Baxter International Inc (BAX) — Q1 2020 Earnings Call Transcript

Thanks, Katherine. Good morning, and welcome to our first quarter 2020 earnings conference call. Joining me today are Joe Almeida, 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 first quarter 2020 financial results. A supplemental presentation to complement this morning's discussion can be accessed on our website in the Investors 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, new product development, business development and regulatory matters, contains forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from 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 14 this year. Now I'd like to turn the call over to Joe. Joe?

Thank you, Clare, and welcome to everyone joining us on the call today. I sincerely hope that you, your families and colleagues are all safe and well during this difficult time. As we continue to deal with the evolving impact from the global COVID-19 pandemic, our Baxter team salutes the selfless health care providers and first responders who are rising to the enormous challenges with bravery and compassion. Their dedication inspires us all. This is uncharted terrain for the healthcare industry and society at large. At the same time, Baxter's path forward is clear. It is defined by our mission to save and sustain lives, just as it has been for nearly 90 years. We are doing everything we can to support patients, the healthcare system, our employees and the communities we serve worldwide. Baxter's medically essential portfolio places us on the front lines of this pandemic. We are experiencing extraordinary demand for many products, including our PrisMax and PRISMAFLEX continuous renal replacement therapy devices and associated consumables. Our MINI-BAG Plus drug delivery system, the Spectrum IQ infusion system, SAS plus IV Solutions, parenteral nutrition therapies, and injectable drugs used in the ICU and across the hospital.

Thanks, Joe, and good morning, everyone. As Joe mentioned, our first quarter performance reflects the value of our medically essential portfolio in the current environment as well as our commitment to meeting the needs of patients and providers globally. Our ongoing business transformation efforts, effective commercial execution, and improved balance sheet flexibility position us to more effectively respond to the COVID-19 pandemic with speed and agility. Turning to our first quarter 2020 results, global sales of $2.8 billion increased 6% on a reported basis and 8% on both a constant currency and operational basis, reflecting the underlying strength of our business, coupled with increasing demand for select products resulting from the pandemic. This heightened demand notably accelerated during the last two weeks of the quarter. We estimate that the COVID-19 related demand contributed approximately $45 million to sales in the quarter.

Congratulations on a really solid quarter here, which is impressive considering the environment. I want to follow up on Jay's comments in Q2. Looking at what other companies are saying, it seems like Q2 might have been the lowest point, and we anticipate sequential improvement from Q2. Would that be a fair comment? Does that apply to Baxter? Any insights on how we should view the trajectory moving forward would be appreciated.

Yes, I'll begin with some remarks and then hand it off to Joe. We are anticipating a challenging second quarter, likely the toughest of the year. However, we expect to see a rebound and acceleration in the third and fourth quarters under one of our base case scenarios. It's important to note that our fourth quarter comparisons will be against a very strong performance from last year. There remains a significant amount of uncertainty regarding how the pandemic will progress and how hospital purchasing patterns may shift toward the end of the year. Generally, the way you've characterized the situation aligns with our perspective in certain scenarios. Joe?

I think you did a good job, Jay. You covered both parts that I was going to cover.

And just one follow-up, maybe this is for Joe. Joe, I think in your prepared remarks, you mentioned the oXiris rate. And we've been hearing about cytokine storm for the COVID patients. How should we think about the revenue opportunity for this product, or any comments on either oXiris or sticking to renal? Any updates on AAKHI? I think that would be helpful. Thank you, guys.

Good morning, Vijay. The oXiris has a special filter. We make them in Europe, and it has a heparin coating, which makes it ideal for the situation we're seeing now. We don't have enough data on the COVID or the coronavirus impact on the filter just yet. It's still in the very beginning stages of use in the US. It seems to us that it's lasting longer than our current filter because it prevents coagulation. It usually clogs the CRRT filters a little faster. So we are working with the FDA, and we are collaborating internally and with our partners in the industry to collect the data to do investigational work, so we can propose keeping the product on the market once the crisis subsides and the agency feels that the product may not be needed anymore. We will do everything we can to register the product in the US with the FDA. It is a product that we've seen outside the US really good results. So we hope that we can prove the point that this is a great therapy for sepsis treatment because of the type of filter and the coating. We also — going to the AAKHI drive. It proves the point that home therapies are ideally positioned for a crisis where there's so much transmission of virus through realization and close contact. Although I cannot comment on where the rule is at the moment, we think that is the right move by the government, and we believe it's going to end up going through. It's just a matter of time. However, that has not stopped Baxter from making its investments. We continue to invest. As a matter of fact, yesterday, I just had a meeting on a phase two investment for this purpose. Remember that our growth in home therapies is growing. In the U.S. alone, PD home therapies grew about 13%. Now, APD home therapies in the U.S. was about 13% growth. So because of that kind of growth, we need to have this kind of investment. So we're optimistic about it. Even if the rule doesn't come as fast as we'd wish, we are working with our partners, VIDA and others in the U.S. We are advancing the home therapies. And rest assured, we're going to continue to make the investments.

Thank you, guys.

Hi. Yes and good morning, and thanks for taking the question. Just curious, one other follow-up on that second-quarter comment and the slower growth that you're expecting there. Is that due entirely to a lower net benefit, Q2 relative to that $45 million that you saw in Q1, or are there other non-COVID-related issues that are changing in Q2 versus Q1?

I want to clarify my comments regarding our forecast before we specifically discuss Q2. We didn't provide guidance for a particular reason: there's significant volatility related to the COVID virus and its impact on our business and overall demand. In Q1, we issued guidance with only a few weeks remaining in the quarter and ended up exceeding that guidance, which is unusual for Baxter due to the consistent nature of our portfolio. This is an unprecedented environment we are navigating. Regarding our expectations, we have a single forecast, but our planning team, led by David Roman, has developed six different financial scenarios we need to prepare for—three lower scenarios and three upper ones—indicating the range of potential outcomes. This is why we have suspended guidance. Concerning Q2, while we do believe there were some advantages in Q1, we expect Advanced Surgery will see a considerable decline due to the postponement of elective surgeries, which is a significant factor we've discussed in MedTech. This did not affect us in Q1, but it will certainly impact us in Q2, and it represents a major area of uncertainty. As we consider recovery and the resumption of elective surgeries, we recognize that in April and May, this poses a significant challenge for us.

Okay. Thank you for that. And then just one other thing I'm curious about, especially in light of the hiring that you guys announced. Could you talk about where you might be capacity constrained this quarter? Are there areas in your business that you just couldn't meet the demand because of capacity issues? And more specific about, or just any comments on capacity in the quarter?

Bob, good morning. We are – if you remember about two years ago, we had Hurricane Maria that taught us quite a bit of a lesson, and we had modified our supply chain to a point that our fluids today don't have any constraint with the exception of our MINI-BAG Plus. However, we made arrangements for extra shifts, and we're putting out record amounts. So we predict that most of our fluids, with few exceptions, would be in protective allocation in the next few weeks. The part – the area of our business that really has a capacity constraint based on the type of virus we have today is CRRT. CRRT is made in a couple of different places in the world between the machines, the filters, the sets, and fluids as well. That's the one that we are capacity constrained. We advised our partners and government agencies of that issue. We are seeing demand that is multiple times what we can produce. And we're working very diligently with our customers to serve our patients best. For the future, that will be an area because of the type of therapy and adoption of therapy that is probably going to grow. We're going to work on diversifying manufacturing sites and putting more locations for fluids across the globe. But that is the one that comes to mind at the moment. Also, some of our drugs that are being used as a backup, for instance, for propofol. We don't make propofol in the U.S. We make propofol for other parts of the world. But dexmed is used as a backup drug for sedation. What we're finding is that we are outstripping our capacity and have outstripped our capacity. So we're going to also be making more investments in our Galaxy technology as we move forward.

Thank you.

Great, thanks. And Jay, glad to hear you're sounding pretty well. So glad you recovered okay.

Thanks, Robbie.

I was hoping – we've seen some other companies this earnings season give us a glimpse of what April looked like to give us a view of what maybe the floor on performance could look like in the second quarter. I was wondering if you could offer similar insights here into what you're seeing in April across the different businesses?

Sure. Look, April is in line with some of our expectations. We predicted that some of the largest impacts with respect to the COVID virus will occur in April and May and then start to see some rebound in June and then Q3 and then better in Q4, as I described earlier. And I want to make sure, Robbie, that you walk away with the understanding that this is simply one scenario that we're looking at. We are expecting the biggest declines to occur in Advanced Surgery in these months of April and May. Generally speaking, that's proceeding in line with the expectations, our base case expectations that we've laid out. So there's nothing wild in terms of incremental commentary I can share with you, other than to say, Advanced Surgery is an important one. We'll want to see that start to rebound. But so far, April was as expected, with so many hospitals really closed to elective procedures, that impact came in, in line with expectations.

Okay, great. And maybe just as a follow-up here. It seems like you're taking a lot of what I would imagine are well-received actions with your sales force. This is something I'm paying close attention to, as I think companies that do the right thing for their employees can probably rebound a bit faster coming out of this. I was hoping you could just walk through some of the positive programs you've put in place for your employees? And do you feel like this puts you in a solid position, as you come out of COVID-19 with respect to your sales force and productivity?

Robbie, good morning. We have taken action with our sales force, for instance, in Advanced Surgery, teaching them technical skills on other product lines that we have, having them call on surgeons on catheter insertion. We're making sure that they are occupied. We're having global webinars that are being conducted by the team. There's a significant amount of activity. And we find that we have a tremendous sales force, and we're going to keep them engaged. We have, as you can see, employees on the frontline. Not only the sales force, we have a service group that services all these machines across the globe, and they are in hospitals across the globe servicing them every day. We're treating them as well as our folks in manufacturing and the global supply chain. We gave them an incremental incentive to recognize their effort in such a difficult time. We also have our plans, for the most part, operating 24/7, almost all of our 50 plans with very few exceptions. So we're making sure that we're having their safety first in mind. It's our number one priority is employee safety. And the second priority is with them being safe, they can produce product for our patients. We are now in uncharted waters here, but I think having our employees' well-being first in mind has been what has brought us to this point. They all have in their minds the mission of saving and sustaining lives, which drives us. So we're very grateful to all 50,000 folks who work for Baxter and are in this battle with us.

Thanks a lot.

Good morning and congrats on a very durable quarter. I just have a couple of quick questions for me, Joe. Maybe I'll start with you. Pump dynamics, Joe, I'm assuming your pipeline was very strong heading into 2020. And I don't think your prior guidance implied any update or upside from your competitors' recall. But just sort of curious what you're seeing competitively and how the balance of sort of new pumps looks relative to replacements and how you think that changes across the year? And then I had a quick follow-up.

David, good morning. We believe there's a significant surge in demand that is challenging to differentiate between what is simply routine and what is more competitive. We are aware of which competitive accounts we will pursue. Currently, we are experiencing increased demand for pumps as patients require more than usual in ICU settings. We are working to clarify this situation. We have significantly ramped up our production of Sigma Spectrum in the U.S., adding extra shifts and personnel. We are also securing and expediting raw materials, sometimes paying a premium to access them more quickly, and we are producing as much as possible. This week, we obtained approval in Canada for our new pump platform, the NOVUM IQ. Our international platform, Evo IQ, is gaining approvals in various countries, including Brazil, Colombia, and the U.K. with NHS. We are observing considerable progress for Baxter's front business. As you're aware, we have submitted for 510(k) approval for our NOVUM IQ platform in the U.S. and have also filed for EUA, as we believe we can start supplying additional NOVUM IQ pumps by July to meet the demand for our existing Evo IQ. We are taking every possible action. Currently, it is difficult to assess competitiveness as everyone is focused on the immediate situation, and there’s little thought given to the future. Hospitals are stretched for resources and are unlikely to make a conversion at this time. Although we've seen a significant spike in demand, our team is actively planning for the future. I am confident our pump platform is developing into a strong offering, and incorporating monitoring capabilities will enhance our position. As you heard and read this morning, we have made investments in algorithm technology and artificial intelligence technology.

Okay, very helpful, Joe. And then maybe just a question for Jay or for Joe. One of the things that we're hearing in light of COVID is that hospital administrators are waking up and asking questions around how much inventory they should have been keeping for critical care products in light of, obviously, COVID. I'm kind of curious what you guys are seeing from an inventory perspective and how you think you and customers are going to manage inventory in light of COVID heading into the hurricane season and frankly, heading into next flu season? Thanks so much.

Yes. That's a good question, David. The integrity of the supply chain is a critical focus for companies like us with medically necessary products, and for hospitals and distributors that serve them. The answer is, it's hard to say at this point. But for us, we want to ensure that we have available supply to meet patient needs under a whole variety of scenarios. By the way, you raised a really good point, which is going into hurricane season. There is talk of a challenging hurricane season this year. Ensuring that we have adequate supply means, at least for this year, at least until the pandemic situation has stabilized, and we get through the hurricane season, we will be carrying extra inventory of critical products. Now that did not show up in our Q1 results because of the sales surge that occurred in the last couple of weeks in March. Our days inventory on hand was actually below our expectations. But what will happen as we approach the latter parts of the year is we will build in those areas that are most sensitive and critical to the current environment. I think, frankly, the same will be true of hospitals as well. Hospitals will evaluate what levels of inventory they need to carry going into these kinds of crises. It's clear that certain of them did some inventory build in March, and a lot of that has been consumed already. But I think each hospital will have to evaluate this on their own merits. Maybe, Joe, you could add some further color commentary here?

Sure. So, David, what you also will see is stockpiling. From this point on when the demand surge is up a little bit, I think hospitals, I don't know if they will have the capacity to stockpile significant volumes of products. There will be some probably, but I think you're going to see governments thinking differently about how they face a calamity, such as this virus. This is teaching a lot of lessons to the whole supply chain, government, and private. A lot of public-private partnerships are going to happen in terms of preparedness. So we will likely see much of that in the third and fourth quarter as this situation evolves.

Great. Thanks so much. Great color.

Thanks, guys. Good morning. Thanks for taking the question. Jay and Clare, I'm glad you're both feeling better. So, first, I just had one on China and one on the P&L. So first, on China, could you talk a little bit about Asia-Pacific? It was obviously quite strong in Q1. Could you talk about what you're seeing there, the pace of recovery, and how much of a read-through do you think that is to the rest of the world for your business? And then I have one follow-up.

Larry, we're seeing some normalcy coming back into Asia. But I want to give you some color that Baxter's business is slightly different in China and primarily in parts of Asia than it is in Europe and the Americas. We are a heavy PD peritoneal dialysis company in China, so that's a chronic disease. We saw stockpiling occur in the first quarter, and that is now being consumed. That business is consistent and constant. We're starting to see some hospitals in China going back to normal in terms of surgery, not 100%, but we probably will see through the second quarter, a return to normalcy for a great deal of businesses in Asia, with perhaps an exception to Japan. I think Japan still has not figured out. They're locked down, which I believe is going to be a little slower than the rest of Asia. Australia is already preparing for a possible second wave and is working on preparedness for that as far as we can see. That is the reason why Asia was strong for us in the first quarter. But we see normalcy coming in, but don't forget our business in Asia, primarily in China, is mostly home care peritoneal dialysis chronic business.

Thanks for that, Joe. And, Jay, thanks for the helpful color on the P&L and a nice quarter on the margins. Could you maybe help tie it together for us a little bit? There seem to be some puts and takes. Can the operating margin be up year-over-year, given that incremental spending, but the trade-off with lower travel? And the two below-the-line items, I don't think you touched on where the other income and tax. How should we think about that?

Yes, Larry, we're talking about severe impacts in terms of incremental spending that will drag down the margin. While I am not prepared to comment on year-over-year margin growth, I can say that we're really not in a position to offset the $150 million in incremental expense from an operating margin through SG&A savings and so on. That’s not going to happen. We view those costs as essential to the long-term success of our business because we have to be there right now for our customers and our employees, ensuring that we have the right amounts of PPE that we're compensating employees who need to be at work in challenging situations. All these factors are at the forefront of our minds. Like I said, that will be a drag on operating margin year-over-year. As it relates to the tax rate in the quarter, business mix was somewhat favorable from a tax rate standpoint. So we saw a little bit of a benefit relative to our expectations. Year-over-year, it was a downside in large part due to some FAS 123R excess benefits that we experienced in Q1 of last year. Lastly, in relation to other income, the two factors, the largest one being we've offloaded the pension plan as part of an important initiative that our treasury team undertook throughout last year, culminating in the December transfer of assets, meaning we’re no longer seeing pension income below the line. Secondly, we did have a loss attributed to a balance sheet position that we held, the movement of which caused a loss, contributing to the year-over-year decline in other income.

Thanks so much, Jay.

Good morning, guys. Thanks for taking my questions. A few questions for you on PD, how much COVID impact was there for new starts for patients both in the U.S. and outside the U.S.? And how is it trending today? And when you talk to dialysis providers, how much pent-up demand are you hearing for patients who want to move into the home? And then I have a follow-up.

Pito, good morning. We saw a healthy level of PD starts, but nothing different than what we had planned. I think what you're going to see is a little bit of a reduction and then a pickup toward the middle of the year because PD is dependent on catheter insertion. Despite the fact that the American Nephrology Society of Nephrologists had recommended and said that this is a necessary procedure rather than an elective one, some hospitals are doing that. In talking to a colleague of mine in the Northeast, he’s the chief surgery of a hospital, and he said that one of the few surgeries they were doing was catheter insertion. However, not everybody had that luxury. Some of the hotspots in New York City, for instance, were using our significant therapy into hospitals to alleviate the pressure on CRRT for patients in the ICU, which is called the acute PD. We will see probably a small slowdown of PD, and then it will pick up through the rest of the year. The demand is there. Home therapies are the way to go for the right patients. I think the momentum is not going to be altered in the long-term. It's just at the moment we have this crisis where insertion is becoming more of an issue. You had a second part to your question, what was that?

So the second part was, how much did the supply impact from Revaclear impact the renal business right now? And was there supply constraint because you're converting manufacturing over to THERANOVA?

Well, it's around $5 million, okay? Around $5 million, the answer on the Revaclear. What we’re finding is our plants producing Revaclear are hitting record levels right now, both one in the U.S. and one in Germany. Furthermore, as we prepare toward the end of the year to convert some of our production lines into THERANOVA, we are getting ready for this launch. We're going to start converting our production lines, and we need to start doing that in Germany. So you’re going to see that swap. That was about $5 million.

Great. Thanks so much.

You're welcome.

Hey. Good morning, guys. Thanks so much for taking the question, and congrats on a really good quarter. And thanks for all you're doing in this crazy environment and helping patients get better. I just have a quick question, a follow-up on PD. It's a non-COVID related question. I'm just curious about any progress you're hearing being made on the kidney initiative. And how we're thinking now, you're making significant investments ahead of potentially that initiative going into place to build for a higher number of PD patients. Where are we with that? How soon can we know? And how does that change the PD outlook long-term?

Anyhow, good point. We don't see the long-term impact on the kidney initiative (AAKHI). You see a pause because I think the administration is quite busy right now with other matters. But speaking to an official the other day, this initiative is still front and center for the White House. They want to move forward with this. I think it's just a matter of time. We have done a significant amount of simulations in Monte Carlos and various analyses to understand capacity demand, and we're ready in July to speak to our Board again on a Phase 2. Phase 1 is already being set in place. Capacity is being augmented. We are going to start seeing more capacity coming in next year. The thing is projecting two or three years down the road, we will need to make that investment. So those investments are already planned. We know where they're going to be made for the most part. We have some decisions to make, but we’re down that path. This unfortunate COVID-19 is a slowdown in decision-making, which we think is just a matter of time.

Got it. Thank you. I'll leave it there. Thanks so much.

Hi Katherine, this is Clare. We have time for one more question. Following that, I'm going to turn it back over to Joe.

Hi, thank you for allowing me to ask a question. I'll keep it to one. Many companies have discussed the declines in the second quarter, primarily attributed to implants and similar surgeries. I'm curious if you could elaborate on how Baxter's exposure is different, given that your focus is more on advanced surgical supplies used in the operating room. Could you provide insight on the stocking flows? As Joe mentioned earlier, some key supply elements are being stockpiled for the latter half of next year as governments reconsider these products. Jay or Joe, could you help clarify any supply flows that might not have affected Q1 significantly but are expected to impact Q2 and the remainder of the year?

Certainly. In the second quarter, compared to the $45 million in the first quarter, we saw some pre-buy activity as hospitals prepared for an anticipated COVID crisis in the U.S. There were advanced purchases of critical solutions and supplies, and we believe most of that has already been utilized. We expect continued sales related to the ongoing crisis within a significant portion of our product offerings. However, around 15% of our sales, particularly from our advanced surgery business and certain inhaled anesthetics, are closely linked to elective procedures in hospitals. If those procedures face delays or reductions, it will negatively affect our sales. We anticipate the most significant impact in the second quarter. That said, the evolution of the second wave and the continuation of the first wave, along with its severity, introduce many variables that influence our demand signals, leading us to hold off on specific guidance for now. We will observe how the situation progresses this year to better understand the implications of a potential second wave. At that point, we expect to be in a better position to discuss our financial performance, especially in the segments most affected. Joe mentioned the possibility of stockpiling at a national level by various countries to ensure supplies of essential products, which we will monitor closely and support wherever possible. Now, I'll hand it over to Joe for some final remarks.

Thank you all for calling in today and listening to our earnings call. We, at Baxter, are very proud of what we're doing today, and we have done everything we can to attend to patients across the globe. We wish you all to be safe and well. Hopefully, we can return to normalcy for our next earnings call. So, to all of you, thank you very much, and have a good rest of your week.