic here is China, and-
Why is that?
Well, I know you're joking.
I am.
You know, there's a lot, a lot of crosscurrents, VBP, macro concerns, made in China, I know-
Mm-hmm.
Initiative is actually affecting Baxter. Now the new one is the anti-corruption policies.
Mm-hmm.
Joe, I'd love to hear you address kind of just Baxter's business in China. I think people are interested in all of those actually, but the anti-corruption is the newest one. So your thoughts on that would be helpful, too.
Let's talk about VBP, MIC, and close with the corruption. We tackle the three of them. So the VBP-
Maybe add COVID, too.
Yeah, but as. So let me frame the business. T hank you, Clare. I'll frame the business for Baxter. Baxter is about 70% of its business in China is renal. It's the PD dialysis, CRRT, and hemodialysis. The rest of the business is a mix of all of the rest of the business of Baxter. So you can see Baxter ex the renal is much smaller in terms of exposure in China. VBP. VBP affected the renal business. We have communicated, and we factored that. By the way, all those things are factored in our forecast, that our guidance that we have given the Street. Am I correct?
Yes. Yes.
Okay, that's all factored in. There's no new thing to be added or to be removed. The VBP was regional, now it's going to the national level. What we have observed and people have observed is there's a higher rate of peritonitis with the new suppliers that they have introduced in the market. As we always said to the government and to all of you, PD is not a therapy that is all about the set and the bag. It has to do with how you surround the patient with training, the physician training, and everything else.
So it's important to know that that may be depends upon the outcome of the research that's coming out, probably in two or three weeks, if I'm not mistaken, that this therapy may be excluded from the national VBP because the health data doesn't work. It's not working that well. Now, let me bring the corruption into this. So what does the corruption crackdown, as portrayed by the government in China, has done to the market? Has interrupted all the life interactions with physicians. We continue two things, live: service and therapy management. So those things continue to go on. Training for new physicians, we are doing via virtual avenues, so we continue to do it. We just went from live interactions to virtual interactions, okay?
So if you have a product that is highly, highly sensitive to promotion and physician interaction becomes more difficult. Our products that are therapy, then you need to train the physician how to insert the catheter, those things, because safety continued to go on, we just transferred to virtual. So the corruption crackdown is a real thing. It has significantly changed the interactions. We believe this will be alleviated going forward once the crackdown gets to the message I think that the government wants to give to the sector. Hopefully, later this year, early next year, we start seeing return to a more normal interaction. For Baxter, we have not seen any material change in our business that would warrant us change what we had given to you at this moment in terms of guidance. Any comments on that?
I agree, exactly. Yep.
Made in China, which I didn't speak, it is a real thing. We are, we are putting more capacity in China for CRRT. This is on the renal, the continuous renal replacement therapy, to make the product in China, bring kits and have a partner assemble for us, or we assemble ourselves, as well as bed and some, some other products that Hillrom sells. I know Hillrom had, before the acquisition, had a significant amount of plans for China. We continue to have, but we're putting the infrastructure in place to be able to make the products there.
So-
This is a very small portion of-
Clare, I don't know if your mic is working. Is Clare's mic working?
Is it-
Go ahead.
So what I would say, Joe's exactly right. Made in China was a bit more of an impact for us, actually, in 2022. And I'd say value-based procurement, so what we have reflected is more of an impact this year. But again, both that and, you know, the impact from the excess mortality-
Yes
-is included in our guidance for 2023 for China.
It sounds like on PD, that Baxter's PD may be excluded from national VBP.
Maybe-
So could that be upside if that's the case?
Longer term.
Long-term, yes, because whatever happened to the regional already happened. So the national was going to be something for the future. This may—if this comes the other way, it is a positive for the long-term for Baxter, because it's excluded, it's easier to do-
Okay
to do business.
Okay, that's helpful. Thank you. All right, switching gears to medication delivery, Joe, I think some of your comments, as I think you probably know, on Novum IQ-
Mm-hmm
-on the Q2 call, may have confused people when you talked about, you know, Canada, updates in Canada potentially affecting FDA approval of Novum IQ-
Mm-hmm
in the U.S.. Can you clarify what you meant and just give us an update of the status, please?
As far as I know, the U.S. FDA does not work with other governments to concurrently approve or disapprove products. So that was not the intent. The intent is we, because we have products launched in Canada, found a couple changes that we need to make to software and hardware to the pump, that we're currently undertaking. The software, we're finished, although we're doing a final review software-wise to make sure there's nothing else. And hardware, there's a change, two changes that we had to make. One was made already, the other one is in process, that we need to complete. We want to do it, and is ongoing conversation with the agency. I don't comment on their reaction or how long it's gonna take. We have remain optimistic, and the pump is a great pump. It works today, is working on the market today.
We just need to get our process in, now, finished with the FDA, and I can't predict the time to get that done, but we'll- eventually, we're gonna get there. I can't give you timing because I'll be guessing what they're gonna do. From our perspective, we put a lot of resources into this. We put more resources than you can imagine to make sure that this product is absolutely what needs to go into the U.S. market.
Okay.
It's a product that has good, good precision, better than some products on the market today in the U.S. And has also a very good interface with the rest of hospital systems two ways. I want to qualify something because I've heard the other day that our heart pump works. Our current Sigma Spectrum is version nine is a two-way communication. The updates does the out, does the out annotates. You remotely program the drug library. It communicates with the EMR back in the pump. That pump is doing well. As a matter of fact, we just sold and converted 50% of a very large hospital in the U.S. from our competitors. So that pump does well and will continue to do well.
We are making sure the pump component obsolescence gets elongated because we need to have this pump on the market for many years, as customers who buy the pump today would like to replace or add more. They will not go to a new platform.
Joe, I just wanted to make sure I heard you correctly. So in Canada, software change, that's completed?
Not implemented yet. We completed for the U.S. platform.
I see.
We have not completed the recall corrections in Canada. We were working with Health Canada to have that done.
Two hardware changes. One is completed, one is in process, I heard.
Mm-hmm.
That's the U.S., or is that Canada?
This works for both.
For both?
For both, yes.
And then I heard you mention agency. I think when you said agency, you're talking about FDA. So I guess what I'm trying to understand is these changes you're making to the U.S. pump and that-
Eventually needs to go to Canada as well, so they'll be corrected there. But the U.S. product that is presented to the FDA has those corrections already.
Right.
We'll not present-
One is in process, though?
One is in process.
What's the- how, how... Any broad strokes on timelines?
No, I don't want to give you any broad strokes on, on timelines.
Or even when that second correction is going to be made?
We will plan to do as soon as possible, put a lot of resources to do it. We want to get it done as soon as possible, and we're going to keep you guys posted if anything changes on that. But I want to make sure that we want to have this pump approved. The current pump is doing a great job, by the way, continue to grab a market share and growing. So, do we need the new pump? Of course, we do, because there's much more capacity. We can expand the market.
Right.
We're doing everything we can to get that through.
Well, I understand you don't want to predict FDA approval, but you're not, you're not willing to say when you can have that second,
No-
Hardware change done?
I don't want to do that. I don't want to do that.
Okay.
- because it's strategic as well and has so much detail.
Okay.
But you just know that-
Fair enough
... that significant amount of resources going in to correct what we found, that needs to be correct in Canada, as well as the pump that is submitted to the FDA.
I understand. Clare, did you want to add something?
Okay. So switching gears, in the time we have left here, just wanted to or just a few more questions. Just one on the second half outlook, top end, top line, as well as the margins.
Mm-hmm.
You know, you had a strong Q2, 4% organic growth. The guidance implies a deceleration in the second half. Help us understand. Today, we've heard you talk about things getting better in general.
Mm-hmm.
Why we might see things slow in the second half?
I think I'm going to ask.
Yeah
... Clare to answer that. There's everything in renal. Renal is the reason why there's deceleration. That's what we already had spoken to about the VBP and the excessive mortality that we saw once zero COVID policy in China was removed.
Joe, that's exactly right. So the biggest driver of the deceleration in the second half of the year from what we saw in the second quarter is renal. So renal in the first half of the year was up around 3%, and that does go to a kind of low- to mid-single-digit decline in the second half of the year. And that's driven by the factors that Joe mentioned. We're also anniversary about $40 million in payments that we received last year, and we have some market exits that are specific to the renal care business that impact the second half of the year. So those are really the drivers. And again, some of this is really also in advance of setting up the business for the spin.
So we are continuing to optimize our In-center HD business, and so those are some of the exits that we're making. The other business that does decelerate a little bit, but still grows, is our pharmaceuticals business, and it's primarily driven by our hospital pharmacy compounding business outside the U.S.-
Mm-hmm
... where we had double-digit growth in the first half of the year, that does slow a little bit in the second half. Primarily, it's just because there are some drugs that we compound there that are going, they're more biosimilars, and so we reflect that lower price in our sales. It's a pass-through entity. So while the margins actually improved slightly, we do see that impact on sales. Now, we'll see. I think the demand for our services remains high, but those are the two drivers. The rest of the businesses continue along their same trajectory in-
Mm-hmm
- the second half of the year. The biggest one, though, is that renal, coupled with pharma.
That's helpful.
X stat, the business, so the markets look, pretty good.
That's good to hear.
Yeah.
The margin ramp, 300 basis points of improvement, first half to second half?
Yeah. So, the biggest driver is really just the incremental sales, which leads to better absorption and better leverage over the P&L. The second piece is really, as Joe was mentioning, the improvement in our overall supply chain network. So as we've seen, some of those benefits accrue to us in the first half of the year. They start to roll out and impact the P&L in the second half of the year. We also, as we've talked about, have a number of initiatives in terms of our value improvement program or margin improvement initiatives that we have, and those continue to build over the course of the year as well. The last piece is that we'll obviously see some better leverage on the SG&A line.
R&D, as Joe mentioned, we'll continue to make investments, but on the, SG&A, we have a number of savings initiatives. Some that we have targeted this year will continue to benefit us in the second half of the year, along with just the overall better leverage on that line as well. So that's really the, the drivers of that 300. It starts, though, with just, a lot of our sales really do accrue in the second half of the year. So even though the growth rate is not as high, the actual dollars are significantly higher, and that's what leads to the better absorption.
That's helpful. So just last one is, any framework on how to think about 2024, when the BPS spin is complete and before the Vantive spin?
Yeah, it's a great question, Larry, and one we have discussed and will continue to discuss as a management team. We do, and you started it out. We have a lot of things going on. So the BPS spin, we do expect to complete this year. And so we will reflect that. We have reflected it in our outlook for 2023 already in terms of the continuing operations. So that should be complete, but obviously, we'll also be able to see the benefit from lower interest expense because we'll be able to retire and address some of the debt load that we have. The Vantive spin, you know, the Kidney Care spin, does make it a little bit challenging. We expect that to occur kind of by the middle of the year. So we'll try to frame it.
I think this is why this Capital Markets Day is really kind of critical, to be able to give the long-term guidance because there are so many moving pieces with that. So we'll have to, you know, grasp what kind of guidance about outlook we give next year, but we'll try to give as much information as possible.
I mean, so you've given, so for earnings, $2.54-$2.62 for continuing ops for 2023.
Mm-hmm.
You have the interest expense benefit. I think you've quantified that, $100 million.
So, if the deal closes at the end of September, it's about a $40 million benefit this year and should be around an incremental $100 million benefit next year.
Or $0.15?
Yes.
And so we can add that to the $2.54-$2.62, and then we just have to decide kind of on the base EPS, how much, how much to grow that next year.
It, in a hypothetical non-spin world, yes.
Right. Okay. Any kind of high-level thoughts on kind of just puts and takes for next year?
Not at this point.
Okay.
I mean, the obviously-
Don't want to speculate.
... there is a lot of things I'd say that you've addressed kind of the biggest one, but I think in terms of the positioning, is, you know, really the Kidney Care spin.
Okay. And Joe, I wanted to give you the last word. There's a lot going on at Baxter. You've certainly been through a lot the last few years, like all medical device CEOs. Challenging macro environment.
Mm-hmm.
Glad to hear things are getting better in general, but wanted to give you the last few minutes to make any closing remarks.
We are, in other words, we see the future of Baxter hinges on the innovation, connectivity, and the ability to continue to deliver leverage through a lean cost structure. So those things will feed us going forward. I'm excited about the future. It is a lot of work that we're going through. Last year was a really tough year in terms of supply chain. That really unsettled the company in terms of how we think about how things are. We are automating our plants to no end. We're taking a reliance on the most fragile part of the supply chain, which is labor turnover in some of our plants. We're making sure that the organization is lean. The accountability that we put into segments has worked tremendously.
People are really owning those segments and their P&Ls, they're CEOs of their segments, and made a difference, even in the innovation path that we have going forward. So, it's innovation, build the ability to connect our business and continue to leverage the P&L. Thank you.
Thank you. Joe and Clare, thanks for being here.
Thank you.
Thank you very much.
Thank you so much.
Thanks, Claire.