Baxter International Inc.

And gentlemen, and welcome to Baxter International's 4th Quarter 2020 Earnings Conference Call. Your lines will remain in a listen-only mode until the question and answer segment of today's call. At that time, if you have a question, you will need to press star 1 key on your touch-tone phone. If anyone should require assistance during the conference, please press star then 0 on your touch-tone phone. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast. without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Claire Tarkman, Vice President and Federal Relations at Baxter International. Ms. Tarkman, you may begin.

Good morning, and welcome to our fourth quarter 2020 earnings conference call. Joining me today are Joel Leda, Baxter's Chairman and Chief Executive Officer, and Jason Carl, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full year 2020 financial results along with our financial outlook for 2021. 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 the first quarter and full year 2021, new product development, 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 factors 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 issue this morning and available on our website. On the call this morning, we will be discussing operational sales growth which for 2020 adjusts for the impact of foreign exchange and the acquisition of Ceprofilm, which closed on February 14, 2020. Now I'd like to turn the call over to Joe. Joe?

Thank you, Claire, and thank you for everyone joining today's call. I hope that you and your loved ones are staying healthy and safe. I'll begin this morning with a review of Baxter's fourth quarter performance and some perspective on 2020 as a whole. Jay will provide additional details on the financials, including our outlook for the first quarter in full year 2021. Then we will close with Q&A. Obviously, it is impossible to frame this year's performance without reference to the COVID-19 pandemic. This has been a year like no other, and I once again want to acknowledge the healthcare providers, first responders, caregivers, researchers, and of course, patients who are on the front lines of this daily struggle. And I'm deeply grateful to my Baxter colleagues who continue to make a difference, not only battling COVID-19, but across all of the acute and chronic conditions addressed by our G.R.U.D. portfolio. In the spirit of our mission, we've partnered with three companies to manufacture selected COVID-19 vaccines through our Baxter Biopharma Solutions business. We're privileged to work alongside these companies and proud to bring our leading-edge contract manufacturing capabilities to the fight against this pandemic. Our results in 2020 demonstrate our commitment to driving performance and reflect the diversity and durability of our portfolio amid these challenging market conditions. Baxter delivered fourth quarter reported sales growth of 5%, 3% the constant occurrence rates, and 2% operations. On the bottom line, adjusted earnings per share were $0.80, down 18% year-over-year, reflecting a challenging comparison to the prior year quarter, our strongest quarter since the back-solid spin-off, as well as the ongoing impact of the pandemic on our business. Geographically, growth was led by our Asia-Pacific segment, which was up 8% of constant currency rates. This reflects the region's overall momentum and leadership in pandemic containment and recovery. Fourth quarter year-over-year sales growth was 5% for EMEA and flat in the Americas, also at constant rates. Four of our six GBUs grew for the quarter at constant rates, unless otherwise noted, all sales growth figures discussed are compared to the prior year period at constant currency rates. Growth was led by acute therapies at 15%. This reflects sustained higher demand for continuous renal replacement therapy, or CRRT, products used in the treatment of COVID-19. Our renal care business delivered mid-single-page growth for the quarter, driven by ongoing strength of peritoneal dialysis therapies, particularly in the U.S. During the quarter, we announced FDA authorization of our home choice Clarion 8 PD cycler, which features ShareSource, the only two-way remote patient management platform for PD patients in the U.S., This new cycle option alongside AMIA supports our ability to expand access to home-based therapy as the new CMS and stage renal disease treatment choices or ETC payment model takes effect this year. While the impact of COVID has been more muted on Baxter's renal care business, overall ESRD patient volumes in 2020 have been depressed by COVID, as its patient population is experiencing a higher mortality rate and the incidence of new patient diagnosis is slowing. As the leader in home therapies, we have launched a global campaign, Safer at Home, designed to educate clinicians and patients around the world about the benefits of peritoneal dialysis therapies and increase awareness of alternatives to E-centered hemodialysis treatment. As a result, we expect home therapist growth to continue to outpace that of overall ESRD growth. Clinical nutrition also grew mid-single digits, reflecting the benefit of the new product launches, enhanced commercial execution, competitive dynamics in the U.S., and demand for nutrition products as part of COVID-19 patient treatment. Advanced surgery grew at 10%, benefiting from the impact of our early 2020 separate film acquisition. Adjusting for the acquisition and foreign exchange, advanced surgery declined low single digits operation year over year, reflecting the ongoing lower rate of surgical procedures globally amid the COVID-19 pandemic. Sales in our medication delivery and pharmaceuticals businesses both declined mid-single digits, reflecting lower rates of hospital admissions versus pre-COVID levels. Declines in admissions were partially offset by increased utilization and stocking of a range of products used in treating COVID-19 patients. including certain presentations of our large-volume parenterals, minibags, and select generic injectable pharmaceuticals. Shifting perspective to full year 2020, Baxter achieved sales growth of 3% on both the reported and constant currency basis and 2% operations. On the bottom line, adjusted earnings per share were $3.09, declining 7% versus 2019. The essential nature of our portfolio has long been fundamental to our business model and mission to save and sustain lives. This certainly proved central to our overall 2020 results. While utilization of certain products and therapies declined in light of pandemic conditions, it surged in others, none more so than our acute therapies portfolio, as well as a range of other products across our GDUs. These products emerged at the core of pandemic care, and as demand rose to record levels, we invested as necessary to help increase the flow of these products to the patients and clinicians who were relying on this globally. Amid the unpredictability of 2020, we remained focused on our strategic objectives, which include advancing healthcare innovation, delivering better to all stakeholders. You can see many highlights in today's press release. And this is not changing as we seize the opportunities in 2021 and beyond. The global launch of our leading-edge NovoMyQ infusion platform achieved key milestones at the end of 2020 receiving marketing in Europe and Health Canada too. And we are on track to resubmit our 510K application to FDA by the close of the first quarter. Plus, our new product pipeline includes additional generic injectables and the next generation of our market-leading Prismax technology, among other highlights. In addition, we'll continue pursuing attractive business development and licensing opportunities in line with our core portfolio and key adjacencies. To the extent we don't find opportunities that meet our disciplines in strategic and financial criteria, we will return value to the shareholders through dividends and share repurchases. Baxter's momentum is also evident in other ways, like our growing Net Promoter Scores globally, demonstrating the strength of our customer relationships and laying the groundwork for expanding opportunities. And it can be seen in our wide-ranging ESG recognition, which reflects our standing as a good corporate citizen and an employer of choice for top talent. That's why I remain optimistic about our future. Brexit transformation, now entering its sixth year, has done far more than strengthen our financial performance. It has strengthened our agility, adaptability, resilience, and tenacity. These attributes, alongside our enduring mission and essential portfolio, have been key to navigating today's uncertainty. they will remain at the heart of driving value for patients, clinicians, and shareholders as the global healthcare landscape continues evolving rapidly. Now, we'll pass it on to Jay, who will take a closer look at our financial performance and outlook for 2021.

Thanks, Joe, and good morning, everyone. As Joe mentioned, our fourth quarter results demonstrate the durability of our portfolio and adaptability of our employees and operations to deliver on our mission. Although 2020 presented some unique challenges, we remain focused on accelerating top-line growth through continued execution on new product launches, market development initiatives and partnerships, and strategic business development. and we are committed to driving improvement in operating margins with particular emphasis on gross margin expansion. To that extent, we've established a similar program to what was put in place to transform and optimize our operating expenses. We expect to begin recognizing benefits from this program in 2021 and beyond. Our current plan is to provide our new long-term financial outlook in the fall of this year. We're targeting September 20th to host an in-person investor conference, but we'll pivot to virtual if necessary. Turning to our fourth quarter 2020 results, global sales of $3.2 billion advanced 5% on a reported basis, 3% on a constant currency basis, and 2% on an operational basis. despite the surge in cases of COVID around the globe and in the face of our most challenging comparison to the prior year period. We estimate COVID negatively impacted net revenues by over $100 million in the quarter. On the bottom line, adjusted earnings declined 18% to 80 cents per share as the negative impact from COVID on our businesses, as well as higher interest expense and tax rate, more than offset operational growth in the quarter. Now, I'll walk through performance by our regional segments and global business units. Starting with our three regional segments, sales in Americas were flat on a constant currency basis and declined 1% on an operational basis. Sales in Europe, Middle East, and Africa advanced 5% on both a constant currency and operational basis, and sales in our Asia Pacific region advanced 8% on a constant currency basis and 6% operationally. Moving on to performance by global business units, note that for 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 Ceprofilm. Global sales for RenoCare were $1 billion, 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 single-digit patient growth in the U.S. and APAC regions. As Joe referenced, the pandemic has clearly reinforced the advantages of home-based PD treatment and the implementation of the new CMS ETC payment model this year will further accelerate the shift of care to the home for ESRD patients in the U.S. Sales in medication delivery of $753 million declined 3% on a constant currency basis. As Joe mentioned, hospitalization rates remain depressed compared to pre-COVID levels, impacting our medication delivery business. This pressure was partially offset by increased demand for IV solutions in the U.S. related to COVID care protocols and a government stockpile order. Internationally, we continue to see growth within our infusion systems business, led by increased placements of our EvoIQ pump platform, and we look forward to building further momentum in 2021. As a reminder, this quarter represented a challenging comparison as growth in medication delivery advanced 19% on a constant currency basis in the fourth quarter of 2019. Pharmaceutical sales of $571 million declined 4% on a constant currency basis, reflecting ongoing pressure from lower hospitalization rates. Additionally, we continue to experience lower demand for our inhaled anesthesia products globally. These declines were partially offset by increased demand for our international pharmacy compounding business. Moving to nutrition, total sales were $246 million, increasing 4% on a constant currency basis. Strong performance in the quarter was driven by the benefit of recent new product launches, competitor shortages in amino acids, and demand for certain products used in the treatment of COVID patients, as well as enhanced commercial execution, notably in our EMEA region. Sales in advanced surgery were $260 million, advancing 10% on a constant currency basis and declining 2% on an operational basis. The acquisition of Seprafilm in February contributed approximately $30 million of sales in the quarter. While globally, surgical procedures remained below pre-COVID levels, we did see improvement in the U.S. and estimate that for the fourth quarter, surgical procedures were flat to pre-COVID levels, above our prior expectation of mid-single-digit declines. Also, as a reminder, the fourth quarter of 2019 benefited from select competitive shortages that did not repeat in 2020. Sales in our acute therapies business were $221 million, representing growth of 50% on a constant currency basis, driven by on-go and COVID-related demand, as the acuity of cases remained high during the fourth quarter. Finally, Sales in our other category, which primarily includes our contract manufacturing services, were $117 million in the quarter, declining 4% on a constant currency basis. Moving through the rest of the P&L, our adjusted gross margin of 41.4% declined by 430 basis points over the prior year, driven by lower sales of higher margin product, increased operations expenses related to COVID, and unfavorable manufacturing variances due to lower production volumes. Adjusted SG&A of $622 million declined 1% on a year-over-year basis, driven by a reduction of discretionary spending related to COVID restrictions, Lower bonus accruals under our annual employee incentive compensation plans. Adjusted R&D spending in the quarter of $132 million declined 14% on a reported basis, reflecting our continued efforts to enhance our processes and optimize our R&D organization, along with reductions in discretionary spend due to COVID. Adjusted operating margin in the quarter was 17.7%, a decrease of 230 basis points versus the prior year, reflecting the factors I just discussed. Net interest expense was $38 million in the quarter, an increase of $18 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 adjusted non-operating expense totaled $5 million in the quarter compared to $16 million of income in the prior year period. This includes increased expenses related to foreign exchange and reduced pension benefits as compared to the prior year period. The adjusted tax rate in the quarter was 20.2% above our expectations, driven primarily by the mix of earnings in the quarter. Turning to the full year 2020, sales of $11.7 billion increased by 3% on both a reported and constant currency basis and 2% on an operational basis. On the bottom line, adjusted earnings decreased 7% to $3.09 per diluted share. On a full year basis, we generated free cash flow of approximately $1.2 billion. This represents a decrease of $250 million versus the prior year period, in part related to carrying higher inventory levels for pandemic preparedness, as well as the impact from settlement of all outstanding interest rate derivative contracts. As of the end of the year, we had approximately $3.7 billion of cash and cash equivalents on our balance sheet, along with $6.2 billion of long-term indebtedness. During the fourth quarter, we repurchased $500 million, or 6.3 million shares of common stock, and over the course of the year deployed approximately $500 million to inorganic business development opportunities. We'll continue to balance our investments across organic and inorganic initiatives to fuel our growth and drive margin expansion. Let me conclude my comments by discussing our outlook for the first quarter and full year 2021. For the full year 2021, we expect global growth of 7% to 8% on a reported basis and 4% to 5% on a constant currency basis. I would like to point out the key assumption reflected in our full year sales outlook, which include approximately 300 basis points of foreign exchange impact. Our current expectation is that on a full year basis, hospital admission rates and surgical procedures are going to remain below pre-COVID levels, roughly down mid single digits for the year. Our expectation is that rates will improve sequentially throughout the year to exit Q4 with admissions down slightly and procedures roughly flat. Moving down the P&L, we anticipate adjusted operating margin to expand between 20 to 50 basis points, reflecting the continued impact from COVID on our business. This impact will be most notable during the first half of the year and then ease as the year progresses. For the year, we expect an average adjusted tax rate of approximately 18 to 18.5% and a full year diluted average share count between the range of 510 to 515 million shares. This share count reflects the fourth quarter repurchases and assume that any additional repurchases are only undertaken to offset dilution. Based on these factors, we expect 2021 adjusted earnings excluding special items of $3.35 to $3.43 per diluted share. Specific to the first quarter of 2021, we expect growth of approximately 3% on a reported basis and sales to decline low single digits on a constant currency basis. We expect adjusted earnings excluding special items of 63 to 65 cents per diluted share. With that, we can now open the call for Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press the star one key on your touchtone phone. If you wish to remove yourself from the queue, press the pound key. If you're using a speakerphone, please lift the handset to ask your question. So that we may be respectful of everyone's time, please limit your comment to one question with one follow-up question if necessary. We appreciate everyone's patience and would like to provide as many of you as possible the opportunity to ask a question. We will pause for a moment while the list is being compiled. I would like to remind participants that this call is being recorded. An additional replay will be available on the Baxter International website for 60 days at www.baxter.com. First question comes from Vijay Kumar. Please state your question.

Thanks for taking my question, Jay. I guess I'll start off with... um you know one or not the revenue guidance here um you know you look at back half of uh fiscal 20 uh this was really impressive right up low singles uh q1 down low singles uh anything going on for q1 uh and when i think about that you know you back out uh all the code noise it looks like the basis uh you know you guys are looking at you know five and a half or six ish on the base is that correct um

Sure. So, Vijay, in terms of growth in Q1, obviously the key factor that's in play is we had an incredibly strong Q1 of last year. And so we exceeded our expectations. And frankly, there was certainly some pre-buying related to COVID, but also strength across the portfolio. So as we think about the sequencing, our most challenging comp is in the first quarter, and we expect the lowest level of performance. And it really is in those areas that are primarily impacted by COVID. Obviously, Q2 and Q3 have much easier comps, so we will start to see some nice growth there. And then we do expect to close the year with some growth against what is a fairly challenging comp given the strong performance in Q1. The guidance of 4% to 5% on a year-over-year basis includes $50 million to $100 million in of improvement related to COVID. So we are still expecting relative to normalized levels, very substantial COVID impact. So that will abate over time. And certainly in the second half, it will be better than the first, but we're expecting to see about 50 to $100 million of improvement. So really that's the story on the overall guidance from a sales perspective.

Yeah, that's helpful, Lampia. And um you know your total reported revenues uh growing seven eight uh the eps guide would suggest uh high singles to doubles uh not a whole lot of leverage um and i i guess uh you know last year you guys had 150 million of incremental expenses um so my question is why wouldn't we see um you know better margin pull through for fiscal 21 and and has anything changed on the underlying in the bachelor thesis of um you know being a premium margin story uh when you think about the outlook thank you sure overall margin improvement is

a crucial part of our long-term focus and the long-term story of the company. So we are very focused on this. You heard in my prepared remarks some comments in terms of implementing now gross margin improvements in similar ways using a similar methodology to what we applied to operating expenses over the last several years. With the new leader for our manufacturing area coming in, Jim Borzy, we're incredibly excited about our opportunity to drive gross margin. But there are some peculiarities that you have to think about with respect to 2021. While from a manufacturing standpoint, we're expecting maybe 150 basis points of improvement as some of these COVID costs abate, we also have an OPEX normalization that we have to contend with. And what I mean by that is things like travel, the bonus pool, discretionary spending, All of those were sources of savings in 2020, and those pools are rebuilt in 2021 as we start to look at accelerating growth for the long term. So that's roughly 100 basis points of headwind as we look at 2021. And then I would add to that, while the FX environment from a sales standpoint is favorable, that's roughly 30 basis points of headwind as we approach next year on the operating margin line. So you put those items together along with our continued normal focus on operating improvement, and you land where we are with respect to the guidance that we shared. What I will tell you is it really is a very different story first half to second half. In the first half, we have some continued COVID costs, we have some continued rollout of manufacturing impacts, and we have a lower revenue base. What happens in the second half is we have a larger revenue base in place Most of the COVID costs are gone by the second half. And then finally, we will start to see and expect to see some of the improvements that Jim and his team are addressing. They accrue more to the second half. And so I think as we get to Q3, Q4, you'll see margins that you're more normally used to seeing in the first half of the year will be a bit lower than what we've typically seen in the past. But, again, the core part of the story, you know, we are very focused on this particular area, and it's a long-term valuation driver for us.

And the message is nothing fundamental has changed on the margin and upside. Thank you. Thanks, Vijay.

Our next question on the line comes from Robbie Marcus with J.P. Morgan. Please state your question. Please state your question.

Oh, great. Thank you, and congrats on a good quarter. Jay, you know, I was hoping you could spend a few minutes on The cadence and some of the one-time items this year, there's a lot of moving pieces, particularly in 2020, a lot of moving pieces that play out. And especially without segment-level guidance, I thought it would just be really helpful if you could walk us through maybe the cadence through the year and some of the notable items, pluses or minuses, to be aware of as we go up and down the model for the rest of 2021. Thanks. Sure.

So just thinking about the cadence of sales, we've given you the Q1 to work with. Obviously, that is, as I said to Vijay, our most challenging quarter of the year, and it's really challenging across the board, although I will say that we do expect to see continued performance in acute in the first quarter before that becomes a very challenging comp in the future. As we move on to Q2 and Q3, the growth rate is much higher. Q2 was, you know, I believe one of the only quarters, if the only, we declined this year. And so from a comp standpoint, while we still expect to have an impact on both admissions and procedures in the second quarter, we do see, we'll see a strong growth quarter in the second quarter and third quarter on the back of easy comps related to COVID impacts. And then in the fourth quarter, you know, our current thinking is sort of lower single-digit, but growth nonetheless, in large part driven by the strength of the portfolio, some of the launches starting to impact sales in the fourth quarter. So those are some of the drivers there. You know, from a business unit standpoint, Renal, generally speaking, is steady. Our acute business will face severe challenges beginning in Q2, as you would expect. Medication delivery has easier comps from Q2 to Q4, so we'll see some nice growth in that category. Our pharmaceuticals business also, which has been impacted by COVID, Fairly substantially, we'll have a challenging Q1, but then, again, growth beyond that. Nutrition overall, we've seen a solid performance in nutrition, proud of the progress there. That will continue, although there is an easy comp in the second quarter. And then advanced surgery will behave like a lot of the discretionary procedure businesses that you're familiar with. Now, what I will say is all of this is underlied by our market assumptions on COVID. And so, you know, there's a lot of optimism lately in terms of patient trends and so on, and we're certainly excited about that and the impact of vaccines as we move forward. But the way we see it, you know, Q1, we expect to be down relative to pre-COVID levels in from a hospital census standpoint, double digits. From a surgical procedure standpoint, mid-single. Q2 starts to improve, so you'll see sort of mid-single in the census or, you know, high single digit in hospital census. And then surgical procedures improve from the mid-single digits. And then Q3, Q4 much more normal. So really that's a crucial underlying assumption for us. If that plays out as is, guidance should be solid. But, again, you know, a lot of variables in play here that we have to contend with.

Great. That's a really helpful color. And, Joe, I was hoping you could touch on the pipeline and the outlook. You know, there were a lot of products that were set to launch but got put on hold early. from COVID, mixed redline comes to mind. We have a slight delay in the pump launch, but that should still be a great opportunity. PD growth is really healthy with AHKI really just starting to come on. I was hoping you could spend a minute on some of the key pipeline growth drivers here, where they stand and what to expect from them over the next 12 to 24 months. Thanks.

Robbie, good morning. Good morning, everyone. Listen, the pipeline that we have got disrupted in 2020, but we feel that we have momentum coming into 2021 and 2022. If you think about DTC, we believe that PD as a category will be a high single-digit growth, which is probably 300 to 400 basis points above the market growth of ESRD. Baxter is well positioned to capitalize on that. We do have investments. We made investments in capacity, and we are prepared to support the growth. As a matter of fact, we have to anticipate some capacity investments because the growth of the category has surpassed our expectations. So even in a COVID year like 2020, we saw growth of that category. So that is one of the drivers. The other one, obviously, you mentioned is the pump. We're all excited about it. But I don't speak on behalf of agencies across the globe. We are filing. with the FDA, hopefully by the end of the first quarter as we prepare the documentation. We have worked collaboratively. I don't speak on behalf of the agency. I can't predict what the agency is going to do. On our side that we control, we will do the best we can to have this all filed. And if we need to make adjustments across the globe beyond our finance, we will. We're confident that we can launch the Novum in 2021. It's a new platform. It's an open architecture platform, and we have great hopes for this product. We also have new pharmaceutical molecules that are launching this year, but just going back and looking at the launch of mixed redline, was impacted by COVID-19 in 2020. We think that with the exit momentum of December, November and December, we see this molecule gaining momentum. We have a lot of new accounts signed up, so I think we're getting there, and we are in a place right now that we don't speak about cyclophosphamide anymore. So we were able to do what we wanted to do, which is to change the mix of the pharmaceutical business. That is one that we continue to invest organically and inorganically as well. I think a couple other things, if I think about P&L, the gross margin improvement driven by supply chain is one that we're laser-focused. Jay has spoken about our digital transformation, which will affect our G&A and how we do business. And also I think the cash in the balance sheet is a great advantage to us, either on the M&A point of view with these small tokens or perhaps large ones. But if nothing comes about the large ones, we'll return the money to the shareholders, creating value as well. So I think altogether shows a good path of optimism and success for Baxter. Great. Thank you very much.

Thanks, Robbie.

Joanne Lynch with Citi is on the line with a question. Please state your question.

Good morning, everybody. I'm going to circle back a bit to your comment on declining hospital admissions and procedures flat year over year exiting the year. And I want to make sure that it was versus 2020 versus 2019. And I wanted to understand how you're thinking about some level of pent up demand and procedures.

Yeah, certainly, Joanne, and you can add anything that you'd like in terms of other aspects to the answer. So, Joanne, thanks for the question. As we think about the two categories, hospital census and surgical volumes, we really make our comparisons to pre-COVID levels. And so if we think about the fourth quarter of 2020, our hospital census as we see it was roughly down 10% and our surgical volumes was roughly flat as there was some pent up demand that was capitalized on in the fourth quarter of this year. Now, as we move to 2021, our assumptions are roughly hospital census continues to be down in the first quarter, double digits relative to those pre-COVID levels, and it ends the year at down roughly 3%. That's our current working assumption. But it's an important driver for us, Joanne, and we'll watch that very carefully during the course of the year. And it's a fairly linear improvement over the course of the year. So on a full-year basis, relative to pre-COVID levels were down mid-single digits on the census standpoint. From a surgical volume standpoint, our census Q4 did benefit from some pent-up demand. So in Q1, we are expecting a decline relative to pre-COVID levels in the mid-single digits range. And then it improves from there. And by Q4, we're assuming down a couple of percent relative to pre-COVID levels. So we expect surgical volumes to perform a little bit better than general hospital census on a full-year basis. So that's our current assumptions. We'll update that every quarter. It's something that we're very focused on, as it is an important driver of our overall sales volumes.

Thank you. And as a follow-up question, product-wise, the pump business, there's a lot of moving parts there. There's a competitive landscape piece of it. There's a stocking piece of it associated with COVID, and then obviously the Nova MyQ launch. How do you think about that ramping through the year and each of those factors? Thank you.

Joanne, we think that the launch plans are set. We do not promote products not approved, but we have an idea of what is the replacement rates on the marketplace. We also understand the frustration of some of the customers who have competitive products on the aging of the platform. So we think we put our plans based on that. I think there were some stockpiling in terms of bumps in some parts of the world. But the cycle to replace old platforms, either seven, eight, or nine years, depends upon how a hospital sees that, is still there. So I believe that our new pump will create the momentum and the impetus perhaps for a hospital to look at that. We do have the plans. We're not going to speak about the plans, but we do have the plans. But more importantly, we do not promote the product prior to its approval.

Thank you very much. Paul Hopkins with Bank of America is online with a question. Please state your question.

Oh, great. Thanks, and good morning. Just two questions, and I'll just state them up front. First, I just wanted a little more clarity on the pump resubmission and refiling that you talked about. You said hopefully by the end of the first quarter, Joe, that I think originally you were hoping more like the very beginning of the first quarter. Maybe I'm misremembering there, but just wanted to make sure that everything's on track there and what else you need to do before you refile. And then the other question I wanted to ask is a little bit longer term, and it's a COVID-related question. The question is, when you think about your core markets, are there any that you think are now, because of COVID, a little structurally weaker due to either pricing or changes in how care will be delivered going forward. Just to get a little bit longer term with that question and then, again, just a little more clarity on where we are with the pump resubmission. Thank you.

Thank you, Bob, and good morning. The resubmission, what I say hopefully is because we are working on a timeline. We have plans and everything is in place to execute this by the end of Q1. We were more hopeful in the second, third quarter of last year to submit it faster, but I think it's slowing down to speed up was Wise's decision by Baxter. We had contact with the FDA, and that contact has been very collaborative. to the point that we understood some of the things that we had to prepare in more detail. So instead of rushing to get something in, we worked with the agency and continued to very collaboratively. So we have what is needed for them to evaluate the pump. So every time that I think about any plans in the future, like this submission, is I'm very, very optimistic, and I have the confirmation from our executives that this is going to happen. But I always say hopefully because I think things happen that we don't anticipate, but at this moment I don't see anything that would prevent us from filing this at the end of the first quarter. I want to make sure that that's clear. On your other question on COVID, there are structural changes in the market, primarily how people seek care. But more importantly is how long is this COVID pandemic and preventive measures will stick with us and how long the herding unit will take us to get a herding unit and people feel more comfortable with it. doing things differently. I think there's a huge adaptability that we're seeing in hospitals, hospitals separate wards, and we believe that there are some changes in how people consult with their primary care physicians. People who have cancer, unfortunately, need infusion. They need infusion. They either needed to do an infusion and have it done in a place that is safe. People who need surgery, they will need to have the surgery no matter what, otherwise they go in and they're sicker later. People who need it to be admitted because they have issues, they need to. So I believe that the return of the pre-COVID will happen with changes in technology that will allow for better triage. I want to point to the home because this is the part that people sometimes are forgetting. We look a lot at that acute side, but the home treatments are the ones that I think will gain prevalence and will gain preference. And Baxter being a home care company in the ESRD space, plays well for our PD business, and we've seen that. Even with issues that we saw in 2020 with reduction in patient census, we still see momentum of that therapy mode, and we are very focused on that. So that is the momentum that has shifted. When it got to Baxter, the growth of PPE was at the SRD or lower in most places in the world, and today I see that reversing, and I think COVID is an affirmation of those changes that are happening.

Thank you very much. You're welcome.

David Lewis with Morgan Stanley is on the line with a question. Please state your question.

Great. Good morning. Thanks for taking the question. Just two for me, one kind of industry for Joe and then maybe one for Jay. Maybe I'll just start, Jay, with you on margins. Just looking at 21J, kind of a two-part question, just thinking about gross and operating margins, the numbers sort of apply, maybe kind of 18%-ish for 21, gross margins maybe 44%. Is that kind of roughly correct? And when do you think you can get gross margins back to kind of 2019 levels?

Sure, David. As we look at the mix between gross and operating margin, you're right. Roughly, the gross margin we're looking at in the 44 range and then on the way to the operating margin that we've identified. Really, what's going to happen is it is a story of two different halves. Specifically, in the first half of the year, we still had some COVID costs. We still have the rollout of some manufacturing variations from Q4 hitting the first quarter and some into the second quarter. And then finally, we also have a lower sales level, generally speaking, which isn't good for positive manufacturing variations. So all of those things negatively impact the first half of the year. And so we will see a fairly substantial step up to that, you know, from below kind of that average level to something above it in the second half of the year. And then the same story holds true on operating margin. we'll start to see some real leverage on SG&A in the second half of the year, in part as we get the incremental sales, but also as some of the savings initiatives from the digital transformation start to play out into our numbers. So it really is a story of two halves in terms of margin improvement. as we look longer term about you know comparisons to prior years and and so on you know i think that um you'll as i said you'll get close from a gross margin standpoint by the end of this year to the pre-coded levels and then you know we'll share some more guidance on long-term expectations when we get together in September. But, you know, core to our story and core to our focus is this idea that we want to be more efficient and we intend to be more efficient, in particular, on the gross margin line for the coming years. That's an important part of our evaluation.

Okay, super helpful. And then, Joe, just kind of two related questions on renal. There are two dynamics that I think industry is talking about this year. One is the positive impact of the ETC model, and you talked about that a little bit. And the second is obviously this terrible thing where COVID mortality is suppressing the dialysis pool, which I'm sort of assuming impacts you less because PD patients are earlier in treatment protocol. Just give us a sense of the positive ETC model. Can that impact numbers positively here in 21, or is that more likely 22? And are you likely to see any impact from this increased mortality from COVID in dialysis? Thanks so much.

David, good morning. The DTC is a positive. and we are uh looking at the rebound in 2021 of patient census that's our our prediction our forecast so we're seeing that going up um to high single digits so that is a positive and and as i said before i i when i first joined bachelor um our our census uh was at best ESRD average growth and we're seeing this to be higher than that. Now, the growth Like fully expected, I would say 2022, it is where we take off on this and becomes fully realized. 2021, because the first quarter is still a COVID environment, you see a little reduction, but then it's going to pick up. And we've seen that pick up also not only in the U.S., but in Latin America and China and other places that were strong in peritoneal disease. So all in all, 2021 is a rebound year, fully realizing growth in 2022. Second, on your question on mortality, we saw an increase in mortality. due to the situation of COVID, as that ameliorates into 2021, we probably should see the reversal of that. And remember, we are a big company in the U.S. We are an HED, HED, hemodialysis company outside the U.S. as well. But we have, we've seen that mortality affect the business. which we think will be reversed in 2021. That's why 2021 is a rebound year with full realization in 2022. Great, Joe. Thanks so much for the detail. You're welcome.

We have a question from Pito Chikurin with Deutsche Bank. Please state your question.

Good morning, guys. Thank you for taking my questions. A few questions here on renal as well. Just to follow up on David's question on the mortality of ESRD patients, Did you guys see the maximum impact during the fourth quarter as you look at early 2021, the vaccine rollout to sort of that population? Have you already seen that begin to moderate at this point? Also, during the script, you talked about the incidence of end-stage renal disease patients seem to be slowing down. I'm curious why you think that is and how fast that rebounds. And finally, looking at the number of new patients with end-stage renal disease, Is the conversion rate to PD versus in-center different today than it was two years ago, and how should we think about that for 2021?

You know, we saw mortality to be less for us than perhaps for other providers of service in the center when it comes to PD in the U.S., okay? So that is a fact. The other thing is we saw a fourth quarter slow down. because the rampant aspect of the pandemic in Q4, that was tremendously, that was filling up hospitals. And how do you get PDs and insertion of a catheter? That's surgery, and people have to go to the hospital. Despite the fact the association said that to be an emergency surgery, some people just did not have the capacity to do it or did not have access the time to go into a hospital queue to get it done. So I think Q4 was depressed by the pandemic with that event. How do we see the next shift going into 2021? vaccination becomes more prevalent, primarily on people who are highly at risk, like patients in the SRT, and you see all the protocols from the CDC to vaccinate folks like that first. So you will see probably these folks pulling back people going back into the PD modality into 2021. Like I answered today, that we see a rebound in 2021 with full realization of that in 2022. And this is what our forecast, our view in this is that this is 300 to 400 basis points above the ESRD average PD. So it is – we're starting to see growth. We saw growth before, and we will continue because DTC to see big growth. You just need to understand that 2021 will be a little bit of a transition in the beginning of the year and picking up towards the end of the year when you have more herd immunity.

That's great. Just to follow up on that one, we saw the incidence of NC adrenal disease decline during the year. Just curious why you think that is, and does that normalize out into 2021, maybe the bullets of patients? Thanks so much.

the incidence has come down because the access to healthcare was also impacted in the very beginning and that carried through. Probably got a little better during the summer months and late spring, summer months, but as we got into the fall, things became more difficult as people became more isolated due to all the protocols for for lockdowns. So I believe that delayed visits were a major driver of that. But you see that as we start to see less cases, visits normalize, as I said before. Look at the first quarter and first half of this year as a transition that moves into an acceleration into the third and fourth quarter because of the herd immunity and vaccination. Great. Thanks so much.

Danielle Ann Passley with SVB Learing is on the line with a question. Please state your question. Thanks.

Excuse me. Thank you so much, everyone, for taking the question. Excuse me, Joe. Just a follow-up question on renal and how to think about – so two questions, actually. Number one is it relates to the AAKHI. I mean, it feels like there's a lot of tailwinds here around pushing patients into the home. You called out in the presentation mid-single-digit PD patient growth. When do we see that start to accelerate? I guess we probably have to get through COVID soon. But when should we, as we look at our model, think of that starting to accelerate? And then what could be, what do you think could be the ultimate penetration here for PD in the U.S.? And then I have one follow-up.

Okay. Hi, Danielle. If you just do a rough math on the rule on DTC, you see that you need to be at high single digits or very low double digits to be able to get to the demonstration of results, to get to what the rule has shown. has set to be achieved for home therapies, right? To have the same, to have all the indicators for transplants and things like that. So if we think about that, in 2020 as the year where things have slowed down, you eventually catch up in 2021, realize full growth in 2022. And this has been, like I said, we think this is going to be high single digits, low, sometimes low double digit growth for the PV business. We believe that opportunity is there and will be realized. This will be realized. So think about the PD penetration to answer a question directly being about 20% over the time period, okay?

Okay, got it. And then just on the point of care, PD penetration, a real-time PD production product. I know COVID has probably delayed that, but any updates on timing for that system and sort of where we are in the regulatory process? Thank you so much.

Thank you. We finished our first phase in improving the technology. We did clinicals on that. We put the technology to work. The technology works. We're happy with that. We are putting that in a second development. Plan meaning we're decelerating that development and accelerating a new cycler because we believe, despite the fact we would benefit from a point of care, we've got to get a cycler that has more affordability and more global nature. So we're putting our resources in what we call our new project, Project Uno, which we're very excited about. It's a three to three and a half years project. in the making in the future, but that is something that we need more urgently than point of care. And so that technology point of care is proven. We can deliver that. More importantly for Baxter right now was to immediately make some capacity investments, which we did, and to be able to attend our customers. Second is to develop a cycle which is globally natured and more affordable. So that is something that we'll provide to our customers on a global basis to think about automatic PD. is only done in countries which have higher income per capita. And so the incidence is actually not only in those countries across the globe. And I think having a more affordable product, it is the mission of the company. And so that took precedence over rolling out on-demand food making. But we can make it. We've proven. And we will activate when we think is best. Thank you.

Thank you.

We have time for one more question.

We have a question from Larry Beagleson with Wells Fargo. Please state your question.

Good morning. This is Larry calling in for Larry. Thanks for taking my question. I want to go back to NovoMyQ for a minute. You talked about filing around the end of Q1, hopefully. Can you talk about your confidence level in launching the product in second half 21? I believe that was the previous goal. And related to that, what's assuming your guidance about NovoMyQ? Then I have a follow-up.

The NOVA market, I want to say hopefully, is because we are engaged and we'll get it done. I'm hopeful because if something comes up, we always address these two people. So we're not going to rush in filing for something if we're not ready. But I have to affirm to you guys, as far as I'm sitting here today, as far as I know, everything is ready and right to file at the end of the quarter. That I can tell you. What I cannot tell you is how long it would take the FDA to review it. We know that there's a fixed amount of time, but we know the questions. We've been working closely with them because we want to do the best job we can in answering all the questions beforehand. But nevertheless, the process is somehow predictable, but it's not It's not my right to predict what the FDA is going to do. So I want to make sure that you know that we are very hopeful for this product. We're going to launch this product this year, assuming the FDA approves the product in the U.S. And as far as I'm sitting here today, as far as the information I have, we are ready. We will be ready to fly with the FDA at the end of the quarter.

Okay. Are you willing to say if you've assumed anything for NovumIQ in the guidance for this year?

Yeah, Jo, maybe I'll just make a comment on that. We do have some sales embedded in the fourth quarter for Novum IQ, but as far as specifics, we won't share product line details at that level. But we do have an assumption regarding some sales. We think it's appropriately risk-adjusted, and we're very optimistic and hopeful that we get this pump approved.

Great. And then if I can just have one more very quick one. In the other line where you have the vaccine contract, can you give any color on kind of what's assumed in that? I think you mentioned there are a few contracts signed already.

Yeah, I'll give some color on that with respect to that lake. We do have some, but right now we're assuming we aren't manufacturing. It's more of a second half thing for us. So we had talked about kind of across all of the contracts as being somewhere between $50 to $100 million. And then so I would say it's likely half of that given that it's second half weighted for us. Now, it could be better, but for right now, that's what we're assuming.

Thanks very much. And that opportunity is partially in 2021. We do believe there will be some opportunity in 2022 related to those vaccines. Thanks, Leigh.

And there are no further questions at this time. And ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for