Q3 2021 Baxter International Inc Earnings Call
Okay.
Ladies and gentlemen.
Thank you for standing by good morning, welcome to Baxter International's third quarter 2021 earnings Conference call. Your lines will remain in a listen only mode until the question and answer segment of today's call.
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I would now like to turn the call over to MS. Clare Trackman, Vice President Investor Relations at Baxter International MS. Trackman you may begin.
Good morning, and welcome to our third quarter 2021 earnings conference call. Joining me today are Joe Almeida, Baxter's, Chairman and Chief Executive Officer, and Jason <unk>, Chief Financial Officer.
On the call. This morning, we will be discussing baxter's third quarter 2021 financial herself in fourth quarter and full year 2021 financial outlook.
With that let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the fourth quarter and full year 2021, the pending acquisition of Hill ROM and new product development business development and regulatory matters contain forward looking statements that involve risks and <unk>.
Uncertainties and of course, our actual results could differ materially from our current expectations. Please refer to today's press release, and our SEC filings for more detail concerning factors that could cause actual results to differ materially.
In addition on today's call non-GAAP financial measures will be used to help investors understand baxter's ongoing business performance.
A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website now I'd like to turn the call over to Joe Joe.
Thank you Claire and good morning, everyone and thank you for joining the call as usual I will begin with an overview of Baxter's third quarter performance J will take a closer look at the financials and outlook for the rest of the Euro then will close with your questions.
Clearly the most notable highlights from the quarter is last month's announcement of our agreement to acquire Huron.
Subject to the approval of a hill ROM shareholders and other customary closing conditions I recently made site visits to select the Huron locations as part of our integration planning process and I was joined by other members of our senior leadership team meeting face to face with Hill Rom's dedicated employee.
<unk> and touring our facilities only underscored our confidence and enthusiasm for the proposed acquisition of Hill ROM.
Upon closing of the transaction, we plan to bring a broader array of products and services to patients and clinicians across the care continuum in the round. The world. We are focused on identifying opportunities to further accelerate innovation to address the rapidly evolving needs of our customers. The teams are working.
Gently on plans to bring together these two complementary portfolios to deliver enhanced value for our stakeholders. We look forward to updating you on these acceleration opportunities following the close of the deal.
Earlier this month, the Hart, Scott Rodino or HSR waiting period in the U S expire with no issuance of a second request by the FTC.
While the FTC reserves its right to take further action. This is a key milestone to clear the way for a successful closing.
We are in the process of securing all remaining global regulatory approvals required for closing and the Hill ROM shareholder meeting to vote on the transaction is currently scheduled for December 2nd.
In addition, our integration planning management office is up and running with teams from both organizations to preparing for a swift effective combination once the deal closes we will expect to close by early 2022.
Moving onto the third quarter for National performance I'm pleased to report solid ongoing momentum as we make our way towards the close of the fiscal year Baxter delivered third quarter sales growth of 9% on a reported basis, 7% at <unk>.
Instant currency and 6% operationally.
Like last quarter growth was impacted by the continuing if somewhat erratic base of COVID-19 pandemic recovery, while the pandemic still represented a headwind to top line sales in the quarter. The magnitude of this headwind has continued to decline.
<unk> the improved rate of hospital admissions in the U S as well as ongoing pandemic recovery in international markets.
This resulted in a favorable comparison to the same period last year.
On the bottom line third quarter adjusted earnings per share were one dollar and two cents up 23% and exceeded our third quarter guidance positive mix and disciplined expense management drove the favorability is.
As you saw in our earnings release, all of our geographic segments and product categories contributed to the positive performance in the quarter.
The pace of pandemic recovery continues to vary by both therapeutic in geographic market, our broad global footprint and diverse portfolio of essential products combined to help mitigate the variability and shore up the strength of our overall enterprise.
We also benefit from our resilience and agility, which have been greatly enhanced through our ongoing transformation.
Looking at performance by business growth was led by Biopharma solutions, which advanced 45% at constant currency rates performance was driven by revenues related to our manufacturing of multiple COVID-19 vaccines medication delivery grew at 11.
Percent constant currency, reflecting the improved the rate of U S Hospital admissions in new infusion pump contract with a large health system in the U S and increased demand for Baxter's small volume <unk>.
With respect to our Novum IQ five 10-K submission we are continuing to work with the FDA to address your questions on our submission while we hope to receive clearance by the end of this year. It is possible you may shift into early 2022.
<unk> pharmaceuticals, 7% constant currency growth reflects the benefit of our acquisition of a specified rights outside the U S to calix Indoxyl adjusting results, where the acquisition operational growth rose 1%.
Year over year growth in the quarter reflects lower U S sales in part due to a large pandemic related government order received in Q3 2020 and softness in inhaled anesthesia.
This challenging comparison was offset by strong growth internationally, driven by our pharmacy compounding business.
Third quarter launch of Premix norepinephrine was met with strong demand.
Part of an increasing trend as hospitals pharmacies embrace premix formulated drugs and other products that improve efficiency.
Particularly in the week of the pandemic.
This is a key strength of our pharma portfolio and we plan to continue launching more molecules with differentiated presentations or complex formulations in the months to come.
During the quarter advanced surgery performance in the U S was affected by lower surgical volumes, which remains depressed versus pre pandemic rates.
Procedure volumes were unfavorable to our prior expectations as hospitals delayed elective procedures, even in light of the Delta variant.
Was more than offset by growth in the international markets, which continued to slowly recover from the effects of the pandemic.
Growth in clinical nutrition reflected the benefit of our new product launches, particularly in international markets.
Acute therapies continues to perform very well.
Year over year decline in U S sales reflects a difficult comparison in the face of last year's surge in demand for continuous renal replacement or see our tea products. Again. This was offset by international growth is an outcome of the pandemic. We now have many more CRT devices in the field.
As well as heightened engagement and utilization on the part of clinicians, creating a platform for sustained momentum grew.
Growth in renal care was driven by our home based peritoneal dialysis or PD products globally. As I have mentioned on past calls demand has continued to be dampened Amit depend damage due to higher mortality rates for patients with kidney disease, and a slowdown in new patient Agnew.
Hostess we.
We expect the ESR D market to gradually recover to pre covia to growth rates over the next one to two years, our renal care teams global safer at home campaign is dedicated to helping clinicians patients and other stakeholders learned more about the benefits of homebrew.
BD care, especially in the context of today's pandemic conditions.
From an ESG perspective, I'm pleased to highlight a new partnership between UNICEF USA and the Baxter International Foundation to improve access to safe water in laghouat heater, Colombia, one of the country's most water challenged regions, a $1 5 million.
<unk> Foundation Grant is helping fund the multi faceted three year program.
This quarter. We also honored to be included on Forbes latest list of the world's best employers and America's best employers for women.
In addition, we were recognized as a leading organization on Sir amounts 2021 inclusion index.
Looking forward, we continue to navigate with some uncertainty on the horizon there.
Overall trajectory of pandemic recovery appears more clear, but the new geographic contours remain inconsistent new.
<unk> variance may take an unknown toll on our business and our employees and we will continue to contend with the effect of macroeconomic issues related to this last point, we are not immune to inflationary pressures and the rising cost of raw materials commodities.
<unk> fuel and ongoing supply chain disruptions, while we are actively working to address these rapidly rising costs. We recognize these factors may continue to impact our operations into 2022.
Amid this challenges we are on pace for a strong close to the year.
These translates into momentum as we get set to execute on the vast potential of our proposed Hill ROM acquisition and launched the next phase of our transformation journey fueled by the commitment of our outstanding Global team now I will pass it to Jay.
For a closer look at our financial results and outlook.
Thanks, Joe and good morning, everyone as Joe mentioned, we're pleased with our strong third quarter performance.
Third quarter 2021, global sales of $3 2 billion advanced 9% on a reported basis, 7% on a constant currency basis and 6% operationally.
Sales growth this quarter reflects the benefit from revenues associated with the manufacturing of Covid vaccines strength in medication delivery and O U S sales of calix, and docile, which totaled approximately $32 million in the quarter on.
On the bottom line adjusted earnings increased 23% to $1 <unk> per share exceeding our guidance range driven by a favorable product mix, primarily from better than expected sales of acute therapies and biopharma solutions as well as disciplined operational execution.
Now I'll walk through performance by our regional segments in key product categories, starting with our regional segments.
Sales in the Americas increased 7% on both a constant currency and operational basis sales in Europe Middle East and Africa grew 7% on a constant currency basis, and 3% operationally and sales in our Asia Pacific region advanced 8% on both a constant currency and operation.
Basis.
Moving on to performance by key product category note that for this quarter constant currency growth is equal to operational sales growth for all global businesses, except for our pharmaceuticals business for which we will provide both constant currency and operational growth adjusting for the acquisition of rights in select territories outside.
The U S for Calix and docile.
Global sales for renal care were $981 million, increasing 1% on a constant currency basis performance in the quarter was driven by global growth in our PD business, where we experienced year over year improvement in global patient volumes. Despite the negative impact on volumes, resulting from the pandemic.
Including increased mortality rates in ESR D patients delays in new patient diagnoses and market wide staffing shortages.
PD growth was partially offset by declining international sales in our in center HD business and renal care clinics, we continue to monitor the impact of excess mortality among ESR D patients and delays in new patient diagnoses, resulting from the pandemic and expect the market to return to pre COVID-19 growth rates.
Over the next 12 to 24 months.
Sales in medication delivery of $747 million increased 11% on a constant currency basis.
<unk> global growth in this business reflects continued recovery in the pace of hospital admissions as well as increased demand for large volume infusion pumps, IV solutions and small volume parental rules.
During the quarter, we estimate the U S hospital admissions were down approximately 4% compared to pre COVID-19 levels, a significant improvement from the same quarter last year, which saw U S admissions down approximately 12% versus pre COVID-19 levels. In addition, during the quarter, we executed and began delivering.
Infusion pumps under a contract with a large health system in the U S, which resulted in our highest number of quarterly pump placements in over five years.
Pharmaceutical sales of $589 million advanced 7% on a constant currency basis and 1% operationally.
Performance in the quarter was driven by demand for our international pharmacy, compounding business and the contribution from O U S sales of Calix docile.
Both in the quarter also benefited from increased sales of <unk> and our portfolio of Premixes as hospitals continue combating the COVID-19, pandemic and look toward premixed formulations to enhance workflow efficiencies.
This growth was partially offset by declines in our U S business related to lower surgical procedures and a government order of approximately $20 million in Q3 2020.
Moving to clinical nutrition total sales were $244 million, increasing 3% on a constant currency basis performance in the quarter was driven by the benefit of new product launches within our broad multi chamber product offering.
Sales in advanced surgery were $249 million, increasing 5% on a constant currency basis within the quarter. We saw strong growth from our international business and estimate surgical procedures improved both sequentially and on a year over year basis in many international markets. This growth was partially offset by performance.
In the U S with surgical procedures estimated at 95% of pre COVID-19 levels, the sequential and year over year decline in surgical procedure volumes due to the impact of the delta variance and staff shortages.
This was below our previous assumption of procedures returning to pre COVID-19 levels. During the third quarter sales in our acute therapies business were $185 million advancing 3% on a constant currency basis and were favorable to our expectations.
Performance in the quarter continued to benefit from elevated demand for <unk>, particularly given the rise in Covid cases associated with the Delta variant.
Biopharma solutions sales in the quarter were $206 million representing growth of 45% on a constant currency basis, reflecting incremental sales related to the manufacturing of COVID-19 vaccines, which totaled more than $50 million in the quarter.
Moving through the rest of the P&L, our adjusted gross margin of 44% increased by 140 basis points over the prior year, reflecting a favorable product mix and operational improvements in manufacturing.
Adjusted SG&A of $640 million increased 11% as compared to the prior year period and was favorable to expectations driven by disciplined expense management, which more than offset increased supply chain and logistics expenses recognized in the quarter.
Adjusted R&D spending in the quarter of $129 million increased 6% versus the prior year period, both adjusted SG&A and R&D spending reflect a somewhat more normalized level of spend as certain expense categories were depressed last year as a result of the pandemic, particularly those related to employee bonus accruals.
This improvement in gross margin coupled with the continued Opex management resulted in an adjusted operating margin in the quarter of 22% an increase of 100 basis points versus the prior year adjusted.
Adjusted net interest expense totaled $32 million in the quarter and other non operating expense was $12 million in the quarter. The adjusted tax rate in the quarter was 14, 8% a decrease over the prior year driven primarily by a favorable change in earnings mix and as previously mentioned adjusted earnings.
<unk> of $1 <unk> per diluted share exceeded our guidance of 93 to 95.
Per diluted share.
With respect to cash flow year to date, we've generated $1 5 billion in operating cash flow free cash flow totaled over $1 billion and represented growth of nearly 50% as compared to the prior year period.
I would like to take a moment to reiterate our excitement around our recent announcement to acquire Hill ROM.
We believe the strategic rationale and underlying financials of the combination are compelling and provide us with a meaningful opportunity for value creation our.
Our integration teams are hard at work and we look forward to finalizing this combination by early 2022 in the meantime, we continue to follow our strategic approach to capital allocation that is founded on accelerating growth driving innovation and returning value to our shareholders.
Let me conclude my comments by discussing our outlook for full year 2021.
For full year 2021, we expect global sales growth of 7% to 8% on a reported basis, 5% to 6% on a constant currency basis, and 4% to 5% on an operational basis.
This assumes a benefit of approximately 100 basis points to both reported and constant currency revenue growth for the acquisition of Calix docile and over 200 basis points of positive top line impact from foreign exchange on reported growth our expectation remains that on a full year basis hospital admission rates in the U S.
<unk> will remain below pre COVID-19 levels exiting the year down low single digits.
Although surgical procedure data in the U S declined sequentially Q2 to Q3, our current expectation is that U S. Surgical procedures will improve sequentially and return to pre COVID-19 levels in the fourth quarter. We are continuing to monitor this assumption in light of potential impacts from Covid outbreaks.
And hospital staffing shortages moving down the P&L, we now expect adjusted operating margin to expand more than 60 basis points.
For the year, we now expect an adjusted tax rate of 16, 5% to 17% and a full year diluted average share count of approximately 510 million shares.
Based on these factors, we now expect 2021 adjusted earnings excluding special items of $3 58.
The $3 62 per diluted share.
For the fourth quarter of 2021, we expect global sales growth of 3% to 4% on a reported basis, 4% to 5% on a constant currency basis, and 3% to 4% on an operational basis.
And we expect adjusted earnings excluding special items of $1 to $1 <unk> per diluted share with that we can now open the call up to Q&A.
Thank you we will now begin the question and answer session.
If you have a question. Please press Star then the number one on your Touchtone phone.
If you wish to remove yourself from the queue press the pound key.
If you are using a speaker phone please lift the handset to ask your question.
So that we may be respectful of everyone's time. Please limit your comments to one question with one follow up question if necessary we.
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 just a moment, while the list is being compiled.
I would like to remind participants that this call is being recorded.
And a digital replay will be available on the Baxter International website for 60 days at Www Dot Baxter Dot com.
Your first question comes from Robbie Marcus of Jpmorgan. Your question. Please.
Congrats on a good quarter, thanks for taking the question.
Thanks, Ravi good morning Ravi.
Maybe to start.
You talked about.
Volumes recovering to pre COVID-19 levels in fourth quarter.
I think it would be good just to run through.
How youre coming up with that assumption is that what youre seeing today is that what you expect given given trends that youre seeing in the U S is it different U S to Europe, and just sort of how youre coming up with that.
Sure.
Procedures in volumes.
The comments really related to the United States because outside the U S. We are seeing more variability.
From a from a U S standpoint, our expectation is that by year end will be down low single digits and in the fourth quarter will be down low single digits from an emission standpoint again.
A third quarter, where we were down 4% and we're seeing that in the marketplace. Today. So far things are tracking broadly in line with our expectations for procedures, we were a little bit disappointed with procedures in the third quarter came in below our expectations down 5%, but we are seeing.
Some recovery and we expect that to continue so that the year end assumption that Q4 assumption is flat procedure volumes relative to prior year now I will tell you. There are risks that we're monitoring with respect to this one of the certainly there's the COVID-19 factor, but another one that's acute and we have to be mindful of is.
And certainly as we as we look at that number.
We'd expect to see some elevation of that as we move into next year, we're going to resume more normal activities. We've still been very limited on a travel basis, we've still been very limited on a promotional basis in light of in light of the Covid environment that we're faced with and so we'll expect to resume.
Activities as we move into next year and there will be some uptick in SG&A percentage of sales is our current expectation.
So I think that's one thing to consider as.
As we look at the gross margin. This is a more interesting one for me.
Our standpoint gross margin came in broadly speaking in line with our expectations in the quarter.
In Q4, we don't have tremendous surprises, but embedded in that we are seeing some material and wage inflation. We're also seeing some planning and fulfillment costs.
Excess of our expectations. So those factors have been a drag frankly on our gross margin in Q3 and Q4.
And as we look to next year one of the big uncertainties that we're facing are in these categories of spending how much is inflation sustained versus temporal how much disruption continues to exist in the supply chain. These are key factors that we're currently evaluating as we look at the plan.
And it's a very dynamic environment. If you think about this year, we've had things like the Suez Canal, the Houston freeze disrupting logistics and also the resin market, but more recently hurricane Ida has put a fragile resin market under real pressure and so how that evolves over the coming months.
<unk> is going to be a critically important input as we look at our 2022 operating plants.
Great. Thanks for all the color.
Thanks Ravi.
Bob Hopkins of Bank of America Securities is online with a question. Please state your question. Please.
Oh. Thank you can you hear me, okay and good morning.
Good morning, Bob.
Good morning.
Yes, I think just pick up a little bit on that last thread there.
Hey.
Your comments on watching inflation and supply chain.
I completely understand and appreciate that but James.
Only in September do you guys provided some preliminary thoughts on operating margin targets for the company and I was just wondering did those targets that you provided for the Standalone Baxter.
Do those still hold do you think those might be at risk based on what youre seeing kind.
More recently on the inflation and supply chain front.
Yes.
At this point, there's no change to that.
The information that we shared in early September related to our projections. So we don't have any expectation of change, but what I will say is.
Hurricane Ida in September did change the dynamic in short and short term in the inflation related to certain critical raw materials that we're watching but but to be clear Bob we're not changing our projections at this point and we're going to continue to work and evaluate over the coming months.
Okay. Thank you for that and then just one other quick follow up on that is.
You guys were nice earlier in the year and on the second quarter call to kind of specifically quantify heads.
Headwinds related to inflation and supply chain and you threw a couple of other things in there.
Apologize if I missed out but I'm just wondering.
If you could give us kind of an updated thought on what that headwind will be for the year. I think originally you called it out as maybe 70 million then it bumped up to 130.
Apologize, if I missed that but where does that stand today.
Sure as we look at as we look at Q3, and Q4 supply chain and logistics expenses has been the key driver that's deteriorated relative to those expectations and I would I would.
Good estimate that we're off those projections by five or six.
Related to planning and fulfillment costs use of expedited freight use of premium freight relate.
Related to really trying to get our product to the right spot, where it's needed and when it's been incredibly challenging for us to address the needs in this volatile supply chain environment. So those those are that's really the key factor that's playing into our numbers today as we think about inflation some of the recent.
Moves actually don't rollout until next year, because as you as you know.
We.
Purchase the product we manufacture the product that sits in inventory and sold in one so that's when we reflect the impact in our financials. So the impact in Q3 and Q4 on inflation is more limited, but that's the piece that we're watching as we move to next year.
Great. Thank you for the color.
Sure.
Larry <unk> of Wells Fargo is online with a question. Please state your question.
Good morning, Thanks for taking the question one on the revenue outlook one on the margins.
You're guiding this year I think to 4% to 5% underlying.
And that's the same has the ERP.
RFP you provided us.
In September how are you feeling about achieving that in 2022, and if youre not willing to kind of blessed that now what are some of the puts and takes we should think about for example.
We'll bps in acute therapies be a headwind next year and I have one follow up.
Sure I will stop short of doing a detailed review on 2022, but.
The compounded growth of 4% to 5% for the next several years is something that we feel comfortable with as we look at 2022. There are a couple of factors and I highlighted some of these on the September call.
And really it relates to the Delta variant and the continued COVID-19 situation that could be disruptive right now our sense and view is that the COVID-19 variance are progressing in a positive manner, meaning I think that our assumptions underlying our law.
Long term guidance are intact and not disruptive we're not disruptive I should disrupted I should say and then from a vaccine standpoint, certainly we are expecting some reduction in vaccine sales. We have very large sales. This year that will abate to some extent, but still be a large component of the overall sales mix of the company.
That's helpful.
Joe you guys have seen kind of what the street has been riding on Hill ROM I'm.
I'm curious now that you've learned more kind of what do you see as some of the misunderstanding or things that are underappreciated right now by investors.
ROM acquisition, thanks for taking the questions.
Larry.
Yes.
Just want to make sure that we acquire Phi that at this moment, which is between signing and closing Werent planning space.
And meeting with our future colleagues at Hill ROM on a planning purpose not only we are absolutely not involved in their day to day activities. So we want to make sure that they are running the company as the best of their ability and we are not involved in that at all.
But I can tell you based on the meetings that we had the visits that we had.
We feel that the street has missed.
What they have done in the last two or three years in terms of connecting their products and going into some very specific markets primarily in the frontline care.
And also the evolution of what used to be just a hospital bed or a capital kept are purchased by the hospital for being a part of ecosystem.
That goes from patient safety patient diagnostic and communication between the patient and the clinician. So there's a lot going on there I was.
Pleasantly surprised going into the to the sites, while we were able to see.
Thank you Joe.
Vijay Kumar of Evercore ISI is online with a question. Please state your question.
Good morning, Joe and Jim Congrats Jerry nice steady quarter.
Joe I think you guys called out the med delivery strength in the quarter highest quarterly pump placements.
Was this a timing element or perhaps are we seeing some share shifts in the market.
Commentary on the market would be helpful.
Vijay good morning.
Yes.
We are seeing.
Shift in share.
Some of those bumps where competitive pumps.
And we don't we don't want to get into share percentage I think we have those conversations a few years ago, we always get into what is the share or perception versus other people. So I'll winches and let's say to you that sufficiently debt.
A lot of those bumps where competitive accounts.
That is crystal clear thank you.
It related to it so Vijay I'm sure you saw in our prepared remarks this related to a contract that we signed and delivered our comps during the quarter with a large health system here in the U S.
Understood Sir.
And one for you could.
Could you just remind us on.
The Q4 operational growth guidance of 3% to 4%.
We just had six in CQ, what changes Q on Q.
The U S admissions it seems like that's improved in Q on Q. Thank you.
Sure from from Q3 to Q4.
One of the big drivers relative to our prior expectations is the removal of Novum IQ from the from the fourth quarter sale. So we had roughly $30 million expected in the fourth quarter and we've taken that those sales out we do we're confident in this product launch.
And very excited about it it will be coming to market hopefully soon but as far as prudent and made sense to take out that so thats really the largest change relative to our expectations from the third to the fourth quarter, we'll see some improvement globally in renal on the back of the.
On the back of the HD business, our acute business will decline in the fourth quarter is our expectation medication delivery will also lower from the 11% that we saw globally in the third quarter to a mid single digit number in the fourth quarter. So those are a few of the factors that come into play, but I think the biggest.
Range from our own internal expectations relates to the pump.
Thank you guys.
Travis Steed of Barclays is online with a question. Please state your question.
Hi, Thanks for taking the question just a follow up to <unk> question earlier as.
As you've had time to spend more time on the Hill ROM acquisition I'm. Just curious if you had any updated thoughts on where things stand on revenue synergies and cost synergies and anything that you.
Learned on that front and you could articulate would be helpful.
We.
We are where we said we're going to be on.
On the cost synergies.
We are putting together an organization structure, we're making sure we understand.
Good morning depth products and when we come out with.
Our Investor Day later in 2022.
Give you that perspective.
It's a little too early for us to jump into that we have an idea of what we think we can do but it's not the right time and we want to make sure that this trend that transaction closes and when it closes we have known.
<unk> ability to go in and understand the <unk>.
R&D capabilities are what investments, we need to do to bring it together with a new product offering if that is the case.
Alright, great. That's helpful. And then given all the time, you spent with hospitals and touching hospitals around the World every day and Jay given all the modeling and forecasting that you guys do just curious to think about over the next 12 months.
How much about anything hospitals are prepared prepared for another COVID-19 rebound.
Hearing from some management teams.
His optimism at least that COVID-19 could be less impactful next year I know it's a.
Little bit of uncertainty, but curious kind of what your outlook is on the next 12 months from a hospital capacity perspective.
I will take this on.
We believe any stuff, we're not forecasters of COVID-19 response by hospitals, but I believe that what you still have.
<unk>.
The factor that many people in the United States are not vaccinated.
And that has proven to be the achilles' heel of <unk>.
Coverage in 2021 was it a lack of vaccination that caused the issue second.
Hospitals have responded very differently upon the regions of the country that got hit the hardest. So you start to sit here and predict I'm sure everybody learned a lesson, but until you get it get to a point that this moves from a pandemic.
Our infection to an endemic.
Infection is going to be tough to predict I believe what you. What we are seeing what needs to be consider and I'm sure. You heard this from other companies is the labor shortage in hospitals.
The issues with nursing availability to travel nurses are very expensive so inflation in hospital cost as well as to the feel a bit of availability of nurses to be able to perform procedures. Some hospitals are doing just day procedures no overnight.
Some hospitals are cutting that they short because of lack of support. So this is not.
Not across the board everywhere. It is very regional sometimes very local depends upon the hospital, so I want to make sure that.
We're not a COVID-19 predictors uninsured the country has learned a very tough lesson hospitals and everybody is much better prepared today, but a lot of the issues that you saw during summer and beginning of the fall were related to him vaccinated people and that is a different subject I don't want to get into it right now yes.
Yes of course, thanks for the thoughts Joe and congrats on the good quarter.
Thank you.
Danielle our policy.
Of <unk> Leerink has a question. Please state your question. Please.
Good morning, Thank you all so much.
Further question and just a quick question on med delivery.
We're already gaining share you have novum coming how think about the midterm outlook for that business.
Thinking about how sustainable above market growth is there over the over the mid term given.
Given the current share dynamics and the upcoming new product launch and then I have one follow up.
I would say that.
When we look at competitive accounts and contracts coming up more so a juice age of the fleet in the United States, you look positive to us with a good very solid product right now, but a launch coming up.
We are not predicting gains and things above normal, but I would say that we will be competing more effectively and.
Replacement market for competitive.
Accounts, because we will have a syringe pump, which is something we don't have today. So we will have a more complete portfolio of brand new product.
But nevertheless, we are competing very effectively to date with our current product. So it is it is a positive outlook for this market for us.
Got it got it. Thank you for that and then Jay One quick question for you just thinking about the exit rate for margins heading into next year can you help us.
Help frame that for us thanks, so much.
Sure. Thanks Danielle.
We will and we'll end the year the second half margin will it should be over 20%, which is really a nice achievement in the context of the environment in which we're operating so as we move to next year really there are a few factors in play every year. The second half margin is ahead of the first half margin in part because of <unk>.
<unk> sales contribution in the second half versus the first half and in addition, we have a lot of spending that's concentrated in the first half of the year relative to promotional activity and so those things sort of lowered the first half margin relative to the second half, but there's a couple of other things that will happen next year, then we'll be mindful of first.
I referenced this earlier there'll be a normalization of operating expenses as we resume activity promotional activity in travel and Thats. Our current expectation, but then the final piece and this is the piece as I referenced earlier, we will have a lot of work to do on is the inflationary impact that I referenced and Joe referenced in his prepared remarks.
The impact of material inflation and wage inflation has increased throughout the year and we had the hurricane either disruption. So the full magnitude of this is something were currently quantifying and carefully watching and the sustained nature of it we've seen resin prices.
Abate, a little bit, but how that emerges that's an important cost category for us all of those things will impact 2022, and so we'll watch those things very carefully.
Thank you guys.
Matt Taylor.
Of UBS is online with a question. Please state your question.
Hi, guys. Thanks for taking my question.
Congrats on a good quarter I wanted to.
And just follow up on some of those funds.
Cost development could play out in 2022 previously.
Previously you had talked about some of the COVID-19 related manufacturing costs winding down in the second half of this year could.
Could you give us an update on how much of those.
Lingering or expected to linger and when they could.
And what are you watching to predict how some of your.
Put costs like our materials inflation shipping and labor.
Could could last through either the first half of second half of 2022, how are you going to look.
But to predict that when you gave guidance.
Early in the year.
Sure.
It's a good question, Matt we are seeing improvement in terms of Covid related expenses. This year, but I will tell you that we still have some significant lingering cost even even in Q3, but part of the improvement from first half to second half relates to a reduction in COVID-19 related costs.
Now the key question for US is what happens through to next year and so we're watching very carefully.
The evolution of the pandemic and that will be an important input as we model out COVID-19 related costs for next year. What we've always said is we expect.
Roughly $30 million of sustained cost and I believe in the past, we've talked about up to $150 million of total COVID-19 related costs impacting our numbers. So we expect some sustained level of cost and frankly, we could have some costs remain in the first half of next year, depending on how things emerge.
The critical variable for us and we've seen very volatile movements. In this are some of the raw material costs related to resin.
<unk>.
Packaging and also accessibility of components.
And so we spend a lot of time analyzing the indices, but I think the key.
Quality of the forecast of these indices only goes out so far and what we've seen thus far as you can probably have reliable data for a few months, but beyond that you have to take a position in terms of improving our dis improving.
So this is going to be an important part of the guidance that we put forth frankly, we'll study. This for the next couple of months heading into January when we ultimately give guidance because it is such a volatile input and it's such an important input for us because a lot of our costs are related to resin the cost of freight the price of fuel.
All of these things are key drivers for us.
Could I just ask one follow up Jay Thanks for that that was good color.
Just wanted to know if you had any ability to pass some of those costs through to customers through price raises I know in the past you've talked about some of your contracts being longer term and having like CPI and players.
In Med del for example, could you give us any sense for that at the company level or any specific examples.
Matt We don't we don't comment at all on our price strategy. We do have just to confirm we have adjustments built into contracts.
But our pricing strategy is not public.
Sure.
Thanks, Joe Thanks.
Thanks, Matt.
Ameron Zafar of Deutsche Bank is online with a question. Please state your question.
Hi, good morning, Thanks, a lot for taking my question I wanted to get a little bit more color around the renal business.
First in the U S regarding the sequentially slower growth could you talk a little bit more about relative impact of the various moving parts.
New patient growth excess mortality from Covid I think he mentioned staffing shortages being being a factor.
Then my second question is on the O U S business can you talk about.
New PV patient trends in some of the key geographies and then I guess question to be is the.
The weakness in center HD is that from price pressure from share loss and dialogues yours. Thank you very much.
Sure. So overall the renal business in the third quarter grew approximately 1%.
We're expecting to see that improve to the fourth quarter. A couple a couple of hundred basis points. So we are seeing we expect to see a recovery in the renal business and if we look at it our PD business was sort of mid single digit growth and we did see declines in HD in the fourth quarter, we will expect to see.
Mid single digit growth again in PD and it will also be matched by an improvement in center HD the improvement in in center HD relates to the timing of tenders that we see an ARCUS EMEA region.
But I think I think your question is a good one related to the trajectory in this business long term obviously, we're incredibly excited about the renal business in particular as it relates to <unk>.
Kha, the advancing American kidney Health initiative, which we believe will provide a great incentive for movement to the home in the coming years, along with patient dynamics. So long term very excited about this and this is an important component of the long range plan that we've shared but we are seeing in the short term some real disruptions in the <unk>.
Market place.
What I would say is there's really three factors excess mortality.
Frankly, these are very vulnerable patients and very unfortunately, we saw a lot of patients die related as a result of the Covid pandemic.
And then the second thing relates to slower patient starts and this is really a global phenomenon people have been reluctant to go to doctors and hospitals.
These catheter in searches in some cases have been de prioritize or other procedures are favored relative to that in today's environment. But then the final factor is one that impacts a number of our businesses.
And I referenced this earlier related to advanced surgery, but I think there is a significant nursing shortage that we want that our country and internationally, we will need to be addressed.
Nurses are in short supply and that that's another factor that's impacting treatment. So frankly, we've seen a challenging patient environment in the U S. We did gain patients globally, but the vast majority of those came from China outside China. We were essentially flat Q2 to Q3. So these are all factors.
Ultimately, we believe will correct in the coming months and years as we referenced earlier, but in the short term. This market is going to continue to be a challenging one just I would add to that.
K shy in the U S is up particularly points of interest because that ask for to wield.
A good future for penetration in the U S and the adoption of <unk>.
<unk> dialysis modality in the U S. It is depressed because of Covid, but as Jay mentioned, we had growth in that business on a global basis much greater than HD and HD is the modality in the U S is that not in home HD, but HD.
<unk> one debt.
Drove a lot of debt reduction so what I think.
The outlook for the business is positive it is going to be a 12 to 24 months.
Climb because did that there were experienced during COVID-19 because these patients are extremely sick patients have chronic disease and there were affected by the virus. The deaths rates was higher amongst that population, but we feel very positive on <unk> going forward as we climb out of this.
We believe that that's something that is here to stay is just that Colgate caused us to have a detour on the trajectory.
Great. Thank you so much.
Q.
Joshua Jennings of Cowen is online with a question. Please state your question.
Hi, good morning, Thanks for taking the questions.
To just ask a quick one high level one on the Baxter is around combination I think med tech acquisitions that have been challenged to typically theirs is.
Disruptions that occurred in the sales force attrition overlapping products or a host of reasons, but.
Can you help us understand from a high level why you think the Baxter you haven't I'm combination.
Will can minimize business disruptions and it.
My follow up question is just on the staffing shortage headwinds that you guys are calling out.
Just with your broad reach what are what are hospitals capable of doing to rectify these shortages if anything.
Are they doing currently and then just with your commentary I think you are still optimistic.
Procedure volumes you can get back to 2019 levels are improved for 2019 levels at <unk>. So just was curious about that dynamic just in terms of your commentary around staffing shortages and just your expectation for that recovery and for acute thanks for taking the questions.
<unk>.
The Hill ROM.
When you acquire a company.
You are acquiring.
The best assets of the company.
People and the culture of the company.
Paul or buy the product in markets right, so you're buying debt because of that so when we looked at the synergies.
We can achieve with the acquisition of Hill ROM.
None of those none of the sales and marketing and research and development are part of the synergies.
But we want to make sure that we continue to thrive and grow and hopefully accelerate growth in the future.
But it's not going to be.
A disruption to how they go to market and how theyre doing their business that now we have seen reduced of course, we do and those are duplication of functions different ways of doing things and we have several.
No shared service centers across the globe, we are larger company would differ.
Resources of course, we do have the ability to take cost out and make that.
Yes.
Synergies, but at the moment now sitting here today, we do.
Don't have any plans in the short term at all.
To make any change that would disrupt their go to market and serving their patients to <unk>.
<unk> focus as patients get spoken to.
Yes.
On your other question about steps steps shortage. This is this is a comment not related to Baxter only Baxter is.
Healthcare company with with injectable pharmaceuticals, and medical devices in peritoneal dialysis home products, where nurse nursing shortages affect the overall market hospitals are dealing with us very effectively in most cases.
And the ability to deal with the defense upon their size and dispense upon the original location. So I can speak on behalf of our customers, but I can tell you that what we see is tremendous adapt to deliver on their side. It does have an overall impact.
The business, but no one that we can pinpoint is just a headwind that the industry has seen with just repeating here to make sure you understand that we're not we're not exempt of this headwind, but it's not a headwind that we can mitigate.
On behalf of hospitals, but we can actually.
With a very diverse portfolio as we've proven in the past be a more resilient company.
Thanks, Joe.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference call with Baxter International Thank you for participating.