Baxter at Barclays Healthcare Conference: Strategic Focus on Growth

On Wednesday, 12 March 2025, Baxter International Inc. (NYSE: BAX) presented its strategic vision at the Barclays 27th Annual Global Healthcare Conference. The company outlined its plans following the separation from its kidney care business, Vantiv, aiming to streamline operations and focus on higher-return projects. While Baxter highlighted its growth ambitions, it also acknowledged challenges such as stranded costs and the need to meet leverage targets.

Key Takeaways

• Baxter is focusing on high-return projects and simplifying operations post-Vantiv separation.
• The company aims for 4% to 5% growth, with a 5% to 6% target for its pharmaceutical business in 2025.
• Baxter plans to reduce its leverage ratio to three times or less by year-end.
• The company is committed to consistent product launches and increasing R&D investment.
• Stranded costs of $240 million from the separation are expected to be fully addressed by 2027.

Financial Results

• Return on Invested Capital (ROIC): Vantiv accounted for 50% of Baxter’s total ROIC, underscoring the potential benefits of focusing on higher-return projects.
• Growth Target: Baxter aims for a growth rate of 4% to 5%, with the pharmaceutical sector expecting 5% to 6% growth in 2025.
• Debt & Leverage: The company is focused on reducing its leverage ratio to three times or less by the end of the year.
• Stranded Costs: Baxter faces $240 million in stranded costs, with $125 million offset by TSA income in 2025, resulting in a 40 basis points impact.

Operational Updates

• Distribution Network: The separation from Vantiv allows for a potential reduction of distribution centers by a third, simplifying the network.
• Product Launches: Baxter plans for double-digit product launches annually in the pharmaceutical sector, emphasizing customer-centric innovation.
• Connected Care: The integration of digital solutions aims to simplify hospital operations and improve patient care.
• R&D Investment: An increase in R&D spending demonstrates Baxter’s commitment to innovation, with spending over 5% when excluding MSA revenue.

Future Outlook

• Acquisitions: Baxter will focus on fold-in, tuck-in acquisitions in areas such as pharmaceutical injectables, ambulatory pump space, and advanced surgery.
• Capital Allocation: The company remains committed to its dividend and plans to reestablish a buyback program after achieving its leverage target.
• Pharmaceuticals: Continued double-digit product rollouts are expected to maintain and expand the margin base.
• Stranded Costs: Baxter expects to resolve all stranded costs by the end of 2027.

Q&A Highlights

• Generic Injectables Strategy: Baxter differentiates itself with proprietary packaging technology for ready-to-use formats in the generic injectables market.
• Acquisition Timing: Strategic activity is anticipated to increase towards the end of the year and into the next, following the achievement of the leverage target.
• Growth Drivers: The new structure positions Baxter to deliver on margin commitments with ongoing investment in R&D and product launches.

For further details, readers are encouraged to refer to the full transcript of the conference call.

Full transcript - Barclays 27th Annual Global Healthcare Conference:

Unidentified speaker, Host: Thanks for joining us.

Unidentified speaker: Thanks for having us.

Unidentified speaker, Host: So I wanted to maybe start with there’s a bunch of topics folks have been asking about. Obviously, you have a CEO search underway. I will just say there’s a concern over hospital budgets. There’s a bunch of things that I don’t know if those are the best things to spend our time on, but we’ll try to come back to them if we have time. And by all means, if anyone has a question, please raise your hand and we’ll get a mic out to you.

But I thought given this kind of turning the page or new chapter feeling that seems to be underway at Baxter, It might be helpful to sort of touch on what some of the limitations were, what some of the challenges were that and I’m thinking of things like I don’t know there’s a whole bunch of things I’ll let you like things like pricing, things like distribution, things like shipping, things like flexibility in the P and L or investment in R and D. What were some of those challenges? Sorry. I think he’s just been following me. But what were some of those things that were before the sale of Vento maybe a little bit more of a constraint?

Sure. And how are they people might associate with old Baxter? And how are they changing here as you begin this new year?

Unidentified speaker: Absolutely. So I’ll start with a couple of things that I think are part of the new Baxter and then I’ll sort of tie that back to this a little bit. I think one of the things that was a key strategic reason, the separation and one of the benefits of this trust is when I’m going to start with capital allocation, okay? The kidney business was about 50% of the return on invested capital of the Baxter as a whole. And so it’s very capital intensive.

And so one of the biggest benefits that we start with is our ability to actually make targeted investments on those projects that are generating higher returns and focus really on accelerating growth and obviously ultimately margin expansion. So So our ability to allocate capital in a way that is more efficient and effective for us is really a key start.

Unidentified speaker, Host: And just before you try to interrupt, but when you say a 50%, fifty %, five point zero %?

Unidentified speaker: So the ROIC for Vantiv was 50% of total Baxter. Okay. So it’s significantly less or half of total Baxter

Unidentified speaker, Host: out of that sand. Got it. Okay. Right. The level of returns on an ROI pay basis.

Claire: We’re half, yes.

Unidentified speaker, Host: We’re half, right, which is not far off of like just if we say op margins, right? Op margins were significantly below that number that

Unidentified speaker: we pay. They were. And so again, this allows us to focus and concentrate our investment dollars and higher return projects. The second thing I would say is from an operational simplicity perspective, and again, I’m never going to go all the way to simple for us yet. But what I would tell you is the exit of Vantiv allows for us from the vertical segments that we have today to have a lot cleaner view from end to end where we’re not integrated or we’re not intertwined if you will with the kidney business.

So our segments have a much cleaner operational execution perspective that is again that allows them to focus very much on the end to end in each one of the segments. So operational simplicity and ability to consistently execute is another part. And I’ll give you an example of that. You mentioned distribution for example. We one of the things as we work through this disentanglement is our distribution network complexity significantly reduces over time with the exit of Vantiv.

We had kind of I would say close to 50 distribution centers in The United States with Bantam. And the reason for that is because a lot of that business was home delivery. So there was a certainly a very different model if you will and a different density of distribution warehouses that was needed. Now that that has been again sold, we have the ability to really refine our network. And again, I don’t have an exact number there, but maybe you need a third of the centers that you needed prior to that, which not only allows for the simplicity of less roofs, but it also allows just to better manage our inventories in terms of the way it moves throughout our system.

So that’s just an example of a couple of things again from just from an operational perspective. And so I think what that translates to is a company that is more focused again and more able to consistently deliver again new product introductions through innovation to consistently deliver our growth targets, consistently execute on our targets that our ability to not only grow, but over time expand our margins as well. And so I think that’s maybe the kind of in a nutshell what I see as the opportunity now post separation.

Unidentified speaker, Host: Okay. And then there were some things that may not necessarily be directly associated with the separation, but they were associated with the structure of the business, contracts in the business, inflationary periods that affected back through the last several years, the pandemic, which are kind of now different. And so one of the things that comes to mind is pricing contracts. That was one thing where you were kind of unable to move on those. Maybe talk a little bit about how that changed?

Sure.

Unidentified speaker: Yes. I think one of the biggest things that’s different today in terms of most of you realize we negotiated two out of our three large GPO contracts. And some of the things that are different there was you referred to some of the flexibility around being able to pass along input costs in a different way than we had in the past. The previous contracts have been in fairness have actually been negotiated at a time when inflation was at a much more modest level. And so the CPI increases on a year over year basis were fixed and not necessarily very large.

And so during the time period post COVID, we end up really holding the bag, so to speak, of a lot of costs that came through. The new contracts were negotiated in a way that actually had a lot more flexibility in terms of passing along input costs. Again, that’s I think another example of sort of what’s a new Baxter. I think the other thing I would just say though too is really this focus on product launches. Again, there is about a there is a time period through COVID through some of the supply chain challenges where we had not rolled out as a company as a substantial number of products and that focus shifted towards other things that were somewhat fighting fires and everything that was going on.

I think where you see us today is in a place where again we’re focused on what we refer to as customer centric innovation that basically says we’re not innovating for science project reasons, but for the purpose of how do we drive innovation that really matters to our customers. And again the introduction of the Noble Pump is a perfect example of that where we have a product now that has advanced features that drive simplicity that can talk to, if you will, connect with other devices in our own ecosystem. That’s a that launch has gone extremely well and is an excellent example of that. And so part of the new Baxter also is a company that is much more consistently driving product launches into the marketplace. And I think that’s another key element.

Unidentified speaker, Host: Okay. And then sort of connected care sort of digital products and assets for lack of a better word. Things like the new Novum software backbone, but also things like Bolt. So, I think this was this had been since the contemplation of the Hill Rom deal and before kind of this like we want to lean into connected care. We have these relationships with hospitals.

We understand the problems they’re trying to solve. Right. We think we can bring the technology solutions to solve them and make them more efficient. Maybe talk a little bit about how those are either product launches are underway, what we can expect to see in terms of where does that affect your growth model and what if anything you can talk about those kinds of products over the next six months, twelve months, eighteen months? Sure.

Unidentified speaker: So maybe what I’ll do, I’ll start with just generally product launches across our business and I’ll certainly touch on the connected element. I think again back to the product launch clearly Novum being a Q1 MPT, But pharma also in our pharmaceutical business, we’ve talked about the fact that double digit numbers of product launches here is a key target. We achieved that in 2024. We’re looking to achieve that in 2025 and beyond that. And these are products that are differentiated products in the injectable space.

So something that is again driving margin accretion as well as growth opportunities. And as you’ve seen in our pharma business, we had a strong year last year. We guided to 5% to 6% growth again this year in pharma. And again, certainly an element of that is the product launches that we have had and will be having here in 2025 and then obviously beyond that. So that’s certainly a key focus.

On the HST side, and I would just say in general, again, I look at connected care as it’s not a strategy in and of itself, but what is it’s a key focus of the products that we have that fit into a connected ecosystem. So the way that you described it is to make life easier for hospitals who have staffing issues, we’re trying to manage more patients with less staff. And so there’s an element of this that when we roll products out in HST and others that really is incorporates the connectedness into it. And so products that we have coming out in HST certainly have an element of that. We’ve got a number of them coming out in 2025.

And certainly even in the furniture space, I’ll say there’s other things that we’re also excited about that we haven’t given specificity to, but we feel really good about is coming out in 2025, ’20 ’20 ’6 and then beyond that.

Unidentified speaker, Host: Okay. So post the deal you’ve talked about and you have paid down a certain amount of debt already I think on the transaction targeting three times leverage or less by the end of the year. And then you’ve already adjusted the buyback and I’d say that I mean, I’m sorry, the dividend. And that was a bit of an overhang leading up to this. I think there was some question, are you going to be able to keep people hold on dividend?

Ultimately made the decision to right size the dividend. So that’s kind of like that’s I guess you could say adjusted and behind us now. The question is, is at what point along the way do you start becoming a little more acquisitive strategically? And in what areas should we start to see that kind of activity? Sure.

Unidentified speaker: Yeah. So just from a broad capital allocation perspective to this point, we certainly have been focused on paying down debt to the three times ratio that you talked about. We’re confident in our ability to hit that by the end of this year. And so and then from there, again, it really does come down to how we start thinking about investments in our business both organically and inorganically. And I’d say one of the things that the three times does for us and combined with our ability to generate cash flow is it certainly does free up capacity for us to be able to start thinking about those type of fold in tuck in deals.

Again, this is not a signal for say some material large acquisition. That’s not the point. But the fold in tuck in deals in areas like pharmaceutical injectables, in areas like possibly in the ambulatory pump space, things like in the advanced surgery. Those are areas that have kind of just jumped out as sort of obvious opportunities for product adjacencies that could continue to benefit our portfolio. But again, those are considerations once now that we achieve our target.

We do remain committed to a dividend. I want to be clear on that. And obviously, as you said, we rightsized it down, but that’s something we remain committed to. And we also look forward to reestablishing a buyback program. I think there’s certainly both in terms of basically absorbing the dilution that’s happened over the last couple of years from that, but also having over time recurring buyback program that makes sense for our company.

And again, really balances out the capital allocation. Again, I do want to reiterate, we wanted that will be something that would happen after we’ve achieved our three times leverage target. But again, I’m very confident in that. And this is a company that over time will generate. I think it could be a very good cash generating business and really look forward to those things we’ve stocked up there.

Unidentified speaker, Host: Sounds good. Yeah, I’m glad you mentioned pharma, because I get the question sometimes like pharma injectables, how is this and I think you got this question from the very beginning when you did that deal and got into this business a little more depth is how is this a good business? Like why is this a good business? So maybe if you could explain which you said there’s products that are kind of differentiated, unique, even though they’re in kind of a space that we might call sort of generic injectables. Yes.

So how is a product like that good for that? What kinds of opportunities are attractive to fold in or tuck into that business?

Unidentified speaker: Yes. So I’m going to start and then Claire can kind of chime in here. I think the key thing I would say here is again it’s, yes, they are generics, but again they fit nicely within our portfolio because they again we have solutions. We have products that generate solutions and we have drugs and obviously are utilized in the space. And so much of how we think about the differentiation around it is packaging and sort of how these things are able to be presented and utilized through our ecosystem.

And so those are that is part of the way we roll these out and have the rights to these molecules and what we acquire are these different ways that we can differentiate ourselves to make it easier again back to this point for hospitals to administer those types of products. Is there anything you need to add to that?

Claire: That’s exactly right. I think it does come down to the proprietary packaging technology that we have allows us to put these products in ready to use formats, which then obviously drives efficiency at the hospital system. So you have labor efficiency there. You also have, you know, if you think about medication errors, potential for reduction in medication errors, because you’re not having to reconstitute those. And we tend to go after those molecules where there is risk of that happening.

So we’re continuing to broaden the number of molecules we bring to the market in the ready to use. So we’re really focused on that differentiation. So we kind of look at it as complex whether it’s from a formulation, packaging, how can we differentiate ourselves within the market because there tends to be less competition and customers are willing to pay a premium for that as well.

Unidentified speaker: Right. And this is where it does come both to an organic and inorganic opportunities because again there’s certainly there’s some of that development that would happen obviously in house and internally, but also again as far as there’s a development timeline on those. And so there’s always a kind of a choice between is it a build versus buy and those opportunities to actually bring in external businesses or licensing that actually allows us to do that in a more in a quicker way. Got

Unidentified speaker, Host: it. So sort of like core expertise, competency and sort of like different containers, injectors, sort of like premixed delivery.

Claire: It’s exactly what it is. Premixed ready to use.

Unidentified speaker, Host: So like a mixed Redland type opportunity. Yes. The ready to use insulin product. And so has that been a success for you? We kind of lost track of it with everything that’s been going on in the last couple of years.

But is that something you’d hold up and say this is a good example or is this more should we think more like generic injectables that are because your sterile fill or your manufacturing capacity you’re especially able to get after like an injectable pharma opportunity? Pharma opportunity?

Claire: Yes. I guess, I think about it as a broader, it’s the portfolio impact versus one specific. The more we launch, what we’re seeing is the more pull through we’re getting for the overall portfolio in general as well. Because when you have some of these hospital systems convert over to the ready to use, you tend to find them buying more of the overall portfolio. So for us, it’s about increasing the number of molecules that we have in this presentation.

So I wouldn’t say it’s one particular mix. Mixed Redlands is doing fine. I mean, I think that Zolacin is another one. We have a lot of the antibiotics and anti infectives. That’s probably an area.

Another, I guess, swim lane there would be oncolytics. So between those two, those are probably the two areas in terms of classes of pharmaceuticals and specialty injectables that we would be looking at to bring into, again, whether it’s from a complexity of manufacturing or being able to put into a proprietary packaging system.

Unidentified speaker, Host: Okay. So, we’ve got about five minutes left here. If anyone has any questions, please feel free to jump in. But so maybe and one those are that’s the area of interest, but is the do we wait until you get to three times before we start seeing increased strategic activity towards the end of this year and into next year? Or are we going to see something before then?

Yes.

Unidentified speaker: I think you should really expect us to get to the three times. I think it’s I’ve always been a strong believer in our RBR to live up to our commitments. Obviously, there’s been some stress on our balance sheet over the last couple of years and we’ve had a lot of communication with the rating agencies and worked well together with them. I think it’s the right thing to do to achieve the targets we said we’re going to achieve. And then from there, we start the opportunity of the process being able to take additional opportunities.

Unidentified speaker, Host: Okay. So, one of the criticisms of the company in the past, again, this is sort of like old Baxter, new Baxter opportunity is that where is I’m sure you’ve gotten this over the years is like where’s the sort of shiny object? Where’s the growth driver? Where’s the thing the innovative thing that we can get excited about behind as an investor? Novum is obviously a powerful launch with a couple of years of replacement cycle in front of it and that’s up 50% last year which is pretty amazing.

But I guess when first of all, what about the separation positions you to do more there? And when what’s the timing of cadence of those kinds of additional growth drivers? Not that they’re going to be like Novum, but additional growth drivers that we can we should start to expect to see.

Unidentified speaker: Yes. I look at that as part of what we think about as part of our growth algorithm going forward. And when we talk about this 4% to 5% growth level, we’ve said that certainly it was for 2025, but we said, hey, this is the way to think about this as a basis to think about our company moving forward. And so a lot of that does have to do with driving new products out into the marketplace. And so I think you should expect us to have a consistent theme of new product introductions really across our portfolio.

And again, so many of the areas we’ve touched on here and that certainly in the pump space and again obviously not only the LVP pump, but there’s a syringe pump that we’ve talked about again over time launching into the ambulatory pump space. I think the from a both from a nutrition standpoint, again from advanced surgery and we talked about those where those are areas to be able to potentially not only developing house products, but to bring other products potentially in through inorganic means that will allow us to grow. Certainly, the pharmaceutical, I think we’ve touched on as a we anticipate this sort of double digit product rollout to continue to occur on a consistent basis. This is as you know in that space, there’s margin implications, products get launched and there’s margin declines that happen. But that’s why it’s so important to continue the new product launches in order to continue to maintain and expand our margin base on that.

And that’s something that you should expect from us. And then and again, really and then again, in HST, it is both the again, the sort of devices and as well as, again, over time some of the products in the I’ll call the broadly furniture space where we should continue to expect to see that. And again, so much of this is driven by our ability as a new Baxter to actually make those types of investments that are very targeted and focused on high return projects. You’ll see our over the next 2025, I mean, our R and D spend did tick up, but 10 basis points ish. And when you back the MSA revenue out, it’s over 5% from an R and D perspective.

And so I think it’s just something that should become a common theme about how you think about our organization and something that we’re really striving to consistently execute.

Unidentified speaker, Host: Okay. So in terms of cadence, if I’m hearing what you’re saying, the new structure positions you to kind of deliver on the margin commitments you’ve made this year without maybe some of the cost cutting and internal stresses that you’ve faced in the past to get to those margin, you’re investing for more in R and D?

Unidentified speaker: That’s right. The only caveat I’d throw to that is that we did have stranded cost That is a residual from the separation. So we’ve talked about the fact that we have $240,000,000 of stranded cost by the end of twenty twenty four. That is something we’re going to need to work down. And what we said in 2025, about $125,000,000 of TSA income is going to offset some of that.

And what will be and as well as cost containment activities we’re working on, we’ll be what we’ll be left with is about a 40 bp, 40 basis points impact for 2025. And then as we head into 2026 and 2027, those TSA incomes will start to move down, but our cost containment measures will continue to elevate. And so by the end of 2027, you should expect that we will have we shouldn’t we won’t have TSA income. Yes. And also we will be through our stranded costs.

Unidentified speaker, Host: Got it.

Unidentified speaker: So that’s the other the one element. I agree with you what you said, but I just caveat it with the need to remove the stranded costs.

Unidentified speaker, Host: You’re still working through some of those the cost transitions from the sale. Yes. All right. Well, we’re at time, so I’m dragging to the next session here. But thanks so much

Claire: Joe and

Unidentified speaker, Host: Claire for coming. Thank

Unidentified speaker: you very much. Thank you, everyone.

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