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spk09: Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Baxter International Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Claire Trackman, you may begin.
spk07: Thank you. Good morning and welcome to our third quarter 2020 earnings conference call. Joining me today are Joelle Neda, Baxter's Chairman and Chief Executive Officer, and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's third quarter 2020 financial results and full year 2020 financial outlook. A supplemental presentation to complement this morning's discussion can be accessed on our website in the investor section under events and news. This presentation includes related non-GAAP reconciliations. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for full year 2020, new product developments, business development, and regulatory matters, contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange, and the acquisition of Seprafilm, which closed on February 14th of this year. Now I'd like to turn the call over to Joe. Joe?
spk06: Thank you, Claire, and thank you to everyone joining us on the call. I hope that you and your families remain healthy and safe. I will begin with a quick review of Baxter's third quarter performance. Jay will provide more detail on the financials. Then we will wrap up with your questions. I want to start again by acknowledging all of the healthcare providers, first responders, researchers, and personal caregivers who are rising to enormous challenges every day in the ongoing fight against COVID-19. And, as always, I want to express my deepest appreciation to Baxter's employees who are navigating these unprecedented times in the unwavering spirit of our mission to save and sustain lives. Just as COVID-19 continues to impact all of our daily lives, it naturally also influences the trajectory of Baxter's operations and performance. During the third quarter, all three of our geographic regions observed sequential improvement in both hospital admissions and surgical procedures, but volumes remain below pre-COVID levels. For the third quarter, we estimate that hospital admissions and surgical procedures in the U.S. declined low double digits and mid single digits, respectively. Jay will discuss our 2020 outlook in more detail, but this guidance assumes volumes remain at these levels throughout the fourth quarter. Turning to our results, Baxter delivered third-quarter sales growth of 4% at constant currency rates and 3% operationally. On the bottom line, adjusted earnings per share were $0.83, up 12% year over year. All three of our global regions contributed to positive performance for the quarter. Growth was led by Asia Pacific, which was up 7% at constant currency rates, reflecting the geography's global leading virus containment and recovery to date, as well as our portfolio mix in the region. Five of Baxter's six global business units also delivered positive constant currency sales growth in Q3. Among them, acute therapies grew 35% year over year, adjusting for FX. This business continues to experience heightened demand for its continuous renal replacement therapy, or CRRT, products in the midst of the pandemic. In Q3, Baxter was granted U.S. FDA emergency use authorizations for our RegioSET replacement solution. Select sets to help address increased demand for CRRT supply and treatment options. This quarter, we also announced a distribution agreement with BioMirie for the NefroClear CCL14 diagnostic test, currently in development for use assessing the risk of developing persistent severe acute kidney injury. RenoCare delivered mid-single-digit growth at constant currency rates for the quarter. driven by continued demand for our portfolio of peritoneal dialysis products. Pandemic conditions continue to underscore the advantages of home-based PD treatment as well as Baxter's ShareSource remote monitoring technology for both clinicians and patients. Late in Q3, CMS announced the finalization of the end-stage renal disease treatment choices payment model, a core component of the Advancing American Kidney Health Initiative. This is a key step forward in increasing U.S. adoption of home-based dialysis care, and Baxter stands prepared to support patients and healthcare providers as the new model takes effect in 2021. Also during the quarter, Baxter received FDA de novo authorization for our third nova dialyzer for expanded hemodialysis or HDX therapy. We have a TPNIS add-on payment application pending with CMS for this novel renal care technology and expect an update when the final rule is published in November. While at this time we're not going to speculate on CMS' final determination, we continue to believe in the benefits this product offers ESRD patients. Among our GVUs, clinical nutrition achieved constant currency mid-single-digit growth. Performance here reflects sustained demand, new product introductions, and the impact of a competitive supply issue in the U.S. Last month, we announced FDA approval of new higher protein formulations of Clinimix and Clinimix E for parenteral nutrition. These offerings further expand the diversity of our U.S. nutrition portfolio, offering physicians new options and flexibility to meet their patients' needs. Advanced surgery grew 9% at a constant currency rate bolstered by our February acquisition of Ceprofilm. Adjusting for the acquisition as well as FX, advanced surgery declined mid-single digits operationally, in line with the lower rate of surgical procedures as compared to the prior year period. On a constant currency basis, pharmaceuticals increased low single digits and medication delivery declined low single digits. Performance in both businesses reflect lower rates of emergency room utilization and associated hospital admissions for a range of acute and chronic conditions. In medication delivery, we remain optimistic about our Novum IQ smart infusion pump technology. We are making progress addressing the open questions from FDA on the Novum IQ 510K applications and remain on track to update the submissions within the next three months. We are working collaboratively with the agency and currently expect to launch the pumps in the U.S. next year. In Canada, the Novum IQ large volume pump was recently approved, and we hope to receive approval for the syringe pump in the fourth quarter. And finally, we anticipate obtaining CE mark for the entire Novum IQ platform by the end of this year. By now, it goes without saying that we are operating in a largely unpredictable environment. We are experiencing an unfortunate resurgence of COVID-19 in many geographies, which resonates across the broader treatment landscape. Baxter continues to respond with a sustained focus on efficiency and effectiveness, which has become second nature across the enterprise. Our strategic emphasis on medically essential products and our broad geographic footprint reinforce the underlying stability of our business model. We remain focused on advancing innovation as a critical growth driver and are actively evaluating opportunities to augment this performance through strategic capital deployment, including business development and opportunistic share repurchases. Despite today's challenges and unknowns, I remain confident in Baxter's trajectory and potential. We are reigniting a legacy of innovation, building upon our leadership in corporate responsibility, and implementing new racial justice efforts that are rooted in our long-time emphasis on inclusion and diversity. By executing across all dimensions, we will deliver enhanced value and make a meaningful impact for all stakeholders we serve over the long term. Now I will pass it to Jay for his comments on the quarter and our outlook for the remainder of the year.
spk11: Thanks, Joe, and good morning, everyone. Although COVID-19 continues to present unique challenges not only to our business but the overall healthcare landscape, our third quarter results demonstrate a level of resilience during these unprecedented times. As we move forward, we must continue to evolve our business strategies and identify new opportunities to deliver enhanced value for all of our stakeholders over the long term. Turning to our third quarter 2020 results, global sales of $3 billion advanced 4% on both a reported and constant currency basis and 3% on an operational basis. Growth among Baxter's GBUs was led by acute therapies reflecting the ongoing demand due to the COVID-19 pandemic. As Joe mentioned, sales in both medication delivery and pharmaceuticals continue to be affected by lower rates of emergency room utilization and hospitalizations in the wake of the pandemic. particularly in the United States. We estimate COVID-19 negatively impacted net revenues by over $65 million in the quarter. On the bottom line, adjusted earnings increased 12% to 83 cents per share, reflecting our top-line performance, reduced discretionary spending, and the benefit of a lower tax rate. Now I'll walk through performance by our regional segments and global business units. Note that this quarter, constant currency growth is equal to operational sales growth for all global businesses, with the exception of our advanced surgery business, for which we will provide both constant currency and operational growth, adjusting for the acquisition of Seprafilm. Starting with our three regional segments, sales in the Americas advanced 2% on a constant currency basis and 1% on an operational basis. Sales in Europe, Middle East, and Africa advanced 3% on both a constant currency and operational basis. And sales in our APAC region advanced 7% on a constant currency basis and 5% operationally. Moving on to performance by global business units, global sales for renal care were $955 million, advancing 4% on a constant currency basis. Performance in the quarter was driven by global growth in both our PD and HD businesses. PD benefited from 6% patient growth in the U.S. and Asia Pacific regions. Sales and medication delivery of $680 million declined 3% on a constant currency basis. In the quarter, we continue to see strong execution of our infusion pumps led by EVO IQ placements internationally. As Joe mentioned, although we saw sequential improvement from the second quarter, hospital admissions and surgical procedures remained below pre-COVID levels. We estimate these lower volumes negatively impacted medication delivery sales by approximately $40 million within the quarter. Pharmaceutical sales were $540 million, up 1% on a constant currency basis, increasing demand for our international pharmacy compounding business, as well as a one-time U.S. government purchase of approximately $20 million contributed to the growth in the quarter. This was partially offset by the impact of reduced hospital utilization, lower international demand for inhaled anesthesia products, and enhanced competition for TransdermScope in the U.S., We estimate a net negative impact of approximately $40 million related to COVID-19 in the quarter. Moving to nutrition, total sales were $237 million, increasing 5% on a constant currency basis. Strong performance in the quarter was driven by the benefit of recent new product launches, increased demand for our automated nutrition compounding business, and competitive shortages in amino acids. We estimate that growth in the quarter was partially offset by approximately $5 million related to COVID-19. Sales in advanced surgery were $236 million, advancing 9% on a constant currency basis. but declining 5% on an operational basis. The acquisition of Seprafilm in February contributed approximately $30 million of sales in the quarter. Declines in surgical procedures drove an estimated negative impact of approximately $14 million for the advanced surgery portfolio. Sales in our acute therapies business were $177 million, representing growth of 35% on a constant currency basis. We estimate that heightened demand for COVID-related products contributed over $30 million to growth in the quarter. Finally, sales in our other category, which primarily includes our contracting manufacturing services, were $147 million in the quarter, advancing 4% on a constant currency basis. Moving through the rest of the P&L, our adjusted gross margin of 42.6% declined by 310 basis points over the prior year, driven by lower sales of higher margin products, as well as approximately $60 million in increased operations and supply chain expenses related to our COVID-19 response. Adjusted SG&A of $574 million declined 7% on a year-over-year basis driven by continued financial discipline, reduced discretionary spending resulting from COVID restrictions, and lower bonus accruals under our annual employee incentive compensation plans. Adjusted R&D spending in the quarter of $122 million declined 9% on a reported basis with reductions in non-project spend being supplemented by our continued focus on operational excellence. We continue to prioritize strategic investments to fuel our innovation pipeline. Adjusted operating margin in the quarter was 19.2%, a decrease of 30 basis points versus the prior year. Net interest expense was $39 million in the quarter, an increase of $26 million compared to the prior year, driven by increased interest expense from higher outstanding debt balances, as well as decreased interest income due to lower interest rates. Other non-operating expense totaled $16 million in the quarter compared to $9 million in the prior year period. The adjusted tax rate in the quarter was 15.7%. With respect to cash flow, year-to-date we generated free cash flow of $686 million compared to $776 million in the prior year period. As of the end of the third quarter, we had approximately $4.4 billion of cash and cash equivalent on our balance sheet, along with $6.5 billion of long-term indebtedness. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure. We expect to recommence our share repurchase activity in the fourth quarter of 2020, generally consistent with our capital allocation philosophy. Baxter's board recently also authorized an incremental $1.5 billion to our existing share repurchase program, bringing the total share repurchase authorization to $2.4 billion of common stock, generally consistent with prior authorization increases. Let me conclude my comments by discussing our outlook for the remainder of the year. For full year 2020, we now expect low single-digit sales growth on a reported constant currency and operational basis. As we see resurgences of COVID-19 cases across many geographies, we anticipate a sustained impact on our business, particularly in medication delivery and pharmaceuticals in the U.S., Nevertheless, we remain ready and committed to addressing patient and physician needs globally with our portfolio of life-saving and sustaining products. In line with our previous commentary, we expect to absorb approximately $150 million of incremental operations and supply chain expenses related to our COVID-19 response efforts in 2020. These costs include measures we are taking to protect employee safety, bonuses paid to our frontline manufacturing and field service employees, and increased freight-related costs as we prioritize delivery of critical products. We expect year-over-year reductions in operating expenses driven by continued financial discipline as well as lower travel and meeting expenses. In line with previous commentary, we expect net interest expense to increase by over $60 million as compared to the prior year. And for the full year, we also expect adjusted other non-operating expense to be negatively impacted by approximately $50 million year-over-year due to the loss of pension-related income from the Q4 2019 transfer of $2.4 billion in pension assets and related liabilities. Given these factors and underlying assumptions, we now expect adjusted diluted earnings per share excluding special items between 302 and 305 for the full year 2020. In closing, the third quarter continued to demonstrate the durability of our medically necessary portfolio and the importance of our multi-year transformation journey. The commitment of our employees and the speed at which the organization has responded to the pandemic has fueled our year-to-date top-line performance. 2020 has certainly brought many challenges, and through it all, we believe we remain well positioned for continued financial stability and long-term success. With that, we can now open the call to Q&A.
spk09: At this time, I'd like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Robbie Marcus from J.P. Morgan. Your line is open.
spk05: Congrats on a good quarter. Thanks, Robbie. Not sure if this is for Jay or Joe, but I was hoping maybe we could start with the guidance outlook here. You know, you're not the first company to point to worsening trends. We see the COVID rates ticking up. And I was hoping you could walk us through, you know, was this fourth quarter, your projection didn't improve as much as you originally thought? Or are you seeing worsening trends coming into fourth quarter here? And if you could just walk us through down the P&L, how the lowered top line outlook affects, you know, down the EPS, the different changes versus expectations.
spk11: Sure. Robbie, overall Q4 is a little bit below the previous expectations that we shared on the last call, both with respect to sales and then also with respect to earnings. While we didn't sort of have specific guidance on Q4, we did have some internal assumptions. And really, I would say the largest driver relates to admissions in the U.S. Our prior expectation, you'll recall I said in the fourth quarter, we expected admissions to be down approximately 3%. We are now modeling roughly an 11% decline in admissions in the fourth quarter. um and if you think about it each point of admissions is worth a couple of million dollars per month so in totality this impact is roughly 50 million dollars to the sales line the second factor again we believe this to be a temporary item is we did have some sales in the fourth quarter related to our novum iq platform and while joe commented around this and and our expectations about this being a long-term driver for us We did remove those sales from the fourth quarter, roughly $25 million, $30 million, representing a couple of cents. So admissions, as I said, you know, roughly $50 million, approximately six cents. Then you also have this pump factor of roughly $30 million, a couple of cents as well. So those are the primary drivers. From our perspective, you know, the good news is these should correct over time. The pace of that correction is the real question at hand.
spk05: Great. And just a follow-up question. It's great to see the share repurchase program coming back online in the fourth quarter. You know, you have authorization up to $2.4 billion, over $4 billion in cash right now. How should we think about the impact in fourth quarter? What's in guidance for share repurchase? And with the share price at $78, you know, is this something we could see a pretty aggressive move here over the next several months? Thanks.
spk11: Certainly, we were pleased to announce the increase to the stock buyback authorization and that the Board approved that recently. And, you know, from our perspective, one of the things that we put on hold over the last six months was the share buyback program. We did that in large part because of uncertainty around the pandemic and its impact on our business. I think now having reported a couple of quarters of solid results in the face of a pandemic, we now have confidence to start to get back to share buyback as a vehicle for returning value to shareholders. It's something that we've done over the last five years. As we think about amounts, the way we assess it is we look at what we believe the shares are worth, evaluating that against an intrinsic value model we keep here. And depending on how shares trade relative to that intrinsic value model, that's when we end up making purchases. We talk about it after the end of each quarter. And so we didn't repurchase anything last quarter. And so for the fourth quarter, we'll talk about this when we report fourth quarter earnings in February. So stay tuned for that. And that's the standard program that we have in place. Again, it was a severe departure from our normal protocol, but we had that in light of the pandemic. We wanted to make clear, you know, what we were trying to optimize during this timeframe. Appreciate it. Thanks.
spk09: Your next question comes from the line of from Deutsche Bank. Your line is open.
spk02: Questions. Just to follow up on Robbie's question on your fourth quarter assumptions, specifically the publicly traded hospitals have been seeing improvement throughout the third quarter on emission trends. So the fourth quarter run rate should be higher than what they saw during the third quarter. Are you seeing or hearing about things getting worse, or are you just making an assumption? And also, as you talk about emissions impacting volumes, the patient days throughout the HCA intended were actually positive. So how should we think about the interplay between lower emissions versus longer length of stays and the impact on medication delivery?
spk06: Good morning, everyone. Good morning, and I hope everybody is healthy and well. Let's divide. You can't just make one assumption. We are a hospital company, but within the hospital, there are several different drivers of our business. So if you look at... Procedures in general are largely stabilizing, right? So they're coming up. They're a little bit below last year's, but it's coming coming perhaps in the fourth quarter more to a same level. Now we have a flare up in the pandemic right now. So we're watching that very closely. In hospital admissions, it has more to do with Medicare patients being admitted in hospitals and how hospitals are taking patients through the ED, the emergency department. So we don't see significant deterioration between Q3 and Q4. We have indicators that are very reliable because we are in those accounts. We are in these businesses. So we don't see that as a huge deterioration in the fourth quarter, but we've got to watch what is coming with this new wave of infections and how that's going to be dealt at the hospital level. But the main drivers for a hospital today, the way we see it is, is the O.R., which is largely stabilizing, and then the admissions of patients through the general floor of the hospital. And that is what you see the biggest deficit in those patients are usually Medicare patients. So we're going to watch it closely and that will inform how we are not only think about the fourth quarter as we're living through the fourth quarter, but 2021.
spk02: Okay. And then on the margin guidance again for fourth quarter, it looks like pretty substantial margin guidance that you're giving us on fourth quarter versus what you saw in the third quarter. Can you walk us through what are any new costs being added sequentially? Is it all just margin pressure coming from product mix? Or just help us understand why the margin difference is so big on fourth quarter versus third quarter. Thanks so much.
spk11: Sure, there is some margin deterioration in the fourth quarter, and really that relates to a few things. First of all, we are expecting to see flat or slight decline in the U.S. business sequentially from Q3 to Q4, and again, it's temporary it's going to be a temporary impact in nature but it certainly is a decline so the result of that when your ex-us business is growing faster than the u.s you tend to have a fairly substantial mixed impact on gross margin And then the second factor is because of some lower volumes we're now anticipating, we are expecting some incremental manufacturing absorption impacts, again, that flow through to the bottom line. So really those are the primary drivers of the Q3 to Q4 margin story. Great. Thanks so much.
spk09: Bob Hopkins from Bank of America. Your line is open.
spk01: Thank you. Just first off, I was wondering, Joe, if you wouldn't mind giving us your sense for the progress that you're making on the filings for NovumIQ and the syringe pump. Just maybe express how confident you are in your timelines and any update on the progress would be great.
spk06: Bob, good morning. We are working very diligently with the FDA. We have meetings with the FDA scheduled, and we are still very confident in our platform. I can't speak on behalf of the FDA and how long it's going to take and the questions, but I think we have a very good idea what are the issues that the FDA had with our previous submission, and we're addressing them very, very quickly, and we hope we can address them to the satisfaction of the FDA. As you know, this is an important platform for us because this is a platform not only with two pumps coming up, but also a PCA pump coming later on, as well as an ambulatory pump coming in 2022. So we are very excited about that, but also as a company, very focused, not only medication delivery, we have a company-wide effort to make sure that we've got the most experts in place helping that group answer all the questions satisfactory to the FDA. We, as a company, don't think that those are insurmountable questions and issues, and we're working very hard, and probably in the next two or three months, we'll refile and go through the process. We hope to launch this product next year. I think it's going to be a great product for not only for Baxter, but also for the market.
spk01: Okay, so it sounds like you still plan on filing this year. No change there. And then my second question is just maybe for Joe, for Jay, you know, for 2021, you know, the street model is 19% earnings growth over 2020, aided in large part by much lower COVID-related spend. I assume you're not going to give guidance on this call, but any directional comments on where the street is for next year or on just kind of year-over-year spend levels?
spk11: Bob, it's really hard to comment on that at this point in time. We're still in the middle of our annual operating plan process. Understanding market trends in the fourth quarter with respect to the pandemic is going to be a critical input to our 2021 guidance. The plan is to provide the guidance on the earnings call on February 4th. The one thing I will tell you is we do anticipate some level of sustained impact from the pandemic on our business, potentially through the first half of 21. It's really hard to assess at this point. It's really hard to assess what's going to happen to admissions, but we're watching that very carefully as it's a critical driver of our growth. So, you know, we're going to take all of the time and we're actually spending a lot of energy and effort really trying to model out expectations around patient admissions and procedures because that's such an important driver for us. As you know, we've had about $150 million in COVID-related costs, but we've had a far bigger impact on the sales line. Over time, the COVID-related costs will dissipate. So as the pandemic ends, we expect to claw back the vast majority of those spend items. But, you know, we're watching carefully the sales line. And the two key drivers are the ones that I mentioned, admissions and surgical procedures. And it's early to say, but we do expect some impact in the first half of the year.
spk06: Bob, we're working very hard in modeling this. We have modelers, we have people working relentlessly in creating a sustainable way of looking through this pandemic and how it affects not only the U.S., but also affects Latin America and affects Europe. at the moment. We see much less effect of the pandemic in Asia, as everybody knows. We had a pretty healthy growth in the third quarter in our APEC business, but we are working 24-7 in getting this model complete, and we hope to have something for you guys when we give guidance that we feel confident in standing behind it in January. Thank you. Great. Thanks very much.
spk09: David Lewis from Morgan Stanley, your line is open.
spk04: Maybe I'll just stay high level because I don't think we're going to get much on 21 specifically. But, Joe, people entered this year enthusiastic about the pump launch, Theranova, and other various drivers. And as you know, we didn't get the benefit of the analyst day, I think. The key question we're getting from investors is, what is the growth thesis for Baxter on a go-for basis? Maybe just take a couple minutes and sort of, as you see the intermediate-term growth outlook for Baxter, what investors should be enthusiastic about as it relates to the growth portfolio? What are the things that are getting you excited, and what should they be focused on?
spk06: David, good morning. We are still very excited about the Novum IQ. This is the first time Baxter has a global platform, as we said in the prepared remarks. This is not a U.S. product only. We're expecting the syringe pump approved in the fourth quarter. In Canada, we expect at the end of the year that we're going to have the platform approved in January. uh europe for ce marked by the way we start already hiring people for the sales force to launch this product in europe remember we were not present in europe for I don't know how many years, probably 20, 30 years, that we have not sold a product. We just started about two years ago selling our Evo IQ pump that replaced the old colleague pumps there. So this is something new. The European folks are super excited. So I'm very excited about the pump because I think it is a transformation for Baxter and is going to be a transformation in the U.S. market as well. I'm also excited about the PD business in the U.S. AAKHI opened the door for this business to grow. We were growing at 5% to 6%. We start to see the growth hitting now 7%, 8%, 9%, 10% as last quarter. So we think high single digits to about 10%, it is a great place for this business to be. We made investments already for the short-term capacity need. We're going to be looking at more investment if we need to. We also looking at new technology eventually to come into the cycler business that will change our ability to service even better our customers. China PD is a great business that is also growing 8% to 10% a year. We're number one there. It's a good business for us and it's a very profitable business for us. So this is a driver that excites me. And actually, I have a call this week looking at more capacity for the Reno business in Asia. Also, we have some molecules like mixed redline that we were not able to roll out well in 2020 because the pandemic, as you know, this is a new way that the product is configured, insulin, pre-mixed insulin, and we need to service the accounts and be able to promote that. And we were not able to get into hospitals for the longest. And I will tell you that this is going to be almost like a relaunch in 2021. And we're excited about that. Also, going back to normal, I think the ability to be a participant in the vaccine business as a few Finnish companies that we are, between our plant in Bloomington, Indiana, and Halla, in Germany will be able to be a participant in this business. So we look at all of this as drivers for 2021. But beyond 2021, we also have some notable launches that I'm excited about, ambulatory pump in 2021, few advanced surgery businesses, new products, rather new products coming out, some pharmaceuticals as well. So our innovation has not stopped. We took a little break in our labs in the beginning of the pandemic, but we're back on our labs operations pretty intensively and we're getting things out there. The employees of Baxter have been relentless
spk04: in the innovation we're going to transform this company's innovation pathway okay super helpful joe and just maybe jade is a quick one for you we just we're not going to get you to comment on theranova what cms will do here next week but just in terms of kind of risk mitigating uh the uh the outcome if it were to happen um just given where you see the plant manufacturing today you know what type of revenue ranges could we be expecting for um for 2021 if you had if you had the approval um and you began to scale up sort of from here uh thanks so much
spk06: David, I would say that, first of all, if we're contemplating both scenarios, the approval and being included or not included, okay, we have a good momentum going on outside the U.S. with Terranova. As a matter of fact, it's a little bit of a downer for our colleagues outside the U.S. because the way, if this gets approved in the U.S., the U.S. is going to take most of the volume of the world. And they were going to be having pretty good momentum until we up the capacity to supply them. So our plan B is if it doesn't get reimbursed here, it doesn't mean that we're not going to sell it here. We're going to continue to sell. We actually had the first sale of Terranova about three weeks ago in the U.S. We will then press forward with outside the U.S. And that sales growth is in the double digits with really good margins. I will refrain now to give you a number for 2021. We'll be more precise about this number. If this product gets included in the TPNIS coming up early November, we then become more clear about what that impact is in the U.S. But I want our investors to know that despite the fact it may or may not get TPNIS approval in the U.S., We will continue to sell it in the U.S., and we will expand and accelerate the sale of the products overseas. So at the end of the day, the product is still a great product for our patients. We believe in the product, and the clinical evidence is there, as we were able to show to the government. Okay, very helpful.
spk04: Thanks so much, guys. Thank you.
spk09: Vijay Kumar from Evercore, your line is open.
spk13: Hey, guys. Thanks for taking my question. I had one quick on the quarter and a big picture question. Maybe, Jay, for you on the Q itself, when you talk about the higher manufacturing variance, is that signaling, you know, gross margin flattish or down sequentially in a Q4? And when you look at the incremental expenses you guys incurred in 150 million incremental with below the line another 50, how much of that is going away or moderating next year?
spk11: Yeah, so we do expect a sequential step down in gross margin from Q3 to Q4. From a Q4 standpoint, you know, thinking for a second year over year, there's roughly 100 basis points of COVID cost impact You know, the fact that we've lost sales is about, and some of those sales are higher margin in the US. It's 130 basis point impact. There's some FX impact in the fourth quarter, maybe 70 basis points. We are seeing some incremental manufacturing costs as well. So there's a combination of items that do take the gross margin down from Q3 to Q4, even absent the COVID impact. But like I said, many of these items are short-term items, which we do expect to recover. Now, as it relates to when, that really is the critical question for us. And so, you know, at this point in time, we do expect some continued impact, certainly through the first half of next year, both in terms of sales and in terms of incremental manufacturing costs. My hope is that in the second half of the year, we see a more normal environment, but I can't say that with certainty at this stage. As I said before, We expect admissions to recover over time. And we also expect the vast majority of those COVID costs to go away over time. But it's hard to say, you know, is that Q1, Q2, Q4 next year? That's the question that we're working through right now. And it's difficult to model, but we're spending a lot of time really trying to model it.
spk06: Joe? i'll add as well that we have a new head of manufacturing jim borzy he comes in with tremendous experience and already making a difference we're looking to significantly alter some of the ways we do things um in the in the engineering groups and parts of the company so we will be looking for efficiency and productivity in operations throughout the fourth quarter and next year. So this will contribute, when we think about back to a normal gross margin, it has to do with mix, it has to do with COVID, it has to do with efficiencies. Because if you're producing less in some of our factories, the cost is actually much higher because the lack of efficiency of running plants 24-7. As we adjusted already our capacity down without affecting at all the customer at the end because we're holding inventory for any kind of a spike in demand due to the COVID situation, we are relentless looking for productivity improvements and we have Put a tremendous faith that Jim and the team in global supply chain will continue to look for those efficiencies throughout 2021 to offset some of the losses until the situation come back to normal. And then we'll continue to progress in our quest for improving gross margin.
spk13: that's helpful and jay uh joe sorry one uh a big picture for you uh this buyback versus m a debate i'm curious on uh how your thoughts change and then the reason i ask is uh look your balance sheet is stellar uh but i think investor perception has changed on M&A. Investors are willing to look at a longer time horizon for ROIC to be above wax. I'm just curious on how you think about M&A in a zero interest rate environment when investors are willing to look at a longer time horizon for returns.
spk11: Sure, Vijay, good question. For us, we expect to do a mix of both buyback and M&A going forward, as we've seen in the past. And so, you know, from a capital deployment standpoint, we think Baxter can be a great acquirer of a lot of different assets, especially ones that have some strategic relevancy to what the company does. It's harder to stretch out into completely new areas. But what we're finding is we are able to generate adequate ROIs in those areas that have some strategic relevancy to the company where the company becomes a logical buyer. So, you know, you never say, you know, you never know what's going to happen with business development, but we are very active. The pipeline is rich. And while ROI is an important strategic and financial criteria for us, we are seeing a rich pipeline today. Joe, do you want to add anything to that?
spk06: i think you'll answer very well i'll i'll simply supplement the the answer with the fourth pillars of transforming baxter the la the last one is transformation of the portfolio to alter the our weighted average market market growth rate now with a solid balance sheet with our cost structure and sgna in place with the innovation pathway set internally for organic investment and talent and culture being one that we tackle first. Now our focus is undivided on how do we alter our portfolio in a way that will continue to provide value to our patients and customers, but also create a good return for our investors. And we always look at ROIC and the IRR and NPV on these deals. We're very stringent some time ago, not that we change how we look at them, but we were in a position In the very beginning, when I started here five years ago with a very low free cash flow and very low cash reserves, now we feel that we have a solid balance sheet, and that actually helps us understand the landscape better, open the opportunities. So it doesn't mean we're doing something. I'm not indicating that. I'm just saying that we are relentless looking for those opportunities.
spk13: That's helpful. Thanks, guys.
spk06: Thanks, Vijay.
spk09: Larry Bajelson from Wells Fargo. Your line is open.
spk12: Larry Bajelson Good morning, guys. Thanks for taking the question. One on the Q4 guide, one on, Joe, on your vaccine comments a minute ago. So, Jay, on the Q4 guide, you know, I've gotten a couple inbound emails. Are we thinking about the implied Q4 operational growth, negative 2% to plus 6%? Is that the right way to think about it? And what kind of gets you to the high end versus the low end?
spk11: um there there is a there is a fairly wide range but we are expecting some some level of decline low single digits um in the fourth quarter and and really what that comes down to is the admissions gap versus prior year but then also a very challenging comp as we look at last year's sales growth you'll recall i believe the fourth quarter operation was in the range of nine percent growth And so tough comp. We always knew that was going to be a challenge for us. But then we have the added fact that we are now assuming admissions down double digits year over year, roughly 11 percent. So that's kind of the high end of the guide range reflects, you know, some low single-digit sales decline.
spk06: And, Larry, also we were planning to launch NovumIQ in the fourth quarter. And that carries a higher margin as well, as well carry the sales. So the combination of two are the ones that created a little bit of headwind in the fourth quarter that we will see easing off throughout next year.
spk12: Thanks, that's helpful. And Joe, I've heard you talk about, you know, the vaccine opportunity a couple times recently. Are you talking about COVID vaccines or is that the flu vaccines? And, you know, my understanding is you've generally operated at capacity there with the flu vaccines in Baxter Pharma Solutions. You know, are you thinking, do you see this COVID vaccine opportunity and do you have to add capacity? Any color there would be appreciated. Thank you.
spk06: So we have the ability to... to do that. As a matter of fact, we have two different plants, one in Germany with a little bit more capacity and Bloomington. And we have the ability to help the country and the manufacturers of the vaccine, the developers in this in this process. We are part of this network of companies that feel finished vaccines. We have that ability and and we we we cannot comment on who and what and why, but we are part of this effort, and we hope to be part of this effort continuously throughout this pandemic. I'm talking about coronavirus, COVID-19. I'm not speaking about flu. Thank you.
spk09: Danielle Antofelli from SVB Learing, your line is open.
spk08: good morning everyone thank you so much for for taking the questions um i have a specific question on the renal business and and pd i think you guys saw six percent pd patient growth number that's very strong and i'm just curious how to think about where that patient growth number can go as the aakhi rolls out and how we should be thinking about the the trajectory of that business with as the aakhi moves into implementation
spk06: Hi, Danielle. You know, throughout this pandemic, early on in the pandemic, I think the... The insertion, catheter insertion for PD was deemed emergency surgery. So our fear was if you, in the very beginning, people don't have an opportunity to have the catheter, they will go straight into hemodialysis and that's it. We see 6%, even throughout this pandemic, as a very good number. If you think about the AAKTI and just do the math, the growth would go between 8% and 10%. You know, that's where we should be looking at for the future. So it represents a really, really good opportunity for the patients to take advantage of this therapy. And also for Baxter, which has been for three or four decades behind this therapy, that finally is being more understood and diffused in the U.S.
spk08: Got it. And then just one follow-up from a technology perspective. and where we are with the sort of point of care dialysis PD system and how that could change the adoption trajectory here.
spk06: Listen, the point of care was a project that we actually proven that works. We have the technology to make it work. We are focusing right now in developing new technology for cyclers, as well as we have some investments, minority investments in companies in the wearable space. So Baxter is explaining all these spaces, not only point of care, but also in technologies that will make more affordable the cycler. The issue that I think we have with the cycler is not one that affects much the U.S., as much as affects the penetration of APD across the globe. It's a very expensive cycler, which you don't see adoption in most countries. They are in development today. So to give access to healthcare and access to that technology, our teams are developing very interesting technologies that eventually will be global in nature and used. Also, I think wearable technology offers a promising future, and we have minor investment in that kind of technology. We also are very focused on point of care in terms of technology that can be used with some of those that are being developed in conjunction, not as itself being launched, but being added to other technologies that we're currently developing. We have a pretty healthy spending in our renal care business, and we don't plan to ease off on that and continue to develop those products.
spk09: Thank you.
spk06: Thanks, Danielle.
spk09: Matt Mixick from Credit Suisse, your line is open.
spk03: Thanks so much. So I just had one follow-up just to clarify something that we talked about a little earlier on the call, and this is the difference. I think, Joe, you answered the question around difference in types of admissions. Jay, in your prepared remarks, you'd mentioned a couple times the importance of ER visits or the fall-off of ER visits. Could you just, is that sort of the difference, you know, fewer people coming in through the emergency service and other types of admissions that we see in the press kind of not really being what drives your businesses? Just one clarification on that and then one follow-up.
spk06: Well, the admissions in hospitals come from a few places. One of them is the E.D., And the other one is procedures, is OR, people who have scheduled procedures, either scheduled procedures through normal routes or a knee replacement or a gastric bypass or a colon procedure, oncology. That part, the procedure levels, are coming back to normal levels. And I think we'll normalize, as you can see now, even with the pandemic resurging so many places, hospitals are more reluctant now to stop the procedures altogether. You see a few doing that. More of them are saying that they will be able to accommodate COVID patients as well as procedures in the other side of the hospital. that is unaffected and we see healthy pickup and going into the fourth quarter, not perhaps at the same levels we saw pre-COVID, but close to those levels. What we see as an issue is the ED has 20 to 25, 30% reduction in visits. Those visits are the ones that generate admissions into hospitals as well for the general floor. So, and we see primarily Medicare patients who are more reluctant because the age to go to an ED visit, even to be admitted. So they're presenting themselves later with more severe issues. So that is how we look at this. We also look at surgery centers and we look at alternate sites for procedures and those actually are doing well.
spk03: Super helpful color, Joe. Thank you. And then just some additional question maybe on the pace and change that we're seeing in Europe for time. Some of these European geographies markets were moving in the right direction over the summer. Now, obviously, you know, we're very focused on the U.S., but there's also these, you know, changes in policy there. I guess anything that you're seeing there is a factor into Q4. Any comments or color would be helpful.
spk06: Yeah, you know, we saw a pretty good recovery in Europe. If you remember, our second quarter numbers were affected. And then now the third quarter, even with issues, is still showing growth. The concern that we have is the two largest markets that you have in Europe right now is one of them France, the other one Germany. Those are two largest markets in Europe, followed by Spain, UK, and Italy. So you see a resurgent lockdown for 30 days just announced by Angela Merkel. You see that that may affect the way people are treated in Europe in the health system. Remember, uninsured and non-insured patients is not an issue in Europe. So you don't see the reluctance to go to the ED, but you see a concern in people having procedures as hospitals continue to fill out to fill up would be for us to watch very closely. When we do modeling here, we don't do modeling only for the U.S. We're doing modeling for U.S. and Europe in a very deep level, even with variations of vaccine approvals and sentiment. of the population in terms of going to the hospital. As I said, the numbers that people are seeing right now is Medicare patients are more reluctant to go to the hospital today for chest pain and other ailments. And telemedicine has helped some of this alleviation because you can do that remotely. In Europe, we see that coming up as a trend as well. We're keeping our eyes very close in Europe, but that's part of our analysis as well.
spk03: Thanks so much, Joe.
spk09: Our last question comes from the line of Matt Taylor from UBS. Your line is open.
spk10: Hi, thank you for taking the question. So I just wanted to follow up on two key points that you've been talking about on this call. Jay, the first one is the $150 million in costs. I know you said that we could be under these kind of COVID conditions for a while. If that does occur, can you talk about what proportion of the costs you could still work off? And how long would it take post sort of normalization to get rid of the remainder, claw back the remainder of those costs?
spk11: Well, post-normalization, I would say within one to two quarters, we should be back to, you know, we should have been able to alleviate the vast majority of these costs. So, or mitigate, I should say. So, post-normalization, it's something that, you know, we'll see go away over time, the vast majority. There will be some that remain because, you know, For example, you know, all of our employees in facilities today now use PPE. In the past, that was not the case, and so that has a daily cost of tenant with it that we'll live with. But like I say, post-normalization, the vast majority of costs will be mitigated. As it relates to next year and how much we can do in the interim to mitigate some of this $150 million impact, that's an open question we're working through, and we believe there is some opportunity, but it's hard for me to quantify that at this stage.
spk10: Thanks. And just to follow up, I think a lot of people are surprised by the admissions comment. And I guess I was wondering, is that reflective of what you've seen quarter to date? Are you assuming any deterioration as we move forward, given the cases rising? If you could give us any color, that would be helpful.
spk11: Sure. Last quarter, from an admissions standpoint, I would estimate roughly a 12% decline, Q3. That's Q3. Q4, our assumption, is roughly 11%. And October to date, that's kind of what we're seeing. The wild card is what happens to escalating cases around the U.S. and in Europe. But look, we think we have a sufficient range that we've shared that encompasses a wide swath of potential outcomes. So we think we've got it correctly called with the range that we've shared. But, you know, we're looking, we're not expecting deterioration from, in our high case, we're not anticipating deterioration from the current level of roughly 11% decline.
spk10: Okay, great. Thanks a lot.
spk07: Thank you. This concludes our call. Thank you very much.
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