Baxter International Q1 2024 Earnings Call Transcript

Vijay, we are committing to a 4% -- around 4% exit rate for the year. We see what happened in HST in the first quarter as a postponement of orders and some operational issues that we have that we addressing very diligently. We're starting to see good results coming out of it. What gives me confidence in the second half of the year for HST is that the orders that we have have improved in the exit of -- Q1 into Q2 with a healthy funnel of opportunities of the rest of 2024. We have commercial and operational challenges that we identified, and we have very specific action plans in place.

We also are executing on the existing backlog. And we also saw some typical seasonality. The first quarter is always the weakest quarter for HST and the fourth quarter is the highest quarter for HST vis-a-vis 2023. We exit Q4 with 7% growth. So what I want to make sure to our investors that we are exit backs around 4% this year -- 4% to 5% actually, 4% to 5%. And we will have recovered of HST based on our operational results and the good funnel that we have established and we're starting to see. This is ex Kidney. I want to make sure that, you know when I talk about Baxter exit 4 to 5, its ex Kidney. So to your question, there's good confidence in exiting the business 4 to 5. Good plans in place and starting to see the recovery in HST. This is the headline.

Yes. Good morning. Thanks. This is Joel. And so a couple of things on the Q1 margins, I would call out. Number one, the ISC [phonetic] drove a substantial portion of that. We had strong operational efficiencies. We had positive manufacturing variances that flowed through. And so I think just in general, our ISC performance was a strong contributor there. Our pricing also has -- I'd say a modest but partial part of that as well, in terms of enhancing our margins. There is a little bit of a mix impact that was offsetting some of that. But I think that's really, those are some of the really primary drivers in the first quarter.

I think from a second quarter standpoint, there's a couple of things I just call out there. Number one is there was some favorability in the first quarter that was related to the closing of our dialyzer facility. And we had production that was increased, so we had better absorption there. And so from a timing standpoint those that benefited the Q1 margins to some extent that you won't see as much in Q2. And I think the other thing I would call out in Q2 while we certainly continue to have positive contribution from the ISC positive contribution from pricing, in particular some OUS markets. But we also did have a pharma MSA that was part of our BPS divestiture that has -- is impacting pharma margins in the second quarter as well. So those are a few of the puts and takes from the Q1, Q2 margins.

I would take the first part of your question. And, Joel will take the second part of your question. We saw -- the operational issues were more related to how we were integrating our enterprise accounts and our folks who are everyday in the field. We had made significant changes halfway through the quarter. But did not catch up fast enough. We've been seeing a great deal of large orders being signed today. As a matter of fact, a couple of them are full conversion, competitive conversions. We have a very effective and large enterprise account that now is fully integrated with HST. And those were the things that we saw and didn't start in the first quarter, you should have been integrated and done a better job probably in August, September last year. We did catch up to that, and we see that better. We also have integrated some of the sales systems with more rigor that we had before, and we are making some changes. At the midlevel management in that operation so we can get more rigor in how we sell products. But I have to tell you that we've already seen the momentum that Baxter brings to HST, the power of the two companies and how the connectivity of our, for instance, a new Novum pump and how that works with the beds and the monitors, how that makes a difference.

So that is one part. There were operational issues. In frontline care completely different than our CCS business. Front Line Care care were related to government orders. It's slowed down by the government. Also primary care issues with the payment system that got hacked in the first quarter. There was a division of United Healthcare that affect the primary care physician's offices therefore affect how they're ordering the products and getting paid, so that affect us as well. And there is a temporary contraction in the primary care physicians market, which we have very high market share, as a matter of fact. We've probably gained share in that business. Instead of losing, we actually have proof that we gain share. So we see there's a temporary blips in the Front Line Care. In the CCS business where pure operational issues, a lack of better integration our key account management, enterprise accounts.

So the headline of the answer is we are executing much better right now. We're starting to see the effect in the CCS. We have converted a couple of very large accounts from the competition. And our offering of launches from last year, Progressa+ and Centrala CLR with a continuous lateral rotation have done very, very well. As a matter of fact, that was the reason why a Midwest system converted from the competition to us. In terms of Front Line Care, we're starting to see the rebound, I think we hit the bottom in the primary care office, and what we saw that in terms of all the things coming together, the payment system and the slowdown of the market. And we're starting to see that it's starting to pick up. So I feel cautiously optimistic that our actions are starting to provide results. And Baxter in general has a pretty strong portfolio that bringing together, as you could see, by the results of the quarter.

Now, passing on to Joel on the second part of the question on the revenue.

Yeah, I would say your question around the second half of your why are we not recovering fully all the way to the way to the 3%. I mean, I guess what I'd say the first quarter was a fairly sharp decline relative to expectations. And I think more than anything, it's simply that we're not fully anticipating making that up throughout the rest of the course of the year. Having said that, to Joe's point, we certainly do remain optimistic about the growth prospects in this business. We have a number of new product launches that are coming in they're going to continue to enhance our growth, as Joe pointed out. The improvement in Front Line Care. We had a lot of issues or we had going through a lot of backlog last year, and so there was actually a lot of difficult comparisons in this first half of the year that we're going to be lapping in the second half of the year. We certainly expect our orders from CCS to continue to meaningfully accelerate. And as Joe said, we've taken specific actions to ensure that commercially and operationally we're executing better as we head into the back half of the year. So I guess to get into summary, I don't know, -- we're planning that we are not going to be able to make up the entire impact that we had in the first quarter of the year, but we're still confident in how we're moving forward. And I would say this, we started to see some modest improvements, even starting in Q2 in that business as well.

So, Peter, I'll take that. There are a lot of questions in there. What I would say is that the key is within our integrated supply chain, a lot of this comes down to the execution on our margin improvement initiatives. They've always been designed to offset inflation. So, even this year, we do have normal inflationary pressures within our organization, but the MIP that the team is executing against are more than offsetting that and driving the savings both on a year-over-year basis and relative to our expectations. Now, in the first quarter, we did benefit from some of the positive and favorable manufacturing variances that Joel was referencing. So within the fourth quarter, we did have better volumes than we had anticipated that did -- so those favorable manufacturing variations rolled off in the first quarter giving us a benefit inclusive of what Joel referenced on Opelika, where we were preparing for the closure of that dialyzer facility down in Opelika, Alabama. So, that's really what I would say. Pricing is a benefit. It's a benefit on a year-over-year basis and it's a benefit relative to our expectations. And this is pricing again across the organization on a net basis. And what we're doing is really outside the U.S., we're looking at those businesses and driving a lot of targeted actions within those markets outside the U.S. So, I think this is collective. This is in line with what we said earlier that a lot of our margin improvement this year would be coming from gross margin. Okay. Thanks so much.

So, Larry, maybe I'll start with that and let folks. I would say most of it -- we did see some strength within our Kidney Care that came in favorable to our expectations. So, I think that we are still anticipating that to slow in the second half of the year as we get the impact from some of the government-based pricing initiatives in China, also just the impact of some of the market exits that we will be incurring for the rest of the year. So, that's probably one of the biggest differences if I think about kind of the rest of the year. In addition, within our Pharmaceuticals business, we had really strong performance from our hospital pharmacy compounding business outside the U.S. We are continuing -- we have strong demand for that business. But we are also really focused on improving the profitability of that business. So, as we look at it going forward, being very disciplined about some of the business and demand that we're taking on for that. So I'd say that's probably the other impact. Besides that, I think most of the other businesses really kind of continue to perform in line. But those are the two big drivers of what changes between the first half and the second half.

And you'll see a tremendous acceleration for HST, Larry, that is reflective of the pace of the business but also acceleration of some of our actions that we took mid Q1, that is starting to get effect in Q2. We have accelerated our pump sales. We also see tremendous demand for our IV solutions and our IV nutrition doing pretty well. And our Pharmaceutical is doing extremely well with the five launches. We put those gains into the forecast, into the guidance going forward. However, we see this as us seeking profitability ahead of sales growth. So, we will make some of the decisions to be markets where we can actually improve the bottom-line. So, it's a combination. You saw what happens. We beat the top, we beat the bottom and we continue to seek for opportunities to hopefully overperform.

And if I could just add one thing on the kidney piece for a little bit just one order of magnitude. That business that we talked about going from flat to 1% from a guidance perspective would be closer to mid-single digits without some of the market exits. So, to Clare's point, that is a fairly sizable impact as we head into the remaining part of the year is on a Holdco basis.

Larry, we will be separating the business in the second half of 2024 and I don't want to comment at the moment in which option is a better option than the other. We're contemplating both options, and we have said that before that we will maximize shareholder return for the option. So, whatever option we choose is going to be one of the two, we will separate first of all. Second, when we separate, we will separate with maximization of shareholder return in mind.

Robbie good morning. I want to start by saying that we actually increased R&D in HST, the former Hillrom business, we call HST in Baxter now. We increased R&D there. we are very, very judicious about capital allocation within the business and what put money in R&D. We also have plans in 2024, but also in 2025 to continue to increase the dollar's value, not as a percentage of sales, the dollar's value that we put there. So we have not reduced the dollar value of R&D for 2024, we actually increased that. As a percentage, that number may show a slowdown, but it has dollar-wise improved. There are no savings that we are requiring from research and development. As a matter of fact, we continue to hire folks. We are right now exploring alternate sites for more R&D centers in one in Ireland and another one in the East Coast of the United States, we are actually increasing that. So, our objective is to drive our goal to 4% to 5% top line growth with innovation, and that's going to be fueled by R&D. You're going to see the Novum which we just had clinical approved in the U.S. for neonate and term babies utilization. We also had -- we have significant pipeline coming in from HST. We have wireless communication device, we have new monitors, new thermometers, we have a significant amount of new technology. So, there's no slowing down in R&D. It's the other way around.

Robbie, we at pharmaceutical relied outside the U.S. in very key markets, the combination of drug compounding and premix and vial pharmaceuticals as well as IV solutions as Baxter provides a full solution to the customers. Drug compounding is not a strategic area for Baxter, but it's strategic in specific markets that we do business. I would look at the performance of injectable pharmaceuticals, which has been -- was 8% this first quarter, we're starting to see the new products really taking shape and helping offset the price erosion headwinds as well as the gross margin that got eroded during the pandemic. So, I would say to you that I'm always optimistic on the second half of the compounding business volume. It is an opportunity that we have to continue to grow. But it's more important to us to grow the new products that we're launching because for every dollar that we sell of a new molecule or a new launched premix, the gross margin is one of the highest in the company, and it goes between 70% and 85%. So, that's the focus. Compounding is a good all-around business in Australia, New Zealand, U.K., Canada, Ireland to bring the IV solution volumes and some of the pharmaceuticals, but it's not the driver of the business in pharmaceutical. The new product launches and the volume is.

Good morning and thank you for the compliment opening the question, it was very nice of you to recognize that, we agree with you. Novum has had no impact in the first quarter. As a matter of fact, that performance is driven by strong volumes all around the MPT portfolio, but Novum. So, Novum is going to be -- will have an impact on the company in the second half of the year when we start shipping. As we noted in the prepared remarks, we have two large accounts that just order the product. One is a full conversion from our competitor, our largest competitor, and we're going to continue to see that as our technology is modern, is new. The equipment was designed with a significant amount of productivity built in. It comes with the best drug library on the market. And we're going to continue to have a combination of good alternatives to our customers between Spectrum and Novum. So as we transition between one technology and the other, we will have customers will continue to use Sigma Spectrum with our award-winning version 9 of the pump and the ones who will have the need for Novum to go there. But our objective right now is competitive conversions. And I think we can make a significant impact there, some in 2024 and more so in 2025.

Yes. And if I could just add a couple of things to that. Number one, keep in mind, as Joe talked about, we continue to see really strong performance in our Spectrum pump. And so throughout the course of the year, we've anticipated still strong double-digit growth in Spectrum. As we head into the second half of the year, again, we will start rolling out Novum. We talked about them from the prepared remarks, we've anticipated some cannibalization of Spectrum with the Novum rollout, but we've included certainly $25 million in the fourth quarter of the year as an anticipation of incremental impact from the Novum rollup -- rollout and as Joe said, much more heading into 2025.

Patrick, we are in an injectable space that is called a specialty generic. We take ANDAs, and we create premixes, they're very safe, they have good shelf life and they can be deployed to hospitals very quickly. So as we think about drug shortages, we continue to explore drugs that can be put into that format. But we have also a different technologies, we have two technologies, one we call Calix, but we have another one that we call bi-flow. In bi-flow technology also allows for premix even better without having to refrigerate for the most part. So, our portfolio and Alok Sonig who runs that business has brought in a significant amount of opportunities for us to look at more drugs, more molecules. We revamped our portfolio of new molecules that is going into premix and put more relevant ones. So, they see the five we just launched. We have a really good effect in 2024 and 2025 for Baxter. That business is launching probably three to four, five relevant molecules a year. And between expansion of markets outside the U.S. and the U.S., we will have more than 25 different launches in 2025. So we continue to accelerate the innovation, but it's the quality of the innovation. In terms of making the product available, we will continue to invest in the technology. As you know, all Galaxy technology is U.S. base is made here in Illinois, and we have some of our products made in Puerto Rico as well as Ireland, but most onshore. So, there should be of a good value proposition for our customers who look for security of supply.

Thank you.

Yes. Thanks for the question. Yes, you're correct in your assumption on that. And then on the Kidney side in particular, there is a lot of impact on that, and some of it I referred to you earlier in terms of closing our Opelika plant. So, again, in the first quarter, there was, I call there's a lot of increased production that drove a fairly significant amount of margin in our Kidney business in Q1 in particular. So, I think that's really the main driver of that business that you saw that looked like a bit of an outsized margin. We're certainly not anticipating that to continue in Q2.

Yes, I think it's really a combination of things. First of all, it's the volume, as you said, it is continued opportunities from pricing. As you know, we've had some pricing impact this year. And we've renegotiated some of our contracts with our GPOs as we head into next year. We're anticipating continued favorability from a pricing standpoint. We also continue to -- the IFC continues to be an area of strength for us that is going to be positively impacting our margins. I think the continued operations for execution, the operational efficiencies, some of the automation opportunities we've had, we continue to do work from a procurement standpoint and some of the buying opportunities we have both leverage our scale as well as for risk mitigation, I see continued opportunities in the IFC space. And I think the other thing I would say is I've said this before, I'll say it again, we're not going to SG&A or way to prosperity. However, there are areas of opportunity there. For example, we'll be hiring, even starting next week, a person that's going to be leading our global business services.

That is an opportunity for us to continue to think about how we -- what our operating model is, as opposed to verticalization and how we can leverage some of the -- those opportunities across our organization. So, I think, again, I see a variety of ways really up and down our P&L in terms of those type of opportunities to continue to expand our margins.

Yes. We have good performance in in Western Europe, we see that, and we see good performance in Latin America as well. So we see that Baxter combination with Hillrom has expanded Hillrom opportunity in those markets. We are making changes in our Asia-Pacific organization to bring more focus on capital sales to supplement what Baxter is strong, which is general acute market sales. So, we're increasing talent in Asia-Pacific with some changes we just recently made. And Western Europe continues to be a strong market for us, and we continue to strengthen the group there, Latin America as well. So it has been a positive take on Baxter and Hillrom combined for outside the U.S. One market where things are not as strong is China, but China because specifically Made in China restrictions in VBP is known in the market, but our sales ambitions there were not very great as opposed to the fact that in Latin America, Europe, Middle East and Africa and the rest of Asia-Pac, they become very strong, including Australia. We're very successful in Australia, just closed some really good deals there. So, Baxter brought a lot of talent into that equation, and we continue to strengthen the team with new hires that we're bringing on board.

Thank you. We, with Novum IQ, syringe and LVP, large volume parenteral, now we have a suite that connects with Baxter, gateway, overall gateway called Canexus. And the connect brings all these devices to talk to each other. So, right now, if you went to our center, our customer experience center in Batesville or in any other place that we have, you would see the pump communicating to devices like Volt, the bed communicating to Volt. You see the connectivity. And as it becomes more important to our customers, Baxter has the right solutions for the hospitals. Interestingly speaking that it has to bring productivity improvement to the hospital. The ability to connect by just connecting is table stakes. But what Baxter is seeking is continue to innovate to bring specific solutions to improve productivity in the hospital setting. So, we -- when we do our -- later this year, we do our Investor Day, we'll be able to bring a demo where you're going to be able to see how these devices will be connecting to each other. But they are very important. And with Novum now, the last piece of this puzzle is complete.

Matt, one of the advantages of Baxter, it's diverse portfolio that brings things to a point where acute -- the acute market, we provide significant amount of infrastructure products for those markets, IV solutions, pharmaceuticals, pumps. We also have the capital market with beds, monitors. And so when we think about Baxter in general, our -- we have several drivers of growth. You could see this quarter was a significant amount of growth and it was more than enough to offset some headwinds that we had in HST and HST is going to continue to -- I'm cautiously optimistic about the business. And I think we have -- we're back into our cadence of growth for that business. We have innovation of every single part of Baxter. We have significant drivers coming out of pharmaceutical, our injectable pharmaceutical portfolio. Our pump conversion rates will be what's going to make that business grow is going to be competitive conversions to our biggest competitor because we have a product that is new and it fulfills significant market needs. We also have, in our HST portfolio, more than seven significant launches in 2025. So, innovation in Baxter is not dependent on one or two products, it's a wide range of products that derisk the company and put the company in a good solid footing to achieve ex Kidney 4% to 5% growth.

Thank you.