Q2 2020 Baxter International Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Baxter Internationals second quarter 2020 earnings Conference call. Your lunch will remain in a listen only mode until the costs.
I shouldn't answers segment of today's call.
At that time, if you have a question you'll need to press Star then the one key on your Touchtone telephone if anyone should require operators assistance. During the conference. Please press star zero on you touched on telephone.
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I would now like to turn the call over to Ms. Clare Trachtman, Vice President Investor Relations at Baxter International Mistreatment you may begin.
Thanks Catherine.
Good morning, welcome to our second quarter 2020 earnings Conference call. Joining me today, our Joel made up Baxter's, Chairman and Chief Executive Officer, and Jay Saccaro backers Chief Financial Officer.
The call. This morning, we will be just stepping back from second quarter 2020 financial result, and full year 2020 financial outlook, a supplemental presentation to complement this morning will discuss in can be accessed on our website in the investor section under events and do.
This presentation includes related non-GAAP reconciliation.
Yeah, Let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for full year 2020, new product development business development and regulatory matters contain forward looking statement, then about risks and uncertainties and all the horse our actual results could differ materially from our CFO.
Current expectation.
Please refer to today's press release, and our I think the filing for more detailed concerning factors that could cause actual results could differ materially.
In addition on today's call non-GAAP financial measures will be used to help investors understand that's an 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 in available on our website.
On the call. This morning, we will be discussing operational sales growth, which is just for the impact of foreign exchange in the acquisition of separate though which closed on February 14th of this year now I'd like to turn the call over the Joe Joe.
Thank you Blair and thanks, everyone for joining us today.
I hope that you and your family's ours healthy insane.
Like last quarter I want to be gain by recognizing all of the health care providers and the first responders, who continue to work tirelessly in combating gold bit 19.
Our deep appreciation also goes to older clinicians and researchers who are advancing knowledge treatment and promising vaccine candidates to address this global pandemic.
Three months ago, we were hoping to see some easing in the trajectory of this deadly pandemic by now Sadly Wilder hot spots may have shifted the infection rates and even back to remain staggering Baxter's second quarter performance reflects the <unk>.
Folding in fact, all spend dammit conditions on the global healthcare landscape and on our own operations. As you saw in today's press release Baxter reported eight year over year decline in both net sales and earnings in Q2 2020, while demand.
For certain pandemic related treatments in technology was reached historic highs within the quarter. We also saw a negative impact on our results from significantly lower rates, all hospital admissions and a reduction in elective procedures.
Implementation of various shelter in place initiatives globally, as well as patient concerns regarding potential coal that 19 infection risk in the health care setting contributed to these trends during the quarter, we've continued to experience significantly higher than the man.
For our acute therapies products due to cold bit 19. According to a number of third party sources, 20% to 30% of coal bit 19, I see you patients will develop acute kidney injury is requiring treatment, where they renal replacement therapy.
We couldn't genius renal replacement therapy or see Archie is the preferred option.
In addition, our chronic renal care business continues to deliver sustained mid single digit constant currency growth driven by our leading Barrington. Your dialysis product portfolio. We continue to highlight the advantages of Barrington Your dialysis therapies.
It was our show source stellar Hill acknowledged U.S. clinicians and patients look to home based treatments to limit the risk is up a dancer pandemic exposure.
This positive performance in acute therapies, and renal care as well as growth in our clinical nutrition business, partially offset year over year sales declines in medication delivery pharmaceuticals, and advanced surgery result for these businesses reflect that.
Negative impact in the quarter, resulting from a declining you ask hospital admissions I'll go over 20% any reduction in U.S. surgical volumes of more than 30%. The rate of these declines were similar to what we observed in both our erupt.
<unk>, primarily western Europe, and Latin American markets during the quarter.
Our Asia Pacific business, particularly our business in China slowly began to recover in the second quarter, while we do expect sequential improvement in both admissions and elective procedures globally. Our current assumption is that both metrics will remain below.
Prior year levels and could be further negatively impacted by Colby the resurgence is in markets around the world.
Sales in the second quarter also reflect the old board of demand into the first quarter, where we saw it generally more aggressive ordering in stocking patterns, among hospitals and distributors, reflecting elevated uncertainty amid the pandemics early rapid.
Global spread.
While the current environment remains deeply uncertain as of the end of the second quarter, we have been able to re normalized production in inventory of high demand products than have reduced the need for owned the clock manufacturing.
We also have been able to wind down our use of supplemental expedited shipping methods, which played an essential role in accelerating product availability early in the pandemic Baxter's resilience and this unprecedented moment continues to be bolstered by then.
Diversity in medically essential nature of our products combined with our market leading positions.
Similarly, our broad geographic footprint supports balance any stability, helping counter their risks all overexposure three more limited range all the geographies the big continuing momentum of our business transformation also.
It helps to strengthen our market position baxter's enhanced efficiency speed and agility are clearly, helping those navigate the impact of coal fit 19 that is just one variable we're addressing as we anticipate a challenging hurricane season, we're leveraging.
Our learnings on enhanced operational effectiveness for maintaining steady supplied as the season unfolds. Meanwhile, we remain steadfastly focused on driving growth through innovation recent weeks have seen the launch of our new evil I used to range infusion system in the UK and ill.
Earlier after the clearance of our outlook for shape bioactive bone graft and the publication of new positive data in the Jordan no chest involving always starling fluid management monitoring system looking ahead additional pipeline.
Slides include our normal Mike you smart pump technology share source analytics and additional differentiated generic injectables in.
In all of these afterwards, our people remain our ultimate resource and differentiating shrimp I'm working closely with some of the most talented and dedicated colleagues I have known our customer satisfaction rates has recently captured in the highest average net promoter scores.
Baxter has recorded globally further speaks to our efforts. During this period together is team has helped advanced dramatic change and we'll continue to do so these includes new initiatives to advance ratio justice within Baxter and among the communities in markets.
We serve.
I'm proud of what we have achieved to date across our business in our culture, but even more importantly, I'm energized by our ability to address with various markets challenges and accomplishes steel more for our patients shareholders employees and the diverse communities, we serve not I'll pass it to Jay.
For a closer look at our second quarter results and outlook for the balance of the year.
Thanks, Joe Good morning, everyone as Joe mentioned, our second quarter performance reflects the resilience of our diversified portfolio, even in an uncertain healthcare landscape.
Our unwavering focus is on meeting the needs of patients and providers globally with medically essential products and therapies.
Turning to our second quarter 2020 result, global sales of $2.7 billion declined 4% on a reported basis, 1% on a constant currency basis, and 2% on an operational basis increased demand for our acute therapies portfolio, along with solid performance in Reno player care and.
Clinical nutrition were offset by declines in our advanced surgery pharmaceuticals, and medication delivery businesses, largely driven by the impact of cobot 19 on surgical procedure volumes and hospital utilization.
We estimate that there was over $180 million in revenue downside for the quarter related to co bid 19.
On the bottom line adjusted earnings decreased 24% to 64 cents per share, reflecting lower sales in higher margin businesses.
Incremental covidien related operations, and logistical expenses as well as higher interest expense and the higher tax rate.
Now I'll walk through performance by our regional segments in global business units no. The for this quarter constant currency growth is equal to operational sales growth for all global businesses, except for our advanced surgery business for which we will provide both constant currency and operational growth.
Adjusting for the acquisition of separate Phil.
Starting with our three regional segment sales in the Americas declined 5% on a constant currency basis, and 6% on an operational basis.
Sales in EMEA advanced 1% on both the constant currency and operational basis and sales in our APAC region advanced 5% on a constant currency basis and 3% operationally.
Moving on to performance by Global business unit Global sales for renal care were $919 million advancing 5% on a constant currency basis performance in the quarter was driven by mid single growth in both our PD and HD businesses.
PD growth benefited from increased patient volumes globally, including high single digit patient growth in the U.S. as well as solid performance in our APAC region.
Our HIV business returned to growth this quarter as we anniversary the prior year sales impact of our revenue clear dialyzers supply constraints.
Sales and medication delivery of $612 million declined 9% on a constant currency basis within the quarter. We continued to benefit from strong execution on our spectrum I view, an evil ifyou infusion pump placements globally.
And as Joe mentioned, we're pleased with the launch of our Eva like Q syringe pump internationally.
We also saw solid growth for our small volume parental products in the U.S. during the quarter. These benefits were more than offset by the impact of cobot 19 on lower patient admissions and a reduction in surgical volumes, which drove global declines in our Ivy therapies business as well as lower.
Assess and access utilization in our infusion systems business as Joe mentioned in the second quarter. We saw the rate of hospital admissions declined more than 20% and surgical volumes come down over 30% as compared to pre covance levels.
We estimate these lower volumes negatively impacted medication delivery sales by approximately $100 million within the second quarter.
Pharmaceutical sales were $485 million down 7% on a constant currency basis, reflecting the expected declines from reduced demand for our inhaled anesthesia products.
As a result of lower elective procedures related to covert 19, we estimate this negatively impacted inhaled anesthesia sales in the quarter by approximately $50 million.
Performance in the quarter was also impacted by increased increased competition for trains term scope. These declines were partially offset by increased demand for our international pharmacy compounding business.
Along with certain generic injectables.
Moving to nutrition total sales were $219 million, increasing 5% on a constant currency basis, reflecting high single digit growth internationally, driven by the timing of orders as well as the continued rollout of new products internationally.
This performance was partially offset by low single digit declines in the U.S., reflecting the lower hospital volumes we've discussed.
Sales in advance surgery $168 million declining 27% on a constant currency basis in 37% on an operational basis. The acquisition of separate film in February contributed 23 million to sales in the quarter declines in elective surgical procedures drove an estimated negative impact of a proxy.
Only $80 million the advanced surgery portfolio.
Sales in our Q therapies business for $186 million, representing growth of 45% on a constant currency basis, we estimate that the heightened kobin related demand contributed approximately 50 million to growth in the quarter.
Finally sales in our other category, which primarily includes our contract manufacturing services were $129 million in the quarter advancing 7% on a constant currency basis.
Moving through the rest of the PNM now our adjusted gross margin of 41.6% declined by 280 basis points over the prior year driven by lower sales as higher margin products as well as increase expenses, we have incurred in our manufacturing operations and supply chain related to our coven 19 response.
Adjusted EBITDA of $577 million declined 5% on a year over year basis, primarily driven by our ongoing focused on expense management reduced discretionary spending, resulting from cobot restrictions and lower bonus accruals under our annual incentive employee incentive compensation plans.
Adjusted R&D spending in the quarter of $118 million declined 16% on a reported basis with reductions in discretionary spend due to covert 19 being supplemented by our continued focus on operational excellence and the timing of certain project related spend we continue to prioritize strategic investments.
To fuel our innovation portfolio portfolio adjusted operating margin in the quarter was 16% a decrease of 190 basis points versus prior year.
Net interest expense was $36 million in the quarter, an increase of $16 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 $6 million in the quarter compared to 4 million in the prior year period, the adjusted tax rate in the quarter was 16.2% higher than the previous year, which included a benefit related to favorable tax ruling and higher stock compensation deductions.
With respect to cash flow in the first half of 2020, we generated free cash flow at $332 million compared to 242 million in the prior year period as Joe mentioned, we are currently carrying higher levels of inventory to ensure adequate product availability in advance of hurricane season, and amidst the ongoing.
Uncertainty related to covert 19 demand.
We remain very focused on maintaining a durable balance sheet and adequate liquidity in an uncertain market environment.
At the end of the second quarter, we had approximately $4.1 billion of cash on our balance sheet, which we believe is sufficient to fund our operations and strategically execute on our capital allocation priorities well to date, we haven't yet experienced significant collection issues, we're closely monitoring the.
Collectability of our receivables in the current environment.
At this time, we've maintained the temporary suspension of our share repurchase program to drive further financial flexibility in the current market within the quarter, we announced an approximate 11% increase to our quarterly dividend payment, reflecting our continued commitment to delivering value to our shareholders.
Let me conclude my comments by discussing our outlook for the remainder of the year for full year 2020. At this time, we expect reported sales growth between negative, 1% and positive 1%, we expect flat to low single digit sales growth on both a constant currency and operational basis.
[music].
And then ever evolving landscape some of the factors impacting this outlook, which we continue to monitor closely around the world included late patient referral pipelines and willingness to return to care pace of elective procedure recovery.
Impact of Covance 19 on the EPS, our depopulation NPD penetration hospital access for our sales and technical representatives any impact of any potential resurgence is for leveling off of infection levels globally as Joe stated earlier, our current outlook assumes.
Actual improvement on a quarterly basis in both hospital admissions and surgical volumes, although still below prior year levels.
Regardless of these uncertainties, we remain ready to address critical patient needs by supplying the market with a portfolio of medically essential products and ensuring the safety of our employees as such in line with our first quarter commentary, we expect to absorb approximately 150 million of incremental operations and supply chain expense.
It is related to our cobot 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 will continue to prioritize our planned R&D investments within the year year over year operating expense reductions will be driven by continued financial discipline as well as lower travel and meeting expenses. We expect full year net income net interest expense to increase by over $60 million as compared to the prior year and for the full.
You are we also expect 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 and pension assets and related liabilities.
Given these factors in underlying assumptions. We currently expect adjusted diluted earnings per share, excluding special items between $3 and $3.10 for the full year 2020.
Finally, as we announced last quarter, we are postponing or Investor conference until 2021, as we previously discussed we withdrawn our long term financial outlook, but remain confident in our ongoing commercial execution strategies and expected contributions from our new product pipeline Weve.
Plan to provide an updated financial outlook at our Investor Conference next year.
In closing in the first half of 2020, each day brought new learnings as to how this unprecedented environment is impacting the patients and providers we serve globally.
Our year to date topline growth is fueled by the durability of our portfolio as well as the a pandemic response, which has benefited from strategic vision financial discipline and the tireless efforts of our dedicated employees around the world in this dynamic environment, we continue to be well positioned for sustained success.
Yes.
With that we can now open the call few anat.
Thank you we will now begin the QNX session. If you have a question. Please press Star then one key on your Touchtone telephone.
If you wish or move yourself from the Q press the pound key.
Using a speaker phone. Please lets the handset to ask your question. So that means we may be respectful 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.
Well pause for a moment, while the list is being copal.
Like to remind participants that this call is being recorded an additional replay will be available on Baxter internationals website for 60 days at Www Dot Baxter Dot com.
And our first question comes from Robbie Marcus with Jpmorgan. Your line is open.
Great. Thanks for taking the question, maybe we could start with the Delta in second quarter versus your expectations coming out of the first quarter and then what gives you the confidence to put out the guidance range that you did and I was still seeming uncertainty through the balance of the year.
Help us understand how conservative this is how much room for upside or downside is in the guidance range and just any color you could provide around thanks.
Robert Good morning, this is Joe.
We.
Had expected that.
And positively for four primarily into your warehouse and Europe.
Widespread or sheltering place initiatives.
And concerns in the beginning on April really read Jewish Hospital admissions people were fearful to go to hospitals, but this sheltering. Please put a reduction in place of cases, along if you remember along the curve for the month of April and May sequentially, those things combined crew.
Aided.
Pressure on.
Hospital Division So let me explain to the folks on the phone that Baxter is a little different than what you think of our peers are.
We are dependent in three different segments of business.
Acute care I see use.
A portion of our business is driven by that hospital admissions drive another portion of our business in home care, primarily did dialysis business drive statue.
So different than many of the appears did you usually site.
Baxter is not an elective pursued independent company.
Hence our resilience has our performance this quarter was slightly below our expectations.
But he showed to be more resilient than double digit decline that you saw a minute PARP years reported already and the reason for dad is that we have business like acute renal care and Barrington, Your dialysis, which are doing extremely well for different reasons, what suffers in Baxter is the business off.
Operating room procedures, you see was understated gas just a pharmaceutical business is down double digits versus prior year debt is mainly driven by by and the steady gases and the lack of uses some injectable medicines that would be using general on the general floor.
Are you on this is a admissions to hospitals saw double digit decline in the second quarter. So that created the brasher did you see in our numbers we also.
Transposing to your question now.
We have done.
An extensive work on modeling with a significant amount of imports.
Created on on our way of understanding the market and we see in our model a modest sequential sequential improvement. That's why we felt a bit more comfortable giving guidance, but if you noticed started guidance is pretty wide Andy.
It contemplates a significant amount of variable is still we have in place, but if you boil down to what fair to boost drive Baxter business is the home care business is admissions into I see you generally emissions into hospitals and the operating room affects our business prime.
Merrily Deanna steady gases and.
Advanced surgery.
Okay.
So maybe as we think about that Joe and maybe you could take it how do you think about what third quarter looks like and what fourth quarter looks like and maybe give us some of the puts and takes around the margins. Both you had pretty material R&D cuts.
How do we think about gross margin you're spending on research and development and where you could get some of the savings to offset incremental 150 million in asking that thanks.
Sure there's a lot to that question. So all hit each of the pieces.
First as we think about Q3 versus Q4.
We were reluctant.
We we provided a larger range than we normally do at this point in the year on both the sales and the and the earnings for the company and we did so because of the very wide dispersion of outcomes that are potential in the marketplace.
I'm sitting here I just wanted the headline indicating a 33% decline in GDP for the quarter, which is just a shocking number and reflective of the wide range of uncertainty that we're currently contending with and so as a result of that we put forth a wider range than we normally do and we also did not share.
Quarterly guidance, because given given how things emerge given hotspot movements in these in different pieces that take place. There is an inherent amount of volatility on sales in a given month and we believe that over a longer duration of time, we have a better ability to predict.
What I would say is we expect higher earnings in Q4 than Q3.
Probably similar levels of sales performance in each of the quarters now as it relates to R&D spending.
The R&D spending we have across SGN and R&D, we are seeing some level of savings as a result of the pandemic and as a result of discretionary controls were putting in place, but what's important to note is that we are incredibly focused on advancing the R&D pipeline. So we will make those investments and that's it.
Great to preserve this wherever possible and like I say and I think you see this in some of our commentary in discussions and progress that we're making we're really happy with the progress in the R&D pipeline. So while there will be some spending savings I wouldn't expect it to radically alter any specific timelines.
As it relates to offsetting the $150 million. So we've made significant investments because right now priority number one is keeping employees safe priority number two is getting our product where it's needed in time. This is a pandemic. It's moving around very very swiftly hot spots are emerging our product has.
To be available and so as a result of that we experienced some significant second quarter costs. Some of those costs will roll out in Q3 in Q4, and we anticipate this $150 million number a lot of which is just ensuring business can proceeds as usual. So now how do you offset that well there are a lot of.
Mechanisms that we put in place to offset from a spending controls standpoint things like travel things like other discretionary areas. Robbie you know as well as I do this company is incredibly focused on zero based budgeting and really smart spending on every single dollar that doesn't change the pandemic does change in terms of how we are.
Approach, our business and affords us some new opportunities, but that philosophy of focusing on every cent is something that we'll continue to serve us well and then the big thing is as this pandemic subside and we don't know when that will be.
Then we'll recover the majority of the $150 million, but but that's going to be thats going to be a cost that will continue to watch and we'll continue to support and then as things ease at some point here.
Then we'll start to recoup some of those expenses.
Thanks, a lot.
Thank you. Our next question comes from David Lewis with Morgan Stanley. Your line is open.
Good morning, just a couple from me, maybe Joe and then I'll get back to to Jay just we just talk about the path for a fair number from here and what you're expecting now in terms of expectations for additional reimbursement either heading into 21 or or beyond and then I'll follow up with Jay.
Okay, David Good morning.
We carried after we receive the news from from CMS, We had several exchanges with them related to our submission and and we.
Demo brass off some rapid change environment in the turnover will submit the comments to CMS by September 4th and we plan to address CMS issues as Ross provide new information to them.
Since our January 2020 filing a out say that.
The information we include publications of our FD clearance trial, a randomized controlled trial with the U.S. Medicare patients also set to be politicians September in a peer review journal our F. D market authorization status is will be it will be shared with them and an update on compare.
We have started to include posters recent presented as some conferences in June 20 to 20 as well as nearly publish man the scripts already shared with CMS.
We're confident we can address the CMS issues. This is not our decisions. There. So I don't want to speak on behalf of CMS, but in terms of addressing what was present was we think we can do it as well.
Okay. Good your confidence in reimbursement for 21 is still would you say.
Or.
David I can't speak on behalf of CMS My confidence is very high that we'll be able to address the questions that they post.
As well was made a Matt analysis that we're doing but.
It doesn't mean that they're going to make a decision when they went the other can't predict at but I can tell it from our behalf that we are confident with that we can produce saw the product all the other data and document stats.
That seems that they are they are not complete.
From their perspective.
Okay very clear and then just two questions from me a one is just on the surgical business, which is the business that's sort of a very similar to other medical device procedure businesses have kind of curious in your guidance. What assumption you made most of your peers are saying sort of those surgically oriented businesses will grow in the fourth quarter, what's implicit in your guidance for the for the fourth quarter there and.
Based on spending 150 million there was a sensor that we sort of correlated to revenue this year, but a lot of that spending got made in the first quarter. So few to what extent will that spending be correlated to revenue throughout the year in how confident are you at the spending dynamics don't carry into 21. Thanks, So much guys.
Okay.
Well, it's going to David to your question was very long can you repeat can you repeat the for I would take the first part surgical procedures surgical procedures that Jay Jay will take the second part the surgical procedures, we see improvement a slight improvement quarter over quarter, we actually we don't comment intra quarter.
But today I'm going to make an exception and tell you know we see slight improvement in procedure for them into the month of July.
For me to sit here today and affirm that we're going to have positive growth in the fourth quarter is very difficult. We don't know what's ahead of us I don't question. Other companys ability to do is at all from our perspective growth is anything above zero right. So if that is the case there is a possibility.
But I tell you is a possibility I'm not going to be sitting here today affirming the procedure growth is going to be positive in the fourth quarter, we've got to having a better understanding how we're controlling the hot spots in the western Europe with the major drivers off of procedure growth as well as how.
How the vaccine will impact.
No the immunity of large swaths of the population that would be.
Ready for surgery, So I would say to you. It there is a possibility for growth in the fourth quarter, but we're not affirming that in terms of guidance is just an opinion.
That's right with a wide range of uncertainty around that David I mean, I think for US one of the things that we are very respectful of is the large range of potential outcomes as it relates to the pandemic.
So that impacts things like to Joe's point surgical volumes, our crystal ball is cloudy because surgical surgical procedures are not scheduled six months in advance so anybody who has a really good line of sight to that I would I would be very thoughtful about those those expectations, but as it relates to the $150 million.
Spending this too is to a large extent related to what happens with the pandemic to the extent that the pandemic and.
And we returned to business as usual than we will have the ability to claw back. The majority the significant majority of this spending but until such time is we have confidence that the situation is manage our employees are safe, we're getting the medically necessary products to our customers we will have some.
Level of cost resident in our PNM and not discussed we will have some level of excess inventory that we carry because we have to protect against things like a wave two or a resurgence or hurricane season. So all of these things will kind of impact us and we're going to watch carefully but I think.
When calling when these things subside becomes very challenging at this moment I was just going to add that.
All of you on the call not only to David question, Yes Baxter.
Yes.
Ultimately responsibility to our patience and our customers. So for us have an inventory on the shelf is incredibly important because as we saw during the peak of the pandemic in the northeast we we were having.
Volume to stay where he reaching 500% off our ability to produce and having that inventory.
Independent of government stockpiling is important for us to habits. The same applied for IP solutions. All of you probably noticed that was not a shortage of I view solutions in any markets that we we serve and one of the reasons for dad is because we prepared well as tropical storm is hitting Puerto Rico as we speak today.
I feel very upset about that something we can't control because if people, Puerto Rico had suffered enough.
Melodies and issues with weather in hurricanes, and and earthquakes, but nevertheless, we do have sufficient inventory in now on the shelf to withstand any any any situation that heaters in the Caribbean. So we will carry dead inventory level for a while we will then.
Reduce appropriately and we are starting to reducing some areas. This and there is nobody more interested that take the $150 million odd of RPM now than I am and we'll do it as soon as we can we have actions in place right now we have significant actions in place, including some changes in the staffing and some of our plants that had on needed to.
Increases staff for the peak of the pandemic in the northeast and we do a responsibly.
Thank you and our next question comes from Peter.
The bank your line is open.
Good morning, guys. Thanks for taking my questions. The first one on PD he talked about the PD business a little bit I believe in early two key was challenging for patients to get the PD catheter, which could impact to gross so can talk about have PD growth change throughout the quarter in we exited onto Q.
And do you think the cobot accelerated pace is interest in home dialysis.
Good morning.
Good morning listen we.
We are.
Very focus on the part to know dialysis is a matter of fact is a business to had five plus percent growth into quarter. The U.S. experienced 8% growth. We had also high growth in Asia.
Europe is the is the spot that has not.
Has not grown to our expectations, but I think somewhat that was related to the middle east.
[music].
Emerging markets, So Europe, Europe, Western Europe itself actually did pretty well so we.
First of all the unless you remember that that brand to neo catheters were deemed to be emergency surgery. So there were being performing several hospitals in the west the growth of our business is very encouraging as you know we ramped up our production.
Got to Neo dialysis.
Supplies, we are implementing capped a right now to shorten up I think the dynamics of.
Of the home therapies is really something that finally coming to the surface as a great advantage and visit be in a in a crisis that we just had so.
We are we are.
Very excited about this business I think our partners are excited about this business and and you can see by the growth even in the middle of the worst quarter for this spend dynamic the U.S. has 8% growth. So that's one of the things that talk about our business is resilience and it's really.
Yes on different sectors of the of the health care continuum of care that help us mitigate some of the most acute issues all hospital admissions as well, whereas the pandemic effects on the whole.
Retiree healthcare system.
Great and then going back to guidance again, I understand that predicting depend a second surgeries.
He is virtually impossible disappoint bikini breakout what percent speak a little bit hospital possible visits youre, assuming at the high end at the low end of the revised guidance.
I think we Peter we Didnt hear the exact specific question that you asked Okay. Let me, let me restate it going back to guidance again, I understand that predicting that bounced back of surgeries is nearly impossible, but can you break out what percent of pre cobot Hospital visits you are assuming in the high end and at the low.
One of your revised guidance.
Yes, I'll stop shop, I'll share some assumptions regarding the higher end in Q4.
As we think about and by the way the area of most interest is the you asked because I think this is the most pronounced but what we're expecting to see from a procedure rates standpoint is basically flat ish in Q4 relative to prior year from a procedure standpoint, we'll see some softness.
In Q3, and then we'll claw back as we move towards Q4, and then from an ambitions rate standpoint, we do expect sequential recovery.
We were modeling down several kind of kind of low single digits versus the prior year in Q4, and those assumptions support the high end of our range. So you can model down from there to see what a low end assumption would be.
And again, it's we've done a lot of modeling on this in terms of statistical and inputs, we have a variety of rich imports to our model, but again there is a wide range of outcomes here that makes that makes forecasting at this point challenging.
Great. Thanks, so much.
Thank you. Our next question comes from Bob Hopkins with Bank of America. Your line is open.
Oh, Thanks, and good morning can you hear me okay.
Yes, we can Bob good morning, great. Good morning.
Everybody first question is on your guidance related to coated.
Thank you for providing that 180 million dollar number for the second quarter. It sounds like that's the net impact of Covidien. The second quarter Im just curious for your guidance for the back half of this year, what do you assume the net impact.
Yes.
Actions you gave us.
[noise], yes, the projections that we shared its roughly.
Somewhere around 130 $140 million of negative impact related to cobot. So that's the assumption that we've put forth and underlying that assumption or the assumptions that I laid out for peto.
In the U.S., and then kind of similar assumptions, although a little bit of better marketplace in Europe and Asia Pacific.
Okay. So that's 130 for the back half.
Yep, that's embedded in the guidance.
Thank you that's helpful and then I just also want.
So if we get a little more color on medication delivery. It sounds like the pump business did about as you expected it sounds like the issues.
Fusion sets.
Yes, it was that 100% related to what's going on with co bid or were there any kind of competitive issues that impacted medication delivery in the quarter just any more color you could provide there would be helpful. Thank you.
Yeah, Bob the medication delivery.
Was.
Largely largely if not 100% related to the two to depend damage to the hospital census, okay.
We did not see any competitive.
Threat in this in the into pump area as a matter of fact, I think we we did as expected in terms of pump sales that we had predicted internally to the company. We don't disclose study specific target.
So as we.
We also have launched bumps outside the U.S.
You for why Q.
Is launched outside the rest of syringe bumps. So we started to have a global portfolio, while bumps as you know and we've been advancing in the U.S., our current Sigma spectrum and we're looking forward to a true.
To hear from the FDA on our new pump platform, which we hope to here sometime in September.
Great. Thanks very much.
Thanks, Bob.
Thank you. Our next question comes from VJ Kumar with Evercore ISI. Your line is open.
Thanks for taking my question Jay out one.
I guess a clarification on the.
The prior question from Bob the I guess I'd assumption here is.
Excluding co it impacted the underlying business is.
In a growing mid singles so there's no change from L. RP.
X code is that the correct, Matt here for Twoq, you and back half.
Yes, that's it's a what I would say is relative to expectations and what we previously shared because remember there were some slight departures between.
What we shared in January regarding this particular business.
And the original L. RFP that we shared a couple of years ago, So relative to the guidance that we shared at the beginning of the year. The primary driver change really relates to cove. It impacts. So thats, you know and its substantial and we've seen a incremental costs. But then also this impact on in particular are made.
Occasion delivery business.
Combination of those two factors cost in sales really thats, a big driver this year in terms of our performance.
But Joe maybe on a question on LR Pete here.
Colin right I mean, when I look at sort of.
What do you guys laid out has anything changed at all.
It feels like since then things have gotten incrementally positive I didn't hear us talk about the depressed in SAP initiated one on home care.
Beyond that when you look at the free cash so year to date performance Im just curious has anything changed on free cash flows at all thank you.
Oh, Hi, if you Jay.
We.
Our our long term perspective for our business as Jay had outlined in our in our pre.
Our prepared remarks.
Yes has changed.
What we look at the R&D portfolio of the company.
There are some puts and takes but we don't see great change from the original.
Original plan that we had in place they are puts in Chile and takes the things that came out things that don't didn't work things there are new or a work in a put in so in terms of innovation because I think the l. are pure the company has two major drivers I would say three major drivers one is the home care push BT, that's a big driver.
For us the second one is the whole innovation.
Underlying.
Push the company's undertaken remember we're looking at the sheer close to sales of new products over the last three years to be close to a billion dollars.
Even even into your off coalfield, we feel very comfortable with the number that is coming out of our innovation. We're very excited by the new pump platform. We're excited about new things are developing other areas. Our previous Max has launched well and it was a great product for the right time.
So that's the second leaving this third is continuously.
Attacking the cost basis of the company and for that there's two areas of focus one this the digital transformation of Baxter, which we started and creating significant.
Change in how we do business internally and sometimes with our customer as well as a completed revamp our manufacturing which will be several years to do it but we will create some good opportunities. So those are for me the areas the underlying conversation for the L.R. Pete. This is the conversation we have with it.
Board and Thats, what we would have without getting faster dose of the four areas three areas with one divide into chew that I would say a major drivers for the company future.
Thanks, guys.
Thanks Vijay.
Our next question comes from Matt Taylor with Yes. Your line is open.
Hi, Thanks for taking my question.
The first question I had was because there's been a lot of focus on this on the call for the 150 million in costs that you are talking about could you just parse out some of the bigger buckets or make it easier for us and investors to understand.
Now some of that could go and I know you've talked about overtime labor.
Pp in shipping those some of the big ones.
And.
Assuming a pandemic ended tomorrow, how long would it take some of those to dissipate.
Yes, Matt maybe I'll make some commentary, but we will stop short of doing line item cost review the from from from an overall standpoint, you are right expedited freight is is an important and significant driver one of the things that we had to do is because we were seeing higher levels of absenteeism. We're on.
So having to higher temporary workers to mitigate that shortfall in employees.
And so that was another expense that we've experienced.
PE is another expense now this will be more ongoing so we'll look to manage this as effectively as we can because frankly I think that PB. He will be here to stay in manufacturing facilities.
And then you know and then like I said.
Overtime and incremental bonuses for funk frontline workers those others comprise the majority of the spending that we've experienced it's important when you get back to our priorities number one employee safe number two continuity of life saving supply we have to ensure that and we've done that and so.
And we're proud of the progress there, but we're mindful that there has been a real economic cost associated with this.
And we will look to manage this down as quickly and swiftly as we can can I give you a timeline in terms of exactly when you know if the pandemic were to end today.
Should we be able to recruit recoup the vast majority of those expenses in next years budget I believe the answer is yes, but we'll have to go through our budget process and clearly the pandemic is not ending today. This is going to be with us for a time and it's going to be with us in terms of.
The level of severity. So that's that's maybe some color for you on this 150 million.
Yes, and then one follow up on Mendell, you mentioned the pumps are in line with your target.
One of your competitors call it a pretty large bolus of placement.
Under USA do you expect to see if something like that and maybe you could also just talk about the potential for us.
Launch for the new platform and the timing of that.
Matt I.
I can't comment on a competitor either way status and what they sold or not but I can tell you that we performed as planned in terms our pump placements.
And we remain very excited with the potential launch of our new pump platform. As you know is a brand new platform very robust are in terms of electronics as well as the modality off syringe bump that we never had as a company. So I think the marketing is ready for something new.
Something that is designed for the future and we will accommodate future digital health updates. So were excited about that so I.
I can't comment than our competitors, but I can tell you that we're we're ready to talk to.
Go back to.
To the market with a new product. Despite the fact, we just launch of version nine which is a robust and very good pump about a year and a half two years ago. After two years ago into July was July 2017, when we launched that.
Drew July 2018, I'm, sorry July 2018, so very excited about new pump platform. So not only that Baxter has a global platform now goes to new plunk platform for us is going to be a global business. Despite effect and now we went back to the outside markets with interim product, which as you avoid.
Our Q, which is doing very well. So we are we're going to position ourselves as a strong pump competitor in the future with a platform that is expansible and out we will we will allow our customers.
Future expansion do still health.
Thank you Joe.
Thank you. Our next question comes from Joanne Wench with Citi Research. Your line is open.
Good morning, everybody I have two questions.
Hi possible to quantify how much of the first quarter purchasing impacted the second quarter and then I'll ask my second question now as we look forward and think about 2021 I recognize there's many many moving parts, but is there way to stir gating, what you think the business.
Hey, look like and if not in terms of numbers, maybe qualitatively or in terms of products. Thank you.
Joann, let me take the your last question first and Jay will take.
The first part of your question in 2021 is a little early for US to review if any kind of comment turned 2021 qualitatively speaking.
We do everything will depend upon how back to normal is going to be.
We feel that the bear to annual dialysis momentum probably will continue and that is a good thing for Baxter, we hope by Dan not affirming, but we hope that we have a new pump platform already launch and ongoing so there's some some.
And we have some launches of some molecules. So I think 2021 back to normality use Baxter back to normal.
Very difficult to see it does at the moment right now.
To forecast is a little foggy, but we hope.
The great confidence, we try to develop and as vaccines and and some of the actions taken in terms of palliative palliative health across the globe. We will help US go back to normal Jay sure joined we estimate.
Around $40 million to $50 million of sales that sort of accelerated in the last couple of weeks of March ended up being prebuying early buying from Q2 negatively impacting Q2 sales.
Thank you very much.
So it is up it is just interesting that when you look at our forecast for the year.
Baxter. Despite the fact that were negatively impacted by coal fit in many areas, including commissions to hospital just to supplement your your question Joanne we see.
We see.
No a range of outcomes that can give us a slight positive three slight negative.
Performance versus prior year, which in a situation like this is shows the resilience of our portfolio shows that our home care bats are done correctly and things are are are no are placed.
Our bats are placed into right places one last comment I'll like to reiterate on research and development is despite the fact is variations in research and development and those are our costs that can be postponed that's absolutely 100% focus in innovation at Baxter and we have no intent.
Actions to let that down.
One iota. So we may have changes a few millions of dollars between quarters or between 2020 to 2021. We are responsible people here, we will do the right thing to make sure that our expenses are in control everybody knows that but there is if there is a bigger commitment to innovation into our research and.
Philip and groups, which are doing extraordinary dropping very difficult circumstances to have data are completing clinical trials data submitted to agents is for product approval, Mike to finish the call by just reiterating that thank you.
Thank you our next line.
Yeah, Kevin we have time for one more question here, Okay and that question comes from Larry Biegelsen with Wells Fargo. Your line is open.
Good morning, Thanks for fitting me in.
Quick one on Injectables and one on capital allocation, Joe just on Injectables you talked about that you were excited about the pipeline there any major new launches. This year Sumant just talked about in an attractive cardiovascular product.
On capital go ahead, Jeff.
I kept a location I am sorry to cut you off I was going to answer your first part of the question just finished that sorry, Larry yen in it I just wanted to get them, both and because we're running at a time sorry. So on capital allocation just thoughts on M&A in this environment and when would you reconsider reinstating the share repurchase program. Thanks for taking the questions guys.
Larry we have couple of things launching 2021, a large bowling 2022. So we are we're excited about pipeline.
We are we have not deviate a talk about El RP. That's one thing that we have is holding pretty true are in the last few years is the pipeline in pharmaceuticals. Despite the fact, we made drop some molecules were able to add more so there's good momentum there remember Baxter.
Yes, pharmaceutical Injectables is always is renewing its really is renewing itself.
Yes, we leave behind the old molecules that were to be used to be the biggest drivers off sales for the company is just products become generic and other companies come in our portfolio is rifampin itself to be able to offset that and moving on if you notice we speak none.
Nothing about cyclophosphamide and Thats a real.
Our real.
A testament to our pharmaceutical team that is starting to two.
Launched products like decks management by Cower, our pre mix injectable insulin and other products that are are are part of our portfolio in terms of capital allocation I, let Jay comment on on share buyback in terms of acquisitions, we still.
We're very focused we have several small deals that we're looking at all the time as you can see by cheese prepared remarks, we have over $4 billion in cash and the balance sheet does the company that he has a solid solid financial position and data for dose to to continue to look.
For opportunities.
Depend dynamic slowed down a little bit.
Because the month of a pretty may were very hectic across the globe.
But we are engaged very much so in continuing to look at inorganic opportunities Jay.
Sure on share buyback.
I think what I, what I would say is we're very pleased with the durability. The resiliency of our business the ability to maintain cash we're over $4 billion and if you think about it or earnings while down year over year by roughly 20 cents all of that is explain.
Trained by Offloading, the pension, which was a smart capital allocation move along with the bond offering that we did so if you think about at those two items, which we're really insurance policies for the company.
Cost is 20 cents and explain fully on the year over year Delta and so we feel very good about our ability to withstand this pandemic and continue to thrive over the long term, having said that I think it's premature at this moment in time to begin on share buybacks once again.
Again, we'll watch as this evolves will carefully studying wave two will kale carefully ensure that our business continues to withstand as it has thus far and once we have better line of sight to where this goes I think we'll be able and willing to reinstate the program which has been.
In a very important part of our capital allocation approach over the last many years, so stay tuned but not yet.
Thank you.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference call with Baxter International. Thank you for participating you may now disconnect everyone have a great day.
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