Q2 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to Baxter Internationals second quarter 2019 earnings Conference call. Your lines will remain in a listen only mode until the question and answer segment of todays call at that time. If you have a question you'll need to press star and then the number one key on your Touchtone phone.
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I would now like to turn the call over to Ms. Clare Trachtman, Vice President Investor Relations at Baxter International Ms. Jackman you may begin.
Thanks, Candice good morning, and welcome to our second quarter 2019 earnings Conference call. Joining me today are Joe Meda, Baxter's, Chairman and Chief Executive Officer, and Jay The Carl Baxter's Chief Financial Officer.
On the call. This morning, we will be discussing Baxter's second quarter 2019 financial results and our updated financial outlook for full year 2090.
A supplemental presentation to complement this morning's discussion can be accessed on our website.
This presentation, along with related non-GAAP reconciliations can be accessed on bankers' external website in the investor section under events the news.
With that let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook, new product development business development and regulatory matters contain forward looking statements that involve risks and uncertainties and of course, our actual results could differ materially from our current expectations.
Please refer to today's press release, and our I think the filing 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 Bakken 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 is available on our website.
On the call. This morning, we will be discussing operational sales growth wouldnt adjust for the impact of foreign exchange and generic competition for cyclophosphamide in the U.S.
Now I'd like to turn the call over to Joe.
Good morning, and thank you for joining us we're pleased to share our second quarter results with you today and to discuss our updated expectations for 2019, I will begin with a review of our performance in the quarter and Jay will then provide more detail on the financials, we will wrap up with your winning.
Baxter maintain this positive trajectory in the second quarter of 2019, delivering sales growth of 4% on both a constant currency and operational basis on the bottom line adjusted earnings per share were 89 cents exceeding our expectations and up 16% year over year growth in the quarter was driven by top line sales performance operational efficiency initiatives, a lower tax rate and a reduced share count all six of our global business units contributed positively to constant currency sales growth powered in part by our revitalized innovation efforts on a constant currency basis global growth in the renal care continues to be driven by increasing base should volumes for our fears to Neil dialysis products as expected results in the quarter were negatively impacted due to the strategic exit of the U.S. new sensor.
Hemo dialysis bloodlines business.
Performance was also impacted by a recall and certain manufacturing challenges there one of our facilities that produces Robert go your dialyzers use for chemo dialysis.
This is creating a temporary supply constrained as we have been selectively slowing down production lines at this facility to address this situation. However, rubber clear production is now ramping up and we expect to return to healthier inventory levels over the next few months, we do expect to incur incremental costs in the second half of the year as we work to enhance our production capabilities at this facility.
I also wanted to take a moment to discuss the recent advancing American kidney health initiative announced by the White House earlier this month.
As proposed it would have a transformative impact on the treatment of end stage renal disease or Eas R&D in the US. This is part of an emerging trend taking shape in worldwide as payers clinicians and patients increasingly embrace home BD as a front line E. S. R&D treatment option based on key economic therapeutic in lifestyle benefits Baxter is the pioneer in global market leader in home PD and we fully support this initiative to broaden the adoption of home dialysis across the United States as noted in our release. This morning, we anticipate capital investments of $500 million to significantly increase our production capacity and meet new patient needs in line with the proposed so.
CMS models these investments will be scaled to align with the patient in market dynamics across the innovation curve increased demand would in turn help accelerate renal care growth and contribute positively to baxter's previously communicated financial estimates we are working to model the anticipated impacts and expect to be in a better position to provide additional information about what this initiative means for bag. So wants to roll this potentially finalized.
Later this year.
Moving on our medication delivery business returned to solid constant currency growth globally. We are now emerging from a challenging performance comparison due to spike in demand for large volume I abuse solutions in the first half of two any 18 growth. This quarter benefited from the continued uptake of our new infusion pumps spectrum Q in the US an evil acute in selected international markets and related disposables.
Increased sales for many banks flows into us in large volume Ivy solutions internationally also contributed to the growth in the quarter.
Mid single digit constant currency growth in our pharmaceuticals business was driven by increased demand for Baxter Hospital pharmacy compounding services. The contribution from recent launches of injectable pharmaceuticals, such as decks Matt.
And the Baxter amid a bad business. This is Trent helped offset the expected impact of generic competition in the us for brevity block and cyclophosphamide.
Baxter's clinical nutrition business delivered low single digit sales growth globally on a constant currency basis.
We're continuing to rebuild momentum here supporting part by the launch of new products, including all the mill and 12 higher protein formulation and minimal our novel fish oil base through both chambers container. We're also positioning for the US launch of cleaner Lippitt Baxter's proprietary olive oil base Lipitor motion later this year.
Advanced surgery delivered high teens growth at constant currency rates performance in the quarter benefited from competitive supply constraints, which resulted in incremental demand for both oil flow Seo and records wrong.
Finally, acute therapies posted high single digit constant currency growth fueled in part by the ongoing rollout of our previous Max next generation technology foresee RFP and therapeutic plasma exchange brings mix can be found in intensive care units in more than 20 countries across Europe and Asia Pacific.
Their plans to bring additional markets some board through 2020.
As all these highlights reflect were continuing to see baxter's renewed emphasis on innovation, gaining traction and delivering results across our businesses. There is a great promise and potential ahead fueled by our research and development pipeline is strong balance sheet and emerging opportunities.
Most importantly, our employees, who are inspired and empowered by our mission to save and sustained lives. Our transformation is on track and we remain absolutely focused on delivering sustainable top quartile performance in service of patients shareholders and the rest of our broad stakeholder base now pass it on to Jay for a closer look at our financials and outlook.
Thanks, Joe and good morning, everyone as Joe mentioned, our second quarter results reflect solid constant currency growth across each of our six business units and further reinforce confidence in our full year outlook.
I'll start by discussing our second quarter results before providing our updated financial outlook for 2019.
Beginning with the second quarter global sales of $2.8 billion were flat on a reported basis and increased 4% on both a constant currency and operational basis, reflecting strength across our portfolio.
On the bottom line adjusted earnings increased 16% to 89 cents per diluted share.
This exceeded our guidance of 80 to 82 cents per diluted share driven by topline performance ongoing operational efficiencies and a lower tax rate.
Now I'll walk you through performance by our geographic segments in global businesses no for this quarter constant currency sales growth is equal to operational sales growth for all businesses and regions segments, except for our pharmaceuticals business and the Americas region for which we will provide operational growth. In addition to constant currency growth.
Starting first with sales growth for our three geographic segments sales in the Americas grew 1% on a constant currency basis and 2% operationally.
Sales in EMEA grew 6% on a constant currency basis in sales in our Asia Pacific region advanced 9% on a constant currency basis.
Moving to performance by global businesses Global sales for renal care were $910 million advancing 3% on a constant currency basis.
Performance in the quarter was driven by high single digit growth in PD therapies globally, partially offsetting this growth was lower sales of select in center HD products.
Including the blood lines business exited earlier, this year, which negatively impacted sales in the quarter by approximately $14 million.
Renal care sales growth in the quarter was also impacted by the recall and temporary supply constraints associated with the Rev. A clear dialyzer the impact was less than $10 million in the quarter.
Sales and medication delivery of $689 million grew 4% on a constant currency basis, representing a return to solid and balanced growth in both the us and internationally.
Performance in the quarter benefited from strength in infusion systems. Following the launches of spectrum, I Q and Eva Q International growth of large volume Ivy solutions, particularly in Latin America, and the continued momentum for many bag plus.
We are pleased with the sequential and year over year growth acceleration in our medication delivery business.
Pharmaceutical sales were $539 million, increasing 4% constant currency and 7% operationally strong international sales contributed to performance in the quarter driven by the increased demand for our hospital pharmacy compounding services generic injectables, including vaster amount upon and anesthesia products.
This growth was partially offset by declines in our us business, which reflected approximately $40 million of lower us sales of Braava block and cyclo as compared to the prior year period.
Sales in the US were also impacted by lower sales of anesthesia and critical care products in the quarter.
Moving to nutrition total sales were $215 million up 2% on a constant currency basis and reflects sequential improvement in both the us and internationally.
We expect sales to continue to ramp throughout 2019, as we work to rebuild our us business and capitalize on new product launches.
Sales of $232 million in advanced surgery increased 17% on a constant currency basis strong global growth benefited from our ability to address competitive supply constraints in the hemostat market in the USA. These supply dynamics contributed approximately 12 percentage points to growth in the quarter.
Sales in our acute therapies business were $133 million representing growth of 8% on a constant currency basis.
Finally sales in our other category, which primarily includes our contract manufacturing services were $122 million a decrease of 9% on a constant currency basis, reflecting a challenging comparison to the prior year period.
Moving through the rest of the PNM, our adjusted gross margin of 44.5% represent a 100 basis point decline as compared to the prior year period as benefits from our manufacturing improvements and portfolio initiatives were more than offset by lower us sales of brevity block and cyclo and a less favorable product mix.
In addition, gross margin was negatively impacted by incremental expenses related to enhancing manufacturing capabilities at our dialyzer facility.
Adjusted EBITDA totaled $610 million decreasing 5% on a reported basis and 1% on a constant currency basis, reflecting the positive contributions from our targeted initiatives to improve operational efficiency.
We continue to strategically invest in sales and marketing initiatives, while maintaining our focus on driving increased effectiveness in general and administrative expenses.
Adjusted R&D spend in the quarter of $141 million decreased 14% on a reported basis and 10% on a constant currency basis versus the prior year period.
We continue to see benefit from our efforts to enhance our processes and optimize our R&D organization, while prioritizing strategic investment in our innovation pipeline.
Other income totaled $28 million in the quarter, driven by pension benefits and foreign exchange gains on balance sheet positions. The adjusted tax rate was 10.8% for the quarter favorable to our expectations, primarily driven by a benefit resulting from a favorable tax ruling along with stock compensation deductions.
Of 80 to 82 cents per share.
Within the second quarter, we repurchased approximately $123 million for 2 million shares of Baxter's stock, which was partially offset by option related dilution within the quarter.
Let me conclude my comments this morning by providing our guidance for the full year 2019, and the third quarter for the full year 2019, we now expect reported growth of 1% to 2% globally and approximately 4% sales growth on both a constant currency and operational basis.
Moving to full year guidance by business on a constant currency basis, except where otherwise noted.
In renal care, we now expect growth of approximately 2% strong growth for our PD therapies globally is expected to be partially offset by lower sales in in center HD due to strategic exits in our us wasnt bloodlines business, which negatively impacted renal care sales in 2019 by approximately $55 million. In addition, the impact of supply disruption from the rebel clear dialyzer is expected to negatively impact full year sales by approximately $20 million.
We expect to return to normal inventory level by the end of the year medication delivery. We continue to expect sales to increase approximately 6% with seeing sequential improvement in the second half of the year for our pharmaceuticals business. We now expect an increase of low single digits on a constant currency basis US cyclo sales are now expected to total approximately $125 million versus our previous assumption of $105 million adjusting for use cyclo operational growth is now expected to increase mid single digits. As a reminder for ever bought sales and are included in operational growth and are expected to decline approximately $75 million in 2019.
Moving to clinical nutrition, we continue to expect sales growth of approximately 3%.
For the acute therapies business, we continue to expect growth of approximately 7% to 8%.
Finally in our other business, we continue to expect sales to decline low to mid single digits.
Moving down the PNM, we continue to anticipate adjusted operating margin expansion of 80 to 100 basis points with his additional savings in operational expenses being offset by the gross margin impact of mitigation efforts to return our dialyzer manufacturing plant to full capacity by year end.
We continue to expect net interest expense of approximately $65 million to $70 million and we now expect adjusted other income of approximately $90 million for 2019.
For the year, we now expect an average adjusted tax rate of approximately 16%, reflecting the favorability from Q2.
Finally for the year, we continue to expect to generate operating cash flow of $2.3 billion and free cash flow of $1.6 billion.
Specific to the third quarter of 2019, we expect sales growth of 3% to 4% on a reported basis and approximately 5% on both a constant and an operational basis.
And we expect adjusted earnings excluding special items of 82 to 84 cents per diluted share.
With that we can now open the call to QNX.
Thank you we will now begin the question and answer session.
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Oh wait from moment, while the list has been compiled.
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Good morning.
Joe I thought your comments on SRT are pretty clear. So so maybe I'll focus on medication delivery in a quick one for Jay So Joe and made delivery. Obviously you beat our number there was a pretty significant momentum improvement you are maintaining guidance can you just talk about how you're feeling about market stability in new customer new account penetration and Frank at the pump business as we head into the second half of the year and then a quick one for Jay.
The business.
As we had predicted that had a really tough comp in the first quarter, but we had confidence in our ability to secure current customers that would have been with us for many years. So we have re sign all GPO agreements and for the most bloggers sign a great deal of IDN agreements as well the markets is stable.
We found opportunities to gain new customers not only in the acute care market, but also in the in the OEM word or contract manufacturing business that is important to us help us in our facilities, but also.
Improve the visibility of backs of product line across all all sets of care when it comes to.
Pumps, we have a very healthy pipeline.
There's always pluses and minuses, but I would say at the moment the pluses are winning.
Free Henley.
The opportunities that we have but I guided the new.
Management group that we have put into us has done an extraordinary job in understanding the pipeline in the creation of value our spectrum.
Version nine is a wonderful pump is a really good device with the number one best in class drug library and that has been very important to us in terms of having this product.
Showcased.
For our.
Customers so the business as we've we've we've predicted.
Is healthy we're going to continue to.
Make progress.
And this continues to be a source of investment for us as our new fund platform is coming along extremely well when we're very comfortable with.
The loan their launch timeline for it.
Okay, very clear and then just thinking about a couple of items in the guidance for the back half of the year of inflow seal was a benefit to this particular quarter I'm sort of curious what your assumptions for for the back half of the year for flow seal and then with mix Redland. Let me just talk briefly about the size of the opportunity there for the company I think we've talked about this product launch for a while how big is that opportunity and what are the assumptions into the into the back half. Thanks. So much short with respect to our biosurgery business. Yes, we did comment on some upside that we experienced in the second quarter.
We don't like to forecast competitor outages. So we don't maintain long term assumptions on that however, if we have a very clear visibility to a short term situation emerging we will reflect that in our guidance. So as we think about advanced surgery theres roughly two months of upside that we're counting on in our numbers as we sit here today. So we'll expect that to continue for a couple of month. If it continues further than that of course, we will be available to supply our customers, but we're not counting on anything more than that we've talked previously about how exciting the insulin mix Redmond launch is it to its own new presentation of workforce product for hospitals, absolutely thrilled the size of the market is significant it's over $100 million market in hospitals in the U.S. So this represents a very viable long term opportunity for us as it relates to this year's guidance, we have single digit millions built in basically nothing big.
It into our guidance at this point in large part we want to be cautious in terms of launch timing preparing and having adequate supply available. When we're when we actually go to market. So no meaningful impact this year, but stay tuned as we give guidance for 2020. This will have a more meaningful impact in those numbers.
Thanks, so much nice quarter.
Thank you.
Thank you and our next question comes from Robbie Marcus from Jpmorgan. Your line is now open.
Okay, great and again, congrats on the nice quarter here.
Hey, two questions for you.
First maybe we could start on the PNM outperformance I think it's really impressive how you were able to offset some of the lower gross margin products strength in the quarter with lower R&D NSG M&A, but.
With with R&D, taking such a hit industry in a coming down so rapidly maybe you could just give us.
Some insight into where that's coming from is it more general efficiency and overhead are you holding back on some projects for the future.
Sure.
Just just with respect to gross margin to your comment gross margin did come in a little bit below our expectations really there were just a few drivers of that some of it related to business mix. As you pointed out we had very strong performance in our drug compounding business, but that carries a much lower margin than the corporate average now interestingly enough about this business. It is a very high return on investment capital business for us, but the gross margin is lower so the fact that we over achieved that business cost us about 30 basis points to our gross margin and then addressing some of the.
The dialyzer manufacturing issues Thats, roughly a 20 basis point impact in the quarter. So those those were two of the more prominent items impacting gross margin for us of course, there are always other bits and bytes as we look but we were able to offset that with continued focus on spending and so on the M&A side. We are very focused on improving the efficiency of our back office operations, along with judiciously spending every single dollar. So we've talked in the past about the zero based spending approach that we have here disciplined around all spending categories, along with really thinking creatively about how we organize the back office that continues to pay dividends today pay dividends in the quarter you saw a decline of SG nay of 1% and again. This is on the back of three or four years of continued improvements in this particular area. So a great performance on the SDMA line R&D is a little bit there.
From some of this relates to timing some of it relates to the fact that we've been able to get after some of the infrastructure costs in R&D faster than accelerations in certain areas and new product spending and so we will see some R&D tick up in the second half of the year. What I will tell you is our overarching principle on R&D is we want to invest to grow and we are funding programs for success, we're not holding back on any dollars and I think the press release Joe's comments about the spirit of innovation at the company is evidence of that philosophy in action.
Having said that we did see some savings in this particular area. So stay tune to the back half Joe you want to add to that is sure.
Rob you did the whole thing about R&D it was for us to create efficiency in the R&D line and the spending has not been very different than if you go back to 2016 is just a mix where are we spending in how we're spending the money. So we abandon large programs that had absolutely.
No return on investment.
And we investing significant opportunities in areas on medication delivery.
Acute renal care.
With our point of care NPD as well as.
Some very quick turn around new products in advanced surgery.
Some in in some in the nutrition area. So we should think about.
We also have significant arbitrage and labor.
Because we created centers of excellence across the goal, but also now we we have a very large center in Bangalore, India would never had so it is well managed accrual our heads of R&D led by our BOP hour by hour Chembio leaders and some month run much entre who is still has over arching responsibility for the function.
Have been very successful in reallocation of costs I want to just.
Tell our investors there were very focus in in in innovation and dead fluctuation in expanding is nothing other than being efficient and timings of fall from the investments nothing to do with us going and tightening the belt in R&D programs.
Very clear and if I could sneak one more in just on capital deployment not surprised.
That we haven't seen any M&A here with Medtech valuations, where they are but how are you balancing your your capital allocation plans here with Baxter share price set at highs and med Tech valuations, where they are thanks.
Robbie has been a very very busy first half analyzing opportunities.
Well the way we allocate capital.
Inorganically is not very different than how we allocate organically.
We do have.
Focus in the area of monitoring in the areas of.
Acute renal care and critical care.
We also are very focused in looking at individual molecules, so what I'm going to say to our investors is.
Think about Baxter, adding value with a small tuck ins.
As we look for the right opportunity and valuation for a larger deal.
It is very very rich right now the market is frothy and we are not going to compromise on the returns.
All of this acquisitions every acquisition has largely to get there.
Harris risk is enormous and we all understand that we all take risk.
But there is a point where the cost of invested in debt assets and that price in valuations are so out of whack that you cannot make an internal rate of return.
Off of low single digits. It doesn't work it doesn't work and then anything goes wrong. The FDA comes about Intelsat a product that you have has a compound that is made into the product that doesn't work.
Now your whole valuation of debt target is under scrutiny, you've got to be very careful with is and understand your targets I think Baxter you surprising to our investors how much opportunity. There was in there is and there will be in our base businesses in how we have the opportunity to innovate and continue to maintain number one position in most of our businesses in watches in the pump business watches there because we're coming out with a great platform of bumps and monitoring devices. So the thing is let's I'd add two dose inorganically as cans, let's not think about all the time this huge capital investment in that location into into assets that overly expensive debt is something else. We will continue to acquire our shares prudently while we see the prices are there because we're not going to sit on cash as I said to you of cash is now.
Going to burn a hole in our pockets.
Thank you.
Thank you and our next question comes from Bob Hopkins from Bank of America. Your line is now open.
Well, thank you and good morning.
Morning.
Wanted to start with a big picture question.
Joe I mean, obviously, you put up a very solid Q2.
It sounds like the pipeline is making good progress.
Obviously also during the quarter you got some nice new sort of structural tailwinds in some of your businesses.
He was you kind of think about all of these factors and put them together today sort of suggests some upward pressure to your long range plan from a revenue growth perspective or are they just nice offset to other headwinds just trying to get a sense for the kids sort of cumulative effect of all these things that are going on right now.
Well.
If you think about our.
Our long range plan.
No when you give a five year plan youre always going to have puts and takes and how you're going to make things happen. Okay. You have the best intentions in the world to have the best plants in the world not everything works the same way on the positive side of negative sides. So for instance, we didn't plan to have our our insulin product Premixed approved as early as we did with plan after to have that approval towards the end of the year, that's a plus for us right, but all those things work the other way as well so when I look at that.
The major forces that we have going on right now you have a tremendous momentum in our prepared for new dialysis business. So you know just just in terms of.
Patient growth, we are experiencing the healthy growth in terms of patient.
Without even having the executive order from the White house coming in and becoming a rule and that will be there will be transformational for the renal business, but just that we experienced no high single digit growth in patients MPD.
So that has an effect to our blend the offsets.
Many many negatives that can appear in the future. So I feel at this moment that between everything that is happening in the market on in the market and the things that are happening back. So that we can sit here and say what we told you last year, we reconfirmed today okay.
Okay that sounds that sounds fair.
But I'm just maybe as a second question I'll just.
Ask a follow up to that.
Because it is.
I understand the philosophy.
But it does seem like there's.
Your philosophy in providing your guidance, but it does seem like.
Since you gave that guidance most of the incremental news flow that you've been getting to your business is positives I mean, I just wanted make sure I'm not missing anything when we think long term are there.
Other negatives that have popped up that would make you hesitant on this issue relative to some of these very.
Very incrementally positive pieces of news that you've gotten over the course of the last couple of months.
Well remember the last time, we gave guidance.
The dynamic in the medication delivery business shifted quite a bit on and we've been able to reconfirm our long term expectations. Despite that shift as a result of strength in many different areas in the portfolio and general buoyancy of the new product pipeline, along with great product progress in areas like PD and successful adoption. There. So look I think it's it's too early to start changing LR piece at this point, we'll consider doing that at some point in the future but on balance we were very pleased with the quarter. We were pleased with the signs of operational strength along with some of the longer term. Good pieces of news that we've been able to either de risk or add to the story.
Great. Thanks very much.
Thank you and your next question comes from Chilean wines from BMO capital markets. Your line is now open.
Good morning, everybody and very nice quarter.
I want to spend a couple of more minutes on the renal business and this is sort of a two part question. The first part is.
Then sort of hurdling a headwind as you.
Exited the HDD business the in center HD business at what stage does that.
Annualized and we don't see that anymore and then the second part is your 500 million investment can you just kind of parse out a little bit what you think the benefit will be and then I would assume there are some level of pressure on gross margins. How we can think about that over time. Thank you.
Sure just maybe I'll make a comment on the bottom lines and then Joe Joe maybe you can comment on the excitement around the investment.
With respect to the bloodline.
That's just one component of the HDD business in the US we do have other ads products that we sell in the us but that particular, one was a product that we distributed and it was a very low margin business. It was a $55 million impact roughly for this year.
And by the end of this year will be done and it will be.
Ceased to be a headwind the end of this year.
As it relates to the investment Joe you want to make some comments about that sure.
We have to the best of our ability to sculpt a project to.
Based on the interpretation of this equity, Florida that we have okay and that is.
Is not final rule, yet and that will be comments will be.
Completing about 50 days.
And after that the HHS has time to put the ruling place. So based on what we know and interpreted from consecutive quarter. We have a three phase investment here, we have an investment where we can supply the market with a growth that is projected.
In the beginning because it's the progressive remember does deserve dresses desks mark is about 50% of the overall overall search market and debt from debt, 50%. There is a ramp there is a period where clinics are given an opportunity to two.
Change there.
Patterns between clinic.
Hemo dialysis and home therapy.
So based on that we can accommodate with some supply chain that we did extremely well about a year and a half a goal by relocating and we are registering products from all over the America. So we can do with that.
Then there is a second phase, where we do a small investment.
More modest in the 500, but part of the 500 that give us incremental capacity all the way down to starting fast into a new plant.
The investment it will be.
Depends upon a time, sometimes concurrently done but.
The effect of the throughput will be felt later in later years remember this is a seven year program. So we feel as a company our responsibility.
Moral responsibility to our customers and more sort of the patients is to be there for this opportunity. So we're going to make everything possible not.
Be a problem during the ramp up that is so aggressively laid out India's active order.
Thank you.
Thanks Joanne.
Thank you and our next question comes from Vijay Kumar from Evercore ISI. Your line is now open.
Congrats on a nice beat here.
Joe and Jane.
Jamie maybe on that that TQ S.
If I just look at the optics right the last few years.
EPS has grown sequentially revenues are accelerating in the back half.
Sequentially I'm not sure why why EPS would be down because it looks like the dialyzer impact on gross margins was flat.
Q.
So maybe can you just walk through that EPS math, and maybe some timing element on expenses, which which could be impacting TQ.
Sure.
As we look at the Q2 to Q3 story there are a couple of factors to keep in mind.
One is the dialyzers impacted us about a penny in Q2.
But as we move to Q3 that will ramp up a little bit somewhere between two and three cents.
Of impact the second prominent driver relates to tax rate will see a really substantial uptake intact from Q2 to Q3, that's somewhere around eight or nine cents. So it really does mask some of the strong operational performance.
Now I have to say hats off to the tax team for great work in terms of optimizing the tax rate and allowing us to capitalize on opportunities that emerge and really think about how we organize our operations effectively in a tax efficient manner. So we saw a benefit in Q1 and Q2, but we don't expect to see that in Q3 and Q4 to the same extent so the tax rate in the third and fourth quarter picks up to roughly 19 ish percent from the 12 ish percent that we've had year to date. So that's really the those are some of the primary drivers will see continued operational strength.
That helps support and offset those items, but that really is the big those are the big drivers as we move from Q2 to Q3 did that's really helpful. Gen. One quick.
On on pharma.
Brady was about 700 800 basis points impact to revenue first half. Despite that you guys did a phenomenal in pharma and as those headwinds go away in the back half.
Just curious why.
Perhaps pharma couldn't come in better.
As we look at the Pharmaceuticals business to your point, we've had a very solid performance in the first half of the year and a lot of that was driven by great performance in our compounding business outside the US we do expect that yet and that business grew in the first half of the year in twentys percent very significant.
As we as we move to Q3 and Q4, we don't expect to see that level of accelerated performance in the back half. So that really is the primary driver that takes the farmer growth rate down, but I will tell you. We're very pleased with the performance in this area. It's been a great source of over achievement for us in steady growth.
And with things like mix Redland on the horizon, which will benefit future years, along with some of the Premixed Injectables and declares portfolio, which has been selling well here in the US overall this has been a very solid performer for us.
Thank you guys.
Thanks Vijay.
And our next question comes from Laurence Biegelsen of Wells Fargo. Your line is now open.
Good morning, Thanks for taking the questions just one on infusion system and one on Asia Pacific.
So Joe one of your competitors have had some issues.
With their pump and infusion sets do you see an opportunity for Baxter to take some share here.
With a new pump platform coming out in 2020, our customers extending the selling cycle to wait for the new platform and I had one follow up.
Larry.
The opportunity is there we are having.
Our mostly mostly related to the strength of our.
Version nine of our pump.
Its offer a bit.
Operability.
Its drug library.
So we have customers will have being our customers for a long time and the stock for them to renew the like of the life innovation and evolution of the product and they indeed just buy it.
There's always there's always opportunity.
When.
There is.
There is a problem with a competitor in the market. If deb problem is perceived to be more permanent and temporary so we need to think about as we look at our.
Advanced surgery business.
That is going to be a probably a temporary gain into the comparative comes back on the market and and because our product is so good flow through is the best product in the market.
There is opportunity to retain accounts right.
So the same applies for the infusion pumps depends upon how how permanent health temporary issues that competitors are having.
But I think the success that we've been having is first of all have very good sales effort.
New team completely focused on pipeline second is the ability to demonstrate the technical superiority of our drug library compared to the competitors.
To your point on the new pump platform, we know the customers who need the product now they will take the product now I just want to let you know that Lv B, which is a large volume for enteral pump, which is what we have today remember we don't have any other pump and thats, what we have today.
The guts of the new pump.
All our different are more modern and and will be part of suncoke bump, but but.
The workflow to drug library all the features are the same.
Meaning you have a new product with the nominal operability.
But also has a great pumping mechanism into new pump platform, we have a great from mechanism today in version nine.
In the off and the upper ability is the same so the customers have a lot to gain when bextra launches. The other pumps, which are part of the same family with the same interoperability so be a new platform on the market that has that capability and I think that customers can see that going forward. If they need a bump now there is nothing that they're losing on this current version versus the new platform for the large bought inferential, but what we are bringing into the market is not only syringe, which.
Patient patient.
Controlled analgesia PC eight as well as in 12 months from the launch of the first one is ambulatory. So I hope this answers to answer your question and and put our investments that easy that that has no business being postponed because we don't have to NPP today.
Very helpful. Joe just lastly.
Asia Pacific has been very strong.
What's driving that and how sustainable is that thanks for taking the questions.
Great. We're really pleased with the performance in Asia Pacific region, 9% growth coming across with really strength across the board we've grown accustomed to solid performance coming from China in the quarter seven plus percent growth from that particular business, but what perhaps is has been more surprising based on historical commentary from Baxter is the fact that we had tremendous performance in Japan high single digit growth coming from our Japanese business.
And this this it's really a combination of factors in play and looking at the other area is a solid performance in southeast Asia, We've had a great business in Australia, New Zealand for the for the math, we've been there for many many years double digit growth there a lot of that benefiting from compounding, but what I will tell you is this is a combination of commercial execution, along with the benefits of new product launches, we've talked quite a bit about the impact of can do yet we are seeing continued momentum in patient gains in Japan and this is that's a great driver for us, but I think across the region. There's examples of innovation, but like I say commercial excellence that have really contributed to this performance on a full year basis. We would expect this to come down a little bit from a growth rate standpoint, but not not materially. So overall great performance from the team in Asia.
Thank you very much.
Thank you.
Next question comes from Kristen Stewart from Barclays. Your line is now open.
Hi, Thanks, so much for the question congrats on a good quarter.
I was wondering if you could just provide us with an update on the pharmaceutical business and some of that.
The legacy Claris manufacturing.
FDA warning letters, how you're feeling about that how that there may be opportunities to de risk that thanks.
Hi, good morning.
Our pharmaceutical business is started are stretched as it takes shape. It took a little bit we have built a second to none formulation team between India and northern Illinois.
Very talented visit fee.
Our partnership to the to launch the insulin product that's Mad and does is just the beginning are both very long pipeline.
When it comes to Claris, our what we call Backstrom antibody, we are doing everything that we have spoken to the FDA and have told the ft were going to do.
Case up to the FDA to lift.
Or to expect us again and provide us with their feedback.
Okay, but nevertheless, we are de risking any claris opportunity for the future.
By having ultimate supplies for almost everything that we make there.
And also for the future molecules we are.
The risk in debt by going to see a most instead in having claris, possibly as a backup in the future.
There's one molecule don't want to read speak about the name of the molecule, but their molecule we're developing in a med abad, but also we're going to have a pilot operation in our northern Illinois facilities. So we can have possibly a back on this in more of a longer term. So we're doing not not only everything that we've told the FDA were going to do to remediate. The warning letter there was given.
To date that we bought the company, but also we are doing everything we can to de risk any future revenue stream.
Now the performance of the business is doing very well is double digit growth that business is resilient is doing well and is not only us but he is also in Europe .
That is too so.
Does this state of our pharmaceutical business.
And just as a follow up do you still anticipate that that you may be able to move.
Beyond the warning letter issues.
Next year I think that's what you've said before in and do some of the actions that you're taking.
What will be kind of a piano impact them back to that put a little bit more pressure on.
On the margin side.
Thanks.
We we have done a couple of things we accelerated the development.
Pulling some molecules from the future, though we think in any case, we will be able to offset any negative they'll come out of a potential.
And I cannot actually rate likely or unlikely because im not the FDA. So right now our plans call for 2021, if it happens if we get the clearance and can commercialize products to a new on file from the plant will be great.
We will follow our plan if data has any postponement for whatever reason, we have backup plans that will probably not alter the trajectory of that business.
So there is upside there is upside if that happens if we are successful when it went up.
Kevin we have time for one more question.
Thank you and our final question comes from the line of Matt Taylor from FBR. Your line is now open.
Hey, good morning, Thank you for taking the question.
I wanted to follow up on a couple of things in the renal business. So I guess first.
Joe or Jay you are talking about the investments that you're planning according to the model that could come out.
I guess I was wondering if you could share with us some insight into the plans in terms of the scale that you are currently planning for meeting if you do invest that 500 million could you help us understand what number of additional patients are dollars that what would allow you to address and just give us a little bit more of the roadmap.
Matt you think about this if you read this active order is the significant amount of interpretations and things to bear it in that's why they have the comment and Thats why they rule is not there yet.
But think about this today.
We are 12% penetrated in PD Indian that understates remember this is a homecare has three pillars to it two of them are interconnected which is the transplantation.
Process and number of available kidneys to be transplant with a lot of incentives in note all no in terms of healthcare insurance for donors and things like that.
All the way to moving from the clinic to the whole two different modalities home hemo dialysis, MPD batches and leader with close to 70% market share NPD on a global basis in us around the same number.
Okay.
So.
He was 12% in the us and there is a 50% population that is being target for demonstration.
If you look at it targets. So the government is not inconceivable to think about double patients just in that period of demonstration within this seven years of the demonstration period.
So it tells you that you would double the incidence patients the prevalent but the incident patients going forward.
That's how we have.
Some of our analysis, but our plans are flexible. So we can flex up did the investment if we need to or flex down the investment because its progressive dose phase one with no investment phase two with some investment phase three which is to build a new plant all of them. We will launch various very similarly time, because they have different lead times for execution, but those are designed to support the program as it was designed by as I said to you Fidus rule comes out in November .
We will have the ability to adjust our plans, but right now we're winning sure.
The government knows I'm faster knows our patients and customers know that we are committed to the program and it will do everything possible to help.
Patients get the therapy that they deserve.
And and and for US as a company to grow in this sector, which is so important and it has been so under estimated and underpenetrated for so many years not only in the us but across the globe.
Thank you if I could just sneak in one follow up you mentioned that lot of the data that you presented on their Nova.
And I was wondering if you had any updated thoughts about getting some differential reimbursement for that product.
Well, we are we are here waiting for a decision from actually not from HHS, but probably from between the HHS and the scoring process that happens it budget office. So we know as much as you do.
But we are.
Excited about that possibility and we have several different avenues to get there and over in the US. Most importantly, we have agreed with the FDA in the normal process and.
Yes.
This challenge that we have at our plant in the us will be timely resolved and plant.
One of the issues that we had at Atlanta, we tried to ramp up the plant too fast because our dialyzers volume went up.
Between two different forecasts and and what we tried to do with the ramp up we encounter some issues because that plant was underutilized at that moment, but with this no not all bad fuel few things good come out a bit and one of them is that we are going to be fully staffed and equipped our all other lines in our plant in opal like us.
To be able to have.
The ability to produce during normal when you needed.
Thank you very much.
Thanks, Matt.
Thank you.
Includes our question and answer session, ladies and gentlemen. This concludes today's conference with Baxter International. Thank you all for participating everyone have a great day.