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Transcript : Baxter International Inc. Presents at 5th Annual Evercore ISI HealthCONx Conference 2022, Dec-01-2022 01:00 PM

01/12/2022 | 19:00

Presenter Speech
Vijay Kumar (Analysts)

Great. Good afternoon, everyone. Thanks for joining us. A pleasure to have with us Baxter. We have the CFO, Jay Saccaro, and from Investor Relations, we have Clare Trachtman. Jay and Clare, thank you for spending the time with us.

Presenter Speech
James Saccaro (Executives)

Vijay, it's very nice to visit with you virtually.

Question
Vijay Kumar (Analysts)

We'll do that in person in Miami next year, but it will have to be virtual this year. With that out of the way, Jay, I wanted to touch upon recent third quarter dynamics before we talk about some of the other topics, right? I think one of the things that surprised people was the amount of the revenue impact from supply chain, right? We're used to seeing supply chain impact on margins. Revenue impact was something that caught people by surprise. Just that $100 million -- I think some questions I've gotten is, look, how is this a supply chain impact? Why is this not a share loss? And maybe can we start with -- on that point?

Answer
James Saccaro (Executives)

Yes, sure. So we had a very significant supply chain impact as it relates to components and supplies of critical raw materials used for -- in our end products. And in the third quarter, you pointed out $100 million. On a full year basis, we've estimated around $300 million of impact. Said another way, our sales would have been $300 million higher, but for the supply -- lack of supply.

The good news is we believe the majority of these sales will still be available to us for a couple of different reasons. One is, in many instances, the products requested are very specific to Baxter or Front Line Care or Hillrom. And -- so in those cases, customers do not want to switch. They want the product that we have and provide, that's what they want to go with.

And then secondarily, in other instances, we've seen many suppliers have similar issues to what we have. And so in those cases, too, the lack of availability is not simply a Baxter phenomena. There are other suppliers, who are contending with some of the same issues.

So I think on the good news front, as we look at things like Hillrom or our pump business, we've had a very solid backlog and strong and intense demand, but the unfortunate thing is this lack of supply has been a real challenge and continues to be.

Question
Vijay Kumar (Analysts)

That's helpful context, Jay. Is that $300 million of impact -- is that the year-to-date impact? Or should we expect another $100 million of impact here in Q4.

Answer
James Saccaro (Executives)

Well, Q4, we think, is a little bit less. So we think on a full year basis, it's around $300 million. So not precisely.

Answer
Clare Trachtman (Executives)

Yes, that probably closer -- on a year-to-date basis, it's around $300 million. On a full year basis, it's probably closer to $350 million. So that will slow a little bit in the fourth quarter.

Answer
James Saccaro (Executives)

Exactly.

Question
Vijay Kumar (Analysts)

Got you. So that, in my mind, Jay, that sounds like an improvement, right? $100 million of impact in Q3, and that impact is $15 million. So what's changing here -- has from a supply chain...?

Answer
James Saccaro (Executives)

I think -- yes, that has to do with the cadence of orders and things like that. I would not say that the supply chain situation has radically improved. And one example, Vijay, the other day, a couple of weeks ago, we get a phone call from a supplier of ours, reputable company. And they said, "Hey, look, you know those boards that you needed for your Front Line Care products, we can't supply them." Now why was that? Because there was a quality issue with the -- one of the ingredients within that they receive from one of their suppliers. And so we can't supply. What's the impact to Baxter? $10 million in the quarter.

And so we work to mitigate some of that. Joe knew some of the folks at that organization. Made some phone calls, and we made a little bit of progress in terms of mitigating that. But that is what we are battling with on an all too frequent basis, and it's not stabilized yet. So this is something that has -- it's been unbelievable. And I'm hopeful that it resolves, but we're still fighting day in, day out on this particular issue.

Answer
Clare Trachtman (Executives)

The only other comment I would make there is, if we think about your comment on slowing is the infusion pumps. We actually could probably be selling more than that. So I'm not -- I'm not putting more infusion pumps in that number just because we don't have the componentry available. So the number could be higher, have we had that, but we don't have those POs in place. So I'm not including that in there.

Question
Vijay Kumar (Analysts)

Understood. Understood. And maybe, Jay, can we split that $200 million impact from Baxter versus Hillrom on how it's flowed through 2 parts of the businesses?

Answer
James Saccaro (Executives)

Sure. I would say it's roughly half and half, Baxter versus Hillrom. In the Hillrom portfolio, probably 2/3 of that 1 half relates to Front Line Care. And then the other portion, a lot of that -- some of the Hillrom beds, where we've struggled to secure certain components. On the Baxter side, certainly pumps. But we've seen this really across the board in a number of different areas on the Baxter side. So it's distributed.

Question
Vijay Kumar (Analysts)

Understood. And you did bring up a backlog, Jay. Any way to quantify what the backlog is versus historical level? Does that give you like 6 months worth of visibility or 12 months' worth of visibility, et cetera?

Answer
James Saccaro (Executives)

So the backlog is definitely at historic highs, and it's several months of visibility. But it's -- we still will need to continue to build orders as we go through forward and we need to see this at some point, resolve itself. I mean the good news is, at some point, we will be able to pay off this demand with available supply, and that will be a tailwind. But at this point, it's hard to say when that is going to occur. And I will say some of the commentary from suppliers and the example that I just shared, which is one of many, it's -- people are still struggling to get things through.

Question
Vijay Kumar (Analysts)

Understood. And is there a way to segregate what part of this supply chain impact has been chips versus non chips? And I know you said it's hard to get to visibility on when things might improve. But what are vendors telling you in terms of how they're thinking about supply?

Answer
James Saccaro (Executives)

Yes. I would say that the majority is chip or electronic related. That's the reality of the situation. And so we outlined a number of actions that we've put in place and we can talk more about some of those. And we're making progress. But at the same time, when you get phone calls like the ones that you got 2 weeks ago and the supplier says, "Hey, look, I have a pathway to improving this situation. But oh, by the way, the order that you had, I'm canceling." It's -- there's a cognitive dissonance that we have to deal with in those situations.

So listen, we don't have a clear line of sight. And really, as we think about the planning process that we're undertaking right now in great depths for 2023, a large component of it relates to an understanding of the anticipated supply over the course of the year, next year for some of these critical electronic components along with some other raw materials that are single source and very important to us.

Question
Vijay Kumar (Analysts)

Understood. And if I just take a step back, Jay, what's -- as you're going through the planning process here for '23, what's been the key lateral lessons for Baxter, right? As you've gone through the last couple of years. And has anything changed in how we go to market, how we deal with the suppliers?

Answer
James Saccaro (Executives)

So as it relates to suppliers, I think the fragility of our supply chain and others, anybody who deals with electronic components, automakers, et cetera, other med tech companies, the fragility of the supply chain has been exposed. And for us, we have to do everything we can to gold plate or bulletproof our supply chain.

So what does that mean? That means making sure that your products are based on the most available boards and semiconductors. That makes -- that means that you have multiyear commitments from suppliers. That means -- and some of that requires -- the first point requires redesign of products, which is a multiyear process, a couple of years to get that done. Long-term commitments from suppliers whenever there's possibilities of spot purchases of inventory, you take advantage of that. All of those kinds of things are new tools that we're adding to the toolbox which will pay dividends over time, but it's not -- it's simply not an overnight fix, especially amidst the current situation that we're dealing with.

Question
Vijay Kumar (Analysts)

Understood. Understood. And then talking about current situation, I think third quarter had some impact from China lockdowns. There's been some headlines here on unrest, lockdowns in China. Any -- what are you seeing on the ground in China? And related to that, anything from a regulatory front, Jay, we need to be aware of, whether it's VBP or other regulations and localizing manufacturing, et cetera, we need to be aware of?

Answer
James Saccaro (Executives)

Sure. So as it relates to lockdowns, I think that impacted us. I think we said about $10 million in the third quarter. There's going to be some impact in the fourth quarter. We had anticipated some of that. But there continues to be a lot of challenge there with respect to the COVID response. So I think that's something that we'll watch, also watch as we go to next year. Clare, do you want to address the VBP in Made in China?

Answer
Clare Trachtman (Executives)

Yes, sure. So I think in terms of policies, you have value-based procurement, which is ongoing in China, and something that we have been dealing with throughout the course of this year and even into last year. I think we've adequately captured -- what that impact is, it is increasing and it will increase into next year as well for Baxter. I'd say that the product lines, it impacts is our Renal Care, both our HD/PD, also some of our inhaled anesthetics that we sold over there and a little bit of our solutions.

But the team has really done a great job there, particularly on the peritoneal dialysis front, working with the government to better educate them on what PD is and then it's more of a therapy versus a product. So I think that they've been fairly successful with that, and we will continue to monitor the situation, but it is one that we have embedded into our outlook going forward. There are some newer policies, though. And -- but just to be there, these polities do continue to evolve and gain speed. And so these are the product categories that to date have been, obviously, we'll look at it.

The other aspect is what's called Made in China. And that is one that impacts more on the device side of it. And so that is something we are looking at and have plans in place given our manufacturing footprint already over in China. We have 5 manufacturing facilities. We are looking at ways to bring some of that manufacturing capacity and ability over to China within those facilities and build those out to be able to comply with those Made in China policies that have impacted.

So this year, we've seen a bit of an impact so that's been split about 50-50 between Baxter and Hillrom. And going forward, we will put plans in place, really, I'd say it's more to be able to deliver the expected growth going forward. So while there will be a slight impact next year as well -- there will be an impact next year as well. It's really about being able to position ourselves particularly on the Hillrom side to be able to capitalize on the growth opportunities that they had seen within that market going forward. And so that's what we're looking at right now.

Question
Vijay Kumar (Analysts)

Understood. And what was that China historical sort of growth rates for Baxter? Was China a high single-digit growth market...?

Answer
Clare Trachtman (Executives)

High single-digit growth for Baxter is what it was for Baxter. So overall, China represents about 6% of total sales for total Baxter.

Question
Vijay Kumar (Analysts)

And based on some of these policy changes there, perhaps we should be looking at the low end of that range for next year? Would that be a reasonable assumption?

Answer
Clare Trachtman (Executives)

So again, I think to Jay's point -- and I'm not sure if it's a specific -- for China specifically, we're not giving any guidance. But I think, as Jay mentioned, we're in the process of actually looking at all of these. We actually just met with our China team last night. So we're going to take all these variables and put some assumptions in place with respect to what we look at for 2023 in terms of our top line sales.

Answer
James Saccaro (Executives)

But definitely a little bit lower than historical levels.

Answer
Clare Trachtman (Executives)

Yes. I mean, China specifically. Yes.

Question
Vijay Kumar (Analysts)

Understood. That's helpful. And Jay, one for you on the broader utilization sort of question here. Medtronic recently called out, slower utilization in developed markets. I know flu, we've seen an uptick here. Just comment on utilization, what is Baxter seeing and how that impacts your business?

Answer
James Saccaro (Executives)

Yes. On the Q3 call, we talked about admissions down low to mid-single digits with improvement in the fourth quarter sequentially relative to the third quarter. And I think broadly speaking, we -- things are in line with those expectations. We don't have radical changes to report. There's definitely some talk of flu and RSV, but this comes down to acuity, right? To the extent that folks are hospitalized, that's the real question. And we haven't seen any major change related to that at this moment in time.

Question
Vijay Kumar (Analysts)

That's helpful. And then one on switching over to a hospital CapEx environment in Hillrom. Hillrom, you noted that order book remains healthy, back at record levels, minimal cancellations. I know one of your peers, they've launched a new bed. They're talking about share gains. Could you just talk about what's happening on that part of the business, what's going into backlog and the quality of the backlog?

Answer
James Saccaro (Executives)

Sure. So it's interesting because Hillrom in the third quarter declined. But we had a record backlog level and about half of those foregone sales relate to Hillrom. So if we were to -- and I'm not suggesting we make adjustments, but just for these purposes of this illustrative discussion, if we were to adjust for the sales constraints that we had, Hillrom would be a mid-single grower this year. And so that's the real challenge that we're faced with. We have the highest levels of backlog that we've seen. We've seen really a stable backlog with minimal cancellations. So we haven't had major cancellation problems.

Now it's interesting, Vijay, because one of the things as we go through this planning process that Clare mentioned, I mentioned, one of the things that we're really getting our hands around is this hospital capital environment through to 2023. We are -- it's an important variable for us. And it's looked at in conjunction with the backlog that we have and the supply constraints that we have.

So there's a couple of things that we're really spending a lot of time on. So far, the hospital capital environment is okay. But what I do know is that a lot of hospitals tend to look at things in a budget context and the budgets are set for the upcoming year, many in January, some of them in October. And so we're really mindful because, listen, there is some recessionary risk in 2023. I think it would be easy for me to sit here today and ignore it and say, hey, it's a small risk, but there is some recessionary risk. And how that plays out with respect to hospital capital is something that we're watching very carefully.

We like the products that we have in the Hillrom portfolio. I really -- I'm really excited by the products that we're selling. The Centrella bed is just a complete -- a tremendous product offering that we have. And we've had some supply issues there, too. but that's one that's just been rolling for many years. We also have some new products in the pipeline, which we're excited about in terms of launching, targeting ICU. So a lot of good stuff there.

And then in the frontline care portfolio, this is just a fabulous portfolio. Our biggest issue is the fragility of the supply chain there. And we're doing everything we can to buttress it at this point. Look, let's get that resolved, and then hopefully, we have an additional opportunity, being mindful of the hospital capital environment as we start to talk to you about guidance for 2023 because that's -- it's critical that stability there.

Question
Vijay Kumar (Analysts)

Absolutely. And just on a related question that for those hospitals, who have set budget so far, right, what's been their commentary on the environment for next year? Are they looking at stable budgets. And you did bring up to recessionary risk, any historical context on how Baxter does during the recessionary environment and how Hillrom has performed?

Answer
James Saccaro (Executives)

So far, it's okay on the hospital capital side. But if you look at some of the financials of hospitals in 2022, they were really challenged. So I think we have to -- we're spending a lot of time. We're doing some work internally really talking to our teams, tell them to our customers to get a sense. Also looking at all the public commentary that's available to you as well. And in combination, that's going to be an important input for us.

Now taking a step back, how does Baxter do in the recession? The answer is there are lots of different elements in play. And so we do have exposure to hospital capital and capital writ large. I would say 10%, maybe 15% of our sales are related to capital. Now it's interesting, though, Vijay, because the capital that we have, some of it has had demand pent up for quite some time. And a lot of it -- and even some of the capital that has traditionally been less smart and less impacting of patient safety, now has features that enhance patient safety and monitoring in it.

And so the question that we're getting at is like how much is pent-up demand, how much is related specifically to patient safety and quality, which means it's likely to be more protected? These are questions that we're going through at this moment and really trying to put some analysis around that. A lot of the other products are fairly durable in the short term.

Now what you would note about 2008, which is the last time we had a major recession is 2 things. One, there was a falloff in capital spending amongst hospitals. And two, after a lag time, there was a drag on elective procedures as unemployment rates increased and COBRA dried up for those individuals, okay? So those are the 2 things. I think, generally speaking, our business should be okay.

The other thing that is something we're watching is what happens to commodity costs and some of these other items because, frankly, there could be benefit in some instances, to a recession that eases the congestion of supply chains, the pressure on semiconductors, et cetera. So that's some of the work that we're doing.

Question
Vijay Kumar (Analysts)

That's helpful, Jay. Also, I think from a hospital perspective, last time around leverage levels for different, I think, arm financing, those markets are still open. So hopefully, this time around, it's slightly better, fingers crossed. Just one more question on this topic related to CapEx. It's been the Hillrom acquisition. The impairment charge on 3Q that did catch people's attention. Now you did say it's mostly a change in external factors, right? But some have asked, is this a change in underlying fundamentals for Hillrom? How would you answer that, Jay?

Answer
James Saccaro (Executives)

Let me walk -- I'll talk about the mechanics of this charge, so folks can understand it, because I did not personally discuss this during the earnings call. But before I do that, what I will say is we are -- it's unfortunate, because we are extremely excited about the Hillrom acquisition, extremely. And from our standpoint, as we get into it, the product portfolio, the compatibility of the cultures, the synergy opportunity on the sales line, their pipeline, how the pipelines can come together along with the cost synergy that we've previously discussed. All of these things operationally are outstanding.

What's the challenge? The challenge is the supply chain situation that we're contending with and some incremental costs that we've had to deal with on the supply chain side -- sort of supply plus purchase price of components. That's been really the driver of a reduction in our expectations around short to midterm performance. It's all about the supply chain issue.

So -- just taking a step back, when we purchased Hillrom, right, the excess of the purchase price over the fair value of assets is assigned to goodwill. And the way this is -- since that time, 2 things have happened, market multiples have come down substantially. We're acutely aware of this. And two, the risk-free interest rate has gone up substantially. And so when you talk about the valuation of goodwill, market multiples plus the discount rate are key factors. Our risk free rate is up over 200 basis points. And so the simple mathematics of it caused 2/3 of the charge that we incurred.

And the other interesting point is a lot of -- you'll see more and more of this, I expect, amongst other companies that have done acquisitions in the last year. But what happened to us in addition is a lot of times when you acquire something, you put it in another segment. And so that segment has goodwill attached to it already, which can serve as a buffer to changes in things like the intrinsic value in the discount rate that you use. When you have a stand-alone segment, which was the right thing to do for us for a lot of different reasons, there's no margin for error. So any deviation in interest rate causes risk with respect to a goodwill impairment.

And so we were aware of this. We understood it. And the reality is, as I said, we're really excited about this, but that's what happened. Interest rates have gone up. Equity values are down 25% since we closed the transaction. That's the state of affairs that we're seeing. So this kind of a movement not unprecedented or anything like that.

So that's the story on the goodwill write-down. But I do want to -- I'm obviously very sensitive to something like that. But at the same time, I want to convey, we really like the deal. And over time, let's see how this goes.

Question
Vijay Kumar (Analysts)

That's helpful context, Jay, explaining on the thought process behind the charge. We've certainly seen that in other spaces, the goodwill write-down for [indiscernible]. And then switching over to some of the segment details here, Jay, renal that come up. There was some talk about portfolio management, et cetera. And I think one of the press articles mentioned renal. Can you maybe just give us a high level of what is renal? What is PD versus chemo? What is consumable versus CapEx and maybe growth rates and margin profile for these businesses?

Answer
James Saccaro (Executives)

Clare, do you want to address that?

Answer
Clare Trachtman (Executives)

Well, I don't -- I don't know if you want to get into the margin profile.

Answer
James Saccaro (Executives)

No, we don't.

Answer
Clare Trachtman (Executives)

So what I would address in general, Vijay, is that the vast majority of the business is really consumable related. So if we think about it, even within the PD side, there is mainly the solutions, the cassettes, the tubing that goes along with it. Automated peritoneal dialysis as we commonly think of it is done mainly in developed markets. In developing markets, that's done as continuous ambulatory PD. So all consumables within those markets. We do sell some monitors, HD monitors in the developed markets and in developing markets. I'd say that's smaller and that has been an area that's actually been impacted by overall supply constraints as well.

So in terms of the overall sales, it's highly consumable. And with PD being the majority, 2/3 of it, HD being about 1/3 of that including around a little over $100 million to $200 million in clinic sales as well that we have some clinics outside the U.S. with that.

In terms of the margin profile, we haven't spoken specifically about it. We did have our HD business categorize in what we call previously are maintained, managed differently, which meant that this was an area that we were focused on improving the overall margin profile of the business, both the growth and margin profile. As we've talked, the HD business has actually declined for us this year. We do continue to face competition on dialyzers outside the U.S. where we've seen some continued pricing erosion there. So the team is focused on that.

We've had success with THERANOVA. We were unsuccessful in getting kind of that differentiated reimbursement. But in terms of the utilization that the customers who use it find it highly beneficial and we see a very high reorder rate from those customers. So we are focused on how do we continue to drive that penetration within those niche markets for it and then continue to improve the overall profitability of the HD business. I don't know if there's anything you want to add.

Answer
James Saccaro (Executives)

That's clear. Great answer. Thank you.

Question
Vijay Kumar (Analysts)

And maybe related to that, I think Joe mentioned some time lines and there was some talk about portfolio management review. Jay, just give us some context on what does portfolio management mean? Are you looking at all segments? And when will we know on what the outcome is?

Answer
James Saccaro (Executives)

Sure. So Joe commented that in January, early next year, we're going to be sharing some commentary around portfolio management. Let's talk about what kind of exercise we undertake when we talk about that. For us, the Hillrom acquisition has really pointed us in a certain direction and generated some real excitement around some opportunities in connected care areas in monitoring, in enhancing therapeutics with analytics and data. So we're so excited about that.

But what it does is it allows you to kind of look at the entire focus of the company and say, Hey, what are the areas that I want to prioritize for investment and some of the stuff that perhaps might have been a focus in the past become less critical. And so that's what we're going to talk about. We're going to share some information on some of those elements. We're not -- now remember, we do similar exercises to this most every year. But I think the Hillrom acquisition has really allowed us to look at things in the new lens.

What we probably won't spend too much time talking about, which is another layer of portfolio management -- but this is a really important one is in certain products, in certain geographies, as a result of the changing cost profile that we have, it's perhaps challenging economics. And so we are also doing very operational work at a lower level of detail around, okay, should we fix, shrink, exit a particular product in a particular country? That's not going to feature in our discussion in any great length when we talk about this with all of you, but it's an important feature to portfolio management.

Vijay, you'll recall over the last probably 6 years, we've walked away from hundreds of millions of dollars of business. We've raised prices on many other areas in our business as well in large part because of this kind of portfolio analysis that we do. When we talk about what we're going to talk about early next year, it's not that. But that's really an important element to how we do portfolio.

Question
Vijay Kumar (Analysts)

That's helpful context, Jay. I know on your third quarter call, by the way, those commentaries you made on fiscal '23 variables that was extremely helpful. You noted perhaps the lower end of the 4% to 5% range is perhaps the right way to think about it. Is that -- can you talk about some of the assumptions that goes behind a common, Jay? Is that assuming some product exit? Is that assuming supply chain to be status quo from fourth quarter levels for anything else we should be thinking about?

Answer
James Saccaro (Executives)

Yes. It's a little -- so Vijay, it's a little bit of a sensitive time for us right now to comment on 2023. Why? Because we are in the midst of a bottoms-up operating planning process. So one of -- what we do periodically throughout the year is we do a top-down with discussions of our key leaders walking through each of the areas of the business to kind of gain comfort in things like a long-range plan.

What we do right now is we're involved in hundreds of our commercial leaders, dozens of our operations leaders, and we're conducting an annual operating plan process that we review actually next week in the lead up to some of the guidance that we give next year. So it's a little hard for me to get into specifics at this point in for 2023. But we're -- and also, there are a lot of variables that we're looking at that we're going to gain further insight on.

So I'll give you one example, maybe a couple. One is we're happy with the progress on the pump. We are close to being in a position to submit. But how that goes and how that looks, that's an important variable for 2023. When I made my comments in October, it included sales of NOVUM as an element to that. Well, as we move into next year, I really want to titrate how that's looking before we make any statement finally in terms of 2023 guidance. I think what we realized in 2022 is the world is far riskier than we could have even estimated. And so we're trying to gather as much, reflect as much of those learnings in this operating planning process. And then reflect that in the guidance that we shared with you -- when we share it, be it in January or February.

Question
Vijay Kumar (Analysts)

I understood. And those are fair comments, Jay. The -- since you brought up NOVUM, I know in the past, an annualized basis, perhaps we've thought of $100 million of contribution, but given the timing of submission -- I'm assuming maybe if there's an approval, it's going to be pretty late in the year. Suffice to say perhaps the 4% included very minimal contribution from NOVUM or...

Answer
James Saccaro (Executives)

The 4% included a good contribution, NOVUM. Why? Because we have 20,000 pumps in inventory today and pathway to availability of chips and real pent-up demand on the customer side. So it's a really -- it's -- we are so excited about the long-term opportunity with the pump. We really are. We think it's differentiated. We think it's going to be well received. We think folks will really like it. So there's so much excitement about this pump. We have to get it over the goal line.

And so that's going to be -- the call that we make on that as far as guidance goes and so on, it's a very important consideration for us, among many others. Like the hospital capital environment, like the resolution of supply. All of those things are things that we're working through right now, which is why it's hard for me to make comments on 2023.

Question
Vijay Kumar (Analysts)

Understood. And just on -- but it's tricky, right, Jay, because the FDA once you make the submission, like have you had -- I'm assuming Baxter has had discussions with FDA, but there is an assumption around the time line for approval rate? How do you comment on that?

Answer
James Saccaro (Executives)

That's exactly the question that we are working through. Now let's take a step back. I believe that we have invested an inordinate amount of time and energy putting together a world-class approvable submission. But I don't work at FDA. Furthermore, we have collaborated extremely closely with FDA over the last several years in this process, okay? That is clear and that I know. Far more than we did for the approval of the Spectrum, which we launched in 2015 or the upgrade to that, which we launched, I believe, in 2018.

Answer
Clare Trachtman (Executives)

'19.

Answer
James Saccaro (Executives)

'19. So a lot of collaboration, a lot of great energy and effort, a lot of expert opinions added into this submission. So we've done a lot of work.

But to your point, this is a key question. Exactly what do we think the time frame for approval is because, frankly, this is disappointed. And so we have to watch this really carefully. So that's just one other factor on that.

Question
Vijay Kumar (Analysts)

Understood. And how should we think about pricing, Jay? I know it is a sensitive topic for customers, but also in all fairness rigs, Baxter has done a lot of heavy lifting in absorbing a lot of those costs. And I think it's fair to share the burden. Just give us some context on how we should think about pricing?

Answer
James Saccaro (Executives)

Sure. So -- let's talk about the dynamic that has occurred over the last couple of -- last 1.5 years, say, that has created a challenge for us. In 2000 -- let me talk about the U.S. first, and then I'll make some comments about other markets. But in the U.S., in 2019 range, we signed a series of long-term agreements with GPOs, some after, some before. And those agreements are based on historical norms and industry standards, which include low escalators, low level, low single-digit escalators in terms of pricing in the future. And that was to reflect and offset inflation. In no agreement did we have a PPI index built in as an adjustment factor. It was not the standard. It would have been extremely difficult to incorporate such a thing.

And frankly, in the world that we were living in, we had not seen shocks to inflation in 15 years. Fast forward, we have a pandemic, we have a disruption of demand and supply in large part as a result of the pandemic, then we have a war in Europe. All of this throws the world into disarray and leads to the highest level of inflation in 30, 40 years. And our agreement structures that we had in place in the U.S., we're not prepared for that. Outside the U.S., much of our sales are either tenders specific price agreements with governments. And many of them are 1- to 2-year in measure.

And so as far as ability to raise price, our dimensions are somewhat limited. Now we have absorbed extraordinary costs in 2022 and even towards the end of 2021. And so what we've done is we've gone to our customers outside of contracts and talked about sharing burden. For us, it is incredibly important to have good long-term relationships with our customers. So that's an underlying premise.

Our mission of the company is to save and sustain lives and to work with our customers in support of that. But we've done a lot of work in terms of really kind of titrating how we can engineer some incremental offsets to the extraordinary costs that we've absorbed. That's the state of affairs. We've had some success with this. We'll continue to have success with smaller agreements in the U.S. Outside the U.S., we'll look at pricing very carefully.

But overall, we don't really have a meaningful opportunity to adjust price until the 2000 -- the contract expired towards the end of 2024 in many instances, then we'll have different -- then we'll have a different thinking that we put in place because the old model of a low inflationary world I don't know that we can count on that. So we have to really titrate it. But that's exactly what we're contending with, but we respect our customers and our customer base and their missions immensely. And so we're really trying to work this in a very productive way.

Question
Vijay Kumar (Analysts)

Understood. And the last one is here, Jay. Margins, I think, is at 75 basis points of margin expansion still feasible? And I know you carved out, I think, $0.30 of impact from below the line in FX? And is that still a reasonable estimate as we sit today?

Answer
James Saccaro (Executives)

Yes, still working -- so this is my comment on the sales line applies to margin as well. I don't want to preempt it such a rich process, which is like currently in flight. And then also, I do want to benefit from another 6 weeks of information in respect to key assumptions. What is the hospital capital assumption? What is the pump assumption? What is the VBP assumption? What is the volume assumption.

As we get to the details around 2023, we really want to benefit from all that work. But then as many parts as possible, including to the one that you just raised, what's the interest rate environment look like? How is that going to impact us? So it's a little -- I'm sensitive only because I have all this work in flight now that we're going to benefit from so much as we go forward.

Question
Vijay Kumar (Analysts)

Understood. Understood. And sorry, the below the line that $0.30, is that still in the right ballpark, Jay?

Answer
James Saccaro (Executives)

I think that the interest rate environment hasn't changed radically since that assumption was shared. So I think those are -- it's somewhat relevant. But that too -- I have to carve that one out, too, because I've got all the teams doing all this tremendous work on modeling these different elements. Those portfolio management play a role? How does it play a role like all of those kind of factors come into this as well. So stay tuned for a very substantive update in January and February as we talk and then ultimately give guidance.

Question
Vijay Kumar (Analysts)

Understood. And then the last minute here, Jay, you did bring up new products. What are you excited about as you think about the medium term?

Answer
James Saccaro (Executives)

Vijay, This pump will be very big. The Front Line Care portfolio has a lot of great and exciting existing products, but new pipeline products that will catalyze for it's so unfortunate that the supply constraint that we've seen there because you would have seen this banner growth from Front Line Care. And then we have some new beds launching soon.

Answer
Clare Trachtman (Executives)

Yes, next year.

Answer
James Saccaro (Executives)

Which we start to get very excited about. So some of the Hillrom, we're going to start to pay that off and share that, which we'll be really neat.

Question
Vijay Kumar (Analysts)

Okay. I think with that, we're at the end of time. Jay, Clare. Thank you both for taking the time this afternoon.

Answer
James Saccaro (Executives)

Vijay, thank you so much. We look forward to seeing you soon, hopefully in person, and we wish you a wonderful holiday season.

Question
Vijay Kumar (Analysts)

Thank you, you as well.

Answer
Clare Trachtman (Executives)

Thank you.

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