Baxter International Inc. (NYSE:BAX) Q1 2021 Earnings Conference Call April 29, 2021 8:30 AM ET

Company Participants

Clare Trachtman - Vice President, Investor Relations
Joe Almeida - Chairman and CEO
Jay Saccaro - Chief Financial Officer

Conference Call Participants

Robbie Marcus - JPMorgan
Bob Hopkins - BofA Security
Matt Miksic - Crédit Suisse
Pito Chickering - Deutsche Bank
Lawrence Biegelsen - Wells Fargo
Joanne Wuensch - Citi
Matt Taylor - UBS
Vijay Kumar - Evercore ISI

Operator

Good morning, ladies and gentlemen. And welcome to the Baxter International’s First Quarter 2021 Earnings Conference Call. Your lines will remain in a listen-only mode until the question-and-answer segment of today’s call. [Operator Instructions]

As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or re-broadcasted without Baxter’s permission. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Ms. Clare Trachtman, Vice President, Investor Relations at Baxter International. Ms. Trachtman, you may begin.

Clare Trachtman

Good morning. And welcome to our first quarter 2021 earnings conference call. Joining me today are Joe Almeida, Baxter’s Chairman and Chief Executive Officer; and Jay Saccaro, Baxter’s Chief Financial Officer.

On the call this morning, we will be discussing Baxter’s first quarter 2021 financial results and full year 2021 financial outlook. Please note, starting this quarter the financial schedule, which breaks out sales by key product categories will now include the sales of our BioPharma Solutions contract manufacturing unit. Historical schedules reflecting this new structure along with a supplemental presentation to complement this morning’s discussion can be accessed on our website in the Investors section under Events & News. This presentation includes related non-GAAP reconciliations.

With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the second quarter and full year 2021, new product development, business development and regulatory matters contain forward-looking statements that involve risk and uncertainties, and of course, our actual results could differ materially from our current expectations. Please refer to today’s press release and our SEC filings for more details concerning factors that could cause actual results to differ materially.

In addition, on today’s call, non-GAAP financial measures will be used to help investors understand Baxter’s ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website.

As mentioned in our press release this morning, during the first quarter, Baxter strengthen its European and Global Pharmaceuticals portfolio with the acquisition of the rights for certain territories outside the U.S. to the widely prescribed chemotherapy medication, Caelyx, also known as Doxil in several geographies, including the U.S.

This strategic acquisition, which closed on February 17th of this year, supplements Baxter’s previously existing U.S. rights to Doxil, which the company acquired in 2019. As a result of this acquisition, on the call this morning, we will be discussing operational sales growth, which adjust for the impact of foreign exchange, as well as the international sales of Caelyx and Doxil.

Now, I’d like to turn the call over to Joe. Joe?

Joe Almeida

Thank you, Clare. Good morning, everyone, and thank you for joining today’s call. I hope that you and your loved ones are healthy and safe. I will begin with an overview of Baxter’s first quarter performance. Jay will take a closer look at the financials including our outlook for Q2 and the year as a whole. Then we will close with Q&A.

Baxter delivered first quarter sales growth of 5% on a reported basis and 1% on both a constant currency and operational basis. These represent solid performance in the face of an unprecedented pandemic, as well as a challenging year-over-year comparison, given the heightened sales we experienced year ago as our customers prepared for the impact of COVID-19.

On the bottomline, first quarter adjusted earnings per share of $0.76 declined 7%. This decrease reflects the negative year-over-year impact of COVID on our results in the quarter. On a segment basis, Asia-Pacific delivered growth of 8% at constant rates. This growth reflects the strength across the region, while much of the region is progressing in its recovery. We continue to monitor the situation in India, which is experiencing the highest COVID infection rates around the world.

Sales results in EMEA were flat year-over-year and decline 1% in the Americas also at constant currency rates. Sales in both of these segments continue to be impacted by lower rates of hospital admissions and surgical volumes due to the pandemic.

Looking at performance by business. Acute therapies led growth across all of our product categories with sales increasing 28% on a constant currency basis. Results were driven by ongoing heightened demand globally for Baxter’s continuous renal replacement therapy or CRT Technology amid COVID-19. As we discussed last year, we expect acute therapies demand to receive from its pandemic peak and return to more typical levels over the course of the year.

Our BioPharma Solutions business advanced 11% year-over-year on a constant currency basis, driven by our partnerships to assist in manufacturing the COVID-19 vaccines.

Renal Care and Clinical Nutrition Pharmaceuticals all grew at low single digits at constant currency. Growth in Renal Care continues to be driven by demand for our peritoneal dialysis or PD products globally.

I would point out that demand from both our each center HD and PD businesses has been dampened by depressed patient volumes driven by higher mortality rates for ESRD patients in the wake of the pandemic. We expect ESRD patient’s volume should stabilize and return to normal over the next 18 months to 24 months, but the base of their recovery may vary by market.

PD growth is expected to continue outpace the HD growth market wide for the foreseeable future. Beyond the general lifestyle benefits of home-based PD, this therapy continues to be recognized as a viral treatment option amid pandemic conditions in addition to new CMS and stage renal disease treatment choices or ATC payment model went into effect in the U.S. at the start of the year, which supports extended access to home therapies.

HD will remain a critical treatment option in numerous markets. As a pioneer in dialysis broadly, Baxter is committed to innovation across both modalities enabling clinicians and patients to make the right treatment choices based on their distinct needs.

Last quarter I highlighted the FDA’s 510(k) clearance of our Homechoice Claria APD Cycler as one more way we are supporting PD growth in the U.S. More recently, we received 510(k) clearance of our leading edge AK 98 dialysis system, a proven platform that is currently used in more than 90 countries worldwide and now launching in the U.S.

Growth in our Clinical Nutrition business reflects the demand for Baxter’s Multichamber nutritional product offense in the U.S. and APAC markets, as well as nutrition compound growth in EMEA.

Pharmaceuticals growth was driven by continued strength in our international pharmacy compounding business, as well as the benefit from the recent acquisition of Caelyx, Doxil rights in select territories outside the U.S. This acquisition further strengthens our Pharmaceuticals portfolio globally, and in particular, represents a platform to accelerate growth in Europe.

Adjusting for the Caelyx and Doxil acquisitions and foreign exchange, pharmaceuticals declined low-single digits year-over-year, performance in the quarter reflects the challenging compares to the prior year quarter, which occurred before the marked decline in hospitalizations and surgical volumes due to the pandemic in tandem with heightened sales as hospitals stocked up on key supplies as the pandemic emerged.

Medication Delivery and Advanced Surgery both declined mid-single digits at constant currency rates as these businesses were also impacted by lower rates of hospitalizations and surgical procedures, as well as the challenging comparison to the prior year quarter. That said, we are seeing gradual steady recovery in this trends, I expect this to continue over the course of the year, particularly as the rate of COVID vaccinations improve globally.

In Medication Delivery, we are also excited by the potential of our Novum IQ Infusion platform, including our Dose IQ Safety Software and IQ Enterprise Digital Connectivity Suite. Novum IQ was resubmitted for FDA 510(k) clearance earlier this month. We look forward to advancing this application and anticipate introducing this exciting technology to U.S. in the second half of this year.

We also remain committed to broadening our presence globally for Novum IQ and currently expect to introduce this platform in Europe in 2022, as we work to enhance our product offerings to address the specific needs of this region.

As a wrap up, I would like to reinforce that Baxter is both well prepared and well positioned for the future. The essential nature and durability of our portfolio, the breadth and diversity of our product lines, our expansion in geographic footprint and the impact of our transformation, all taken together fuel our resilience, adaptability and agility.

We remain focused on advancing innovation, the key to sustained growth in any industry. We have a lot to look forward to across our businesses, including new therapeutics and increasingly new value-added digital solutions. You may hear about many of these at our upcoming investor conference and some even sooner, and to supplement our organic pipeline, we will continue to pursue attractive PD opportunities in our core portfolio and key adjacencies, as well as compliments our business. And our 50,000 employees remain absolutely dedicated to advancing our mission for patients and we are committed as ever to returning that to our shareholders.

Now I will pass it over to Jay for a deeper dive into our financials and outlook.

Jay Saccaro

Thanks, Joe, and good morning, everyone. As Joe mentioned, we are pleased with our first quarter performance, particularly in light of the ongoing pandemic conditions and a tough comparison to first quarter 2020 where we experienced heightened demand for select products as COVID-19 began to spread to the U.S. and other geographies. The strength and resilience of our portfolio continues to be on display when we are executing on the priorities we have set out.

As Joe mentioned, this quarter we resubmitted to FDA 510(k) filing for Novum IQ. Our suite of next-generation infusion pumps is a promising multiyear growth drive for Baxter. Additionally, in line with our strategic objective, we bolstered our Pharmaceuticals portfolio with the acquisition of rights to select territories outside the U.S. that will allow for future growth, particularly in our EMEA region and we continue to execute our recent new product launches across our businesses and geographies.

Turning to our first quarter 2021 results, global sales of 2.9 billion, advanced 5% on a reported basis, 1% on a constant currency basis and 1% on an operational basis. For the quarter, we estimate that COVID negatively impacted year-over-year sales growth by approximately 400 basis points.

Sales growth in the first quarter did exceed our expectations driven by operational strength and the benefit from COVID vaccine manufacturing-related revenues. Also, the recent acquisition of Caelyx/Doxil contributed approximately 45 basis points to grow in the quarter.

On the bottomline, adjusted earnings declined 7% and $0.76 per share has the negative impact from COVID on our business and operations, as well as increased interest expense and a higher tax rate more than offset operational growth in the quarter.

Now, I will walk through performance by our regional segments in key product categories, starting with our three regional segments. Sales in the Americas declined 1% on both a constant currency and operational basis. Sales in Europe, Middle East and Africa were flat on a constant currency basis and declined 1% on an operational basis. And sales in our APAC region advanced 8% on both a constant currency and operational basis.

Moving now to performance by key product category, note for this quarter constant currency growth is equal to operational sales growth for all global businesses, with the exception of our Pharmaceuticals business, for which we will provide both constant currency and operational growth, adjusting for the acquisition of rights in select territories outside the U.S. for Caelyx/Doxil.

Global sales for Renal Care were $922 million, advancing 2% on a constant currency basis. Performance in the quarter was driven by the global growth in our PD business. We continue to monitor the impact of excess mortality among ESRD patients and delays in new patient diagnoses resulting from the pandemic.

This is particularly notable in select Latin American markets, which saw patient volumes declined mid-teens during the quarter. Our current expectations for PD patient volumes to ramp over the course of the year, although as Joe mentioned, the pace of recovery will vary by market and be further impacted by the rate of COVID vaccinations, longer term we remain excited about the trajectory for our Renal Care business, in particular with our leading portfolio of home therapies.

Sales in Medication Delivery were $652 million declined 6% on a constant currency basis. The sales decline reflects a difficult comparison to the first quarter 2020, where we experienced tightened demand for certain Medication Delivery products and hadn’t yet felt the full impact from the lower rate of hospital admissions and surgical procedures. During the quarter, we estimate that U.S. hospital admissions were down high-single digits as compared to pre-COVID levels.

Pharmaceutical sales were $552 million advanced 1% on a constant currency basis and declined 2% on an operational basis. OUS sales of Caelyx/Doxil contributed approximately $13 million to the quarter. Pharmaceutical performance in the quarter was also negatively impacted by the Q1 2020 pre-pandemic buying for select products, as well as lower rates of hospital admissions and surgical volumes, with sales of both inhaled anesthetics and specialty injectables declining high-single digits, excluding the benefit of the Caelyx/Doxil acquisition. Strength in our international pharmacy compounding services partially offset this impact.

Moving to Nutrition, total sales were $234 million increasing 3% on a constant currency basis. Performance in the quarter was driven by increased demand for Multichamber bags and nutrition compounding products in EMEA.

Sales in Advanced Surgery were $217 million declined 6% on a constant currency basis. Sales within the quarter were impacted by lower surgical procedure volumes, as well as difficult year-over-year comparison, as the first quarter of 2020 included a benefit of approximately 600 basis points resulting from competitor product shortages. Although, surgical procedures experienced a slow start to the year, we expect quarterly sequential improvement and anticipate ending the year with procedure volumes approximately flat to pre-COVID level.

Sales in our acute therapies business were $207 million, representing growth of 28% on constant currency basis driven by ongoing COVID-related demand. As Joe mentioned, we anticipate this demand will slow as vaccination rates increase and COVID-related admissions decline.

As mentioned, beginning this quarter, we are disclosing sales associated with our BioPharma Solutions contract manufacturing unit, which was previously presented in our other category. First quarter sales in BioPharma Solutions were $135 million, representing growth of 11% on a constant currency basis. Performance in the quarter was driven by revenues generated from manufacturing COVID-19 vaccines on a contract basis. We are honored to play a role in helping meet global demand for COVID-19 vaccines.

Moving through the rest of the P&L. Our adjusted gross margin of 42% declined by 230 basis points over the prior year, driven by lower sales of high margin products, and increased operations and supply chain expenses, resulting from COVID.

Adjusted SG&A of $609 million increased 3% on year-over-year basis and was flat on a constant currency basis. Adjusted R&D spending in the quarter of $128 million increased 4% on a reported basis and was also flat on a constant currency basis. Both adjusted SG&A and R&D reflected continued benefit from lower discretionary spending amid the pandemic.

The adjusted operating margin in the quarter was 17%, a decrease of 180 basis points versus the prior year. Net interest expense was $34 million in the quarter, an increase of $13 million compared to the prior year, driven by increased interest expense from higher outstanding debt balances, as well as decrease interest income due to lower interest rates. Other non-operating expense totaled $5 million in the quarter.

The adjusted tax rate in the quarter was 16% and was favorable to our expectations driven primarily by a discrete tax benefit recognized in the quarter. We would expect this benefit to occur later in the year.

Let me conclude my comments by discussing our outlook for the second quarter and full year 2021. For full year 2021, we expect global sales growth of 8% to 9% on a reported basis, 5% to 6% on a constant currency basis, and 4% to 5% on an operational basis.

This assumes a benefit of approximately 100 basis points to both reported and constant currency revenue growth for the acquisition of Caelyx/Doxil, as well as approximately 300 basis points of positive topline impact from foreign exchange on reported growth.

Our expectation remains that on a full year basis, hospital admission rates and surgical procedures will stay below pre-COVID levels, with rates improving throughout the year and exiting the fourth quarter with admission down low-single digits and procedures roughly flat.

Moving down to P&L, we now anticipate adjusted operating margin to expand between 40 basis points to 60 basis points, reflecting the strong first quarter performance and the inclusion of the Caelyx/Doxil OUS rights. We expect this benefit to be partially offset by increased supply chain and manufacturing-related costs given the increasing commodity pricing and freight transport, as well as the negative impact from foreign exchange.

For the year we expect an average adjusted tax rate of approximately 18% and a full year diluted average share count between the range of 510 million shares to 515 million shares. Based on these factors, we expect 2021 adjusted earnings excluding special items of $3.47 per diluted share to $3.55 per diluted share.

Specifically, the second quarter of 2021, we expect global sales growth of 14% to 15% on a reported basis, 8% to 9% on a constant currency basis, and 7% to 8% on an operational basis. And we expect adjusted earnings excluding special items of $0.72 per diluted share to $0.75 per diluted share.

With that, we can now open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] I would like to remind participants that the call is being recorded and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Robbie Marcus of JPMorgan. Your question, please.

Robbie Marcus

Oh! Great. Congrats on a good quarter and thanks for taking the question.

Joe Almeida

Thanks, Robbie.

Jay Saccaro

Thank you.

Robbie Marcus

Maybe to start it off, Jay, I’d love to get a little more color on the cadence that’s assumed in your guidance here, second quarter is coming in a touch below the street. But you did raise EPS guidance a little more than the first quarter beat. So I was hoping to get a sense of some of the items impacting second quarter, is there still lag from high cost inventory flowing through COGS, et cetera, and how to think about the margin expansion on the back half of the year?

Jay Saccaro

Sure. Robbie, consistent with how we outlined performance at the beginning of the -- at -- when we gave guidance originally, we really do see this as a tale of two different halves, with the shape of the second half being very different than the shape of the first half. In part that relates to admissions and surgical procedures. And in part, it relates to certain manufacturing costs, which we expect to subside to the back part of the year.

So, first, as it relates to admissions, our second quarter assumption in admissions, first quarter, we saw about 8%, down relative to pre-COVID levels. In the second quarter, we are expecting to see roughly 7% down. That’s kind of the working assumption that we have in place. But in the back half of the year, we will expect to see roughly 3% down and so we do see a market improvement from first half to second half that benefits the topline.

And then from the margin standpoint, we will see incremental improvements in the second half of the year, in particular with respect to gross margin that starts to drive our performance up. And so, in fact, the second half average margin will be in the 20% range or a little bit north of that as implied by the guidance that we have shared.

Now, specific to the second quarter, there are a few moving pieces. What I would say is, we do have sequential improvement in sales that contributes approximately $0.10 of earnings impact roughly all in and included in that is maybe a couple of cents related to the Doxil acquisition.

Now, but as we think about the second quarter, one of the things that’s really important for us is setting the stage for successful acceleration in the second half and setting the stage for a successful 2022. We are making meaningful OpEx investments in the second quarter to support that acceleration. So we are seeing roughly about $0.10 or so of OpEx investments that take place in the second quarter.

And then from a financial statement standpoint, there’s a tax rate. We see the tax rate from the first quarter to the second quarter ticked up roughly $0.03. We saw a discrete item in the first quarter of the year. We don’t expect that to repeat in the second quarter. Therefore, there’s a bit of a tick-up.

So, I think, broadly speaking, as you say, we are really pleased with the first quarter performance. It’s a nice start to the year. It sets the stage for successful performance throughout the rest of the year. But I view Q2 as a little bit more of a stage setter on the way to really -- a really solid second half of the year.

Robbie Marcus

That’s great. Jay, I know, I am going to try and phrase this in a way that maybe you will be able to answer it. I know we are going to get the full long-term guide, the September Analysts Day. But you are exiting the year with over a 20% operating margin, your street sitting at about 19.8% for next year. Is there anything that would prevent us from taking the exit rate in the second half and bringing that throughout the next year? So maybe you could just talk about maybe some puts and takes and what’s in that second half margin, is that a good go forward? Thanks.

Jay Saccaro

On -- so two things. One is stay tuned. We are really excited for our upcoming Investor Day. We are hopeful that we will be able to conduct that in person with folks in attendance and I believe it’s going to be in the Deerfield area, so very excited to share.

And at that point, we will share some thoughts on 2022 and beyond in terms of where we can take the long-term platform of the business. And it’s safe to say we as a team are incredibly focused on margin enhancements as we have been for the last five years. So there will definitely be some discussion of that.

The one thing I would caution you is, remember, we always have a seasonality factor in play and Q1, Q2 are typically lower than Q3, Q4 for a whole host of reasons. But there is some seasonality that needs to be considered when you look at exit rates of Q4 margins, which typically are highest in the year.

Robbie Marcus

Great. Thanks a lot.

Jay Saccaro

Thank you.

Operator

Bob Hopkins of BofA Security is online with a question. Please state your question.

Bob Hopkins

Yeah. Great. Good morning and thanks for taking the question. And I just wanted to follow-up on Robbie’s questions on operating margins, because I think it’s a really important topic. So you are starting 2021 at 17% and you mentioned what will happen over the course of the rest of the year, including the back half. How much of the trajectory over the course of the year is dependent on the improvement in revenue growth versus things that are kind of directly in your control on the manufacturing and cost side?

Jay Saccaro

Bob, that’s -- thanks for the question. It’s a difficult question to answer, because to some extent, they do go hand-in-hand. Now we have specific programs that we have earmarked on both the gross margin and the cost side.

If you will recall in our last earnings call, we talked a little bit about the digital transformation that’s under way led by Andy Frye and Talvis, our CIO. We have got an enormous amount of work ongoing in terms of cost improvements and efficiency enhancements related to that transformation.

And also, Jim Borzi, our Head of Manufacturing and Operations, has a lot in terms of accelerating operating performance in the second half of the year. So, all of those things will feature prominently as we look at Q3, Q4 and beyond.

But we do need -- as is always the case, if you are falling short of revenue expectations, it creates a real absorption challenge in the manufacturing facilities. It creates a real absorption challenge as you look at things like fixed SG&A and R&D costs. So there is some -- it’s important that we do see the acceleration on the revenue line in order for us to deliver what our expectations are.

Now having said that, I do believe that we have the right revenue projection in place and I think our ability to forecast revenues in light of this highly volatile environment has really improved quite substantially over the last 18 months. So I think the assumptions that I outlined that support the second half hopefully prove reasonable but we will have to wait and see.

Bob Hopkins

Okay. And then, just a follow-up actually on operating margins, thinking a little long-term, if you are starting -- if this year you end up successful and we end up at around 18.5% as you are guiding, the Street model is roughly 100 basis point improvement in 2022 and 2023, and you will give us all the specifics in September and I am sure we are all looking forward to that. But just directionally, is there -- are there things that we should be considering that would suggest that those numbers are way off?

Jay Saccaro

Again, it’s hard for us to comment. In the context of we have taken the guidance off the table. And we did it because of a lot of different reasons. The guidance was stale. It was from 2018. We have had a global pandemic since we provided that guidance and a lot of different things have happened.

So what I can tell you is, and by the way, it’s a little painful that we don’t share anything, because this team is committed to margin improvements. We focus a lot of our energy and efforts on it and culturally, the notion of efficiency, enhancing the efficiency of our operations, that is center stage.

And so for all of those reasons, I’d love to share some commentary on future margins, but I think in light of the fact that we still want to see what -- how the pandemic plays out and our assumptions valid for the rest of this year and what happens to 2022. And in light of that, it’s a little difficult and I will have to hold off on commenting on future year’s margin performance.

Joe Almeida

And Jay, if I just may add. Bob, we are not going to comment on the street expectations, we do that in September. But what I want our listeners and investors to know is the company is really focused on margin improvements of few levers.

The first one is new product launches. This year we are launching more than 20 new products, including we are hopeful to obtain the 510(k) from the FDA on a new pump platform. Then we also have very good momentum in the integrated supply chain led by Jim Borzi.

We also have, excuse me, the digital transformation that is touched in every corner of the company with significant redesign of the finance function in the company and other functions in the company that will completely be redesigned and the use of artificial intelligence and use of bots.

So we have a lot of momentum going on. So we are not going to discuss a specific number, just telling folks that we are not just sitting here. We have a significant amount of work going on in Baxter to continue to improve our margins.

Bob Hopkins

Okay. Thank you.

Jay Saccaro

Thanks, Bob.

Operator

Matt Miksic of Crédit Suisse is on the line with a question. Please state your question. And Matt Miksic with Crédit Suisse, your line is open. Please state your question.

Matt Miksic

Hi. Can you hear me okay?

Joe Almeida

Yes. Hi, Matt. How are you doing?

Matt Miksic

Thank you, and well, thanks. Thanks so much for taking the question. So, Jay, I had one that I -- that you are -- we have gotten over the last couple of months, I think, about Baxter and some of the comments that you have made. And some of the comments that you have made today regarding projections on things like procedures and hospitalizations. And I know it’s a challenge to make those kinds of projections, given the variability in the environment and sort of the newness of this whole process that we are all going through. But can you help us understand a little bit how you get to some of the thoughts you have on first half, second half and census levels, et cetera and your visibility to those and sort of confidence as we kind of get into the year is that we are going to wind up where you are describing and assuming in your guidance? And I have one follow-up.

Joe Almeida

Sure. And I will tell you that this is an area we have invested a lot in and a lot of this work is done by our Americas team led by Guy Jaeckel and Heather Knight and it starts with aggregation of data sources.

There are a number of proprietary data sources that we now have in place that really give us good line of sight to like in terms of actual patients admitted to hospitals along with surgical procedures. So we have a number of sources, and then, of course, there’s a lot of publicly available sources.

But early on in the pandemic, if we rewind over a year, we didn’t have the availability of data sources for the -- for information. Because, frankly, this was -- hospital admissions was never a variable that was very concerning to us. It was always something that would grow low-single digits each year and so in light of the Q2 last year, where we saw a 20% decline, Giuseppe and started spending a lot of their energy and effort assessing and understanding data sources.

But then the second thing that we did was we started to do some work in terms of anticipating and forecasting with some artificial intelligence, looking at a variety of data sources that could predict behavior.

And ultimately, what we found is, in the fourth quarter of last year, in the first quarter of this year, the model that we built. And I am talking most specifically to the U.S., because I think that’s a big driver for us and it’s also a discrete data set that lends itself to a level of analytics that perhaps other markets, it’s a little more challenging. What we found was Q4, Q1 we were largely in line with our expectations within the tolerance range that was acceptable and so we have applied that same analytic lens looking forward.

Now we could be wrong, of course, and we have quantified in the past what that -- what a mistake would cost us from an admission standpoint. I believe 1 percentage point in the U.S. per month is a $2 million and so that’s the sort of the penalty for being wrong.

But I think throughout, once we got through Q2 of last year, our ability to anticipate what the outcome was going to be, has been significantly better and past performance is no guarantee of future performance. We have caveats related to forward-looking statements that Clare shared at the outset of this call. But I feel like we have done a nice job really, really assessing this and understanding drivers going forward. I don’t know, Joe, if you would like to add anything.

Jay Saccaro

Jay, I think, you have covered very well. Thank you.

Joe Almeida

Thank you.

Matt Miksic

Yeah. That’s super helpful. And then just one follow-up on sort of your capacity and your focus on margins and efficiency, I know this is becoming a bit of a topic for the call, but it is important, obviously. So maybe if you could describe where the resources that you put to work when you came, let’s say, in a couple of years leading up to this pandemic. A fair amount of effort on zero-based budgeting and all sorts of operating efficiencies and rethinking of R&D spend, et cetera? And I am just wondering, where is the flex in your organization to get after -- get back after some of those opportunities, or how is the -- how do you anticipate your organizations are shifting to get after sort of the next leg of margin opportunity coming out of the end of this year?

Joe Almeida

Mike, there are three very specific areas of -- that we are very, very focused. One is integrated supply chain. From the moment we buy raw material is -- whatever raw material it is, all the way to the delivery to the customer.

We have specifics and that’s coincidentally I just reviewed that yesterday with the team. We have programs in all areas, from cost of raw materials to the cost reductions in our manufacturing facilities, the ability to predict cost of logistics, which has been a headwind for the company and for many other companies around the globe, with containers and shipping lanes being clocked up. So those things are the focus of Baxter. And I saw the numbers yesterday, there’s a progressive increase in net cost reduction of integrated supply chain that pleased me.

The second thing is digital transformation because Baxter did indeed remove cost from a G&A, but not enough. We got to a point that now we need to redesign our processes. So I just give an example to supplement Bob’s question to Jay is finance organizations a large group within the company, does a great job. But also we can do things in a much more concise and better way. So we are looking at that from digital transformation of our quality organizations, regulatory affairs, as well as the research and development.

We shift research and development within the company. People ask me why don’t we spend more in research and development. Always, we can spend more money. There’s always opportunity to put more money, but we are now, this year, piping out 22 new products, a brand new platform of pumps that this company never had the capability to develop and we are doing this with the R&D resources that we have by shifting location of labor, but also becoming more effective in doing that.

And lastly is the mix of this new product that will come into play for the margin accretion. So there is opportunity in G&A and gross margin via reduction in costs from integrated supply chain, as well as the mix due to new products.

Matt Miksic

Very helpful color. Thanks, Joe.

Operator

Pito Chickering of Deutsche Bank is online with a question. Please state your question,

Pito Chickering

Good morning, guys. Thanks for taking my questions. The first one is a follow-up on the cadence question, but focusing on revenues versus the OpEx that you are spending in 2Q, January and February were tough for most of the country due to COVID surge and storms. But can you give us some color on the exit rates in March and maybe April that you are seeing within medication delivery, advanced surgery and acute therapies. I am just trying to understand the dynamics of the COVID tailwinds and headwinds as we head into 2Q?

Jay Saccaro

Sure. So, overall, I think, what we outlined was admissions Q1 down roughly 8% on the way to 7% in Q2 and that very much has an impact on our medication delivery business and the performance there.

And then from -- I didn’t mention this, but from a surgery standpoint, we saw it down kind of low single digits, maybe 4% in the first quarter. We are expecting to see a sequential improvement to the second quarter of the year, maybe down 2% and my comments are specifically related to the United States.

And so -- and our April trends, what we have seen thus far is broadly speaking supportive of the comments that I have made. Now having said that, for all of the reasons that you know well, Pito, the second quarter of the year represents a very, very easy comp for areas like medication delivery.

So, whereas in the U.S. and globally, we saw a decline in the first quarter of the year, we expect to see a fairly reasonable growth level in the second quarter of the year in large part because of the easy comp and then some of the easing that we are seeing from an admission standpoint.

Pito Chickering

Okay. And then for Renal Care, can you give us some more color on what you are seeing within the U.S., Europe and other markets? I believe you mentioned that LatAm was down in mid-teens. How should we think about the increased mortality on the ESRD patients as it relates to both our in-center products in your PD products within those geographies in 2021? And also, have you seen increased PD demand as patients would rather be at home versus the center and as patients get vaccinated, are they keeping on PD?

Joe Almeida

Pito, this is Joe Almeida. So, I would say that, we saw a decline in sensors just as was outlined by the providers and by us before there was a significant death because our patients off therapy. But when we look at the dynamics of the market, we still see the U.S., the PD patient growth even with that in the U.S. was 3.3% and the outlook for the year is 6%.

The issue that was dampened the number overall is significant reduction in Latin American patient sensors, primarily Mexico, some in Brazil as well, due to fatalities, due to COVID-19. And also a reduction in sensors until the -- once COVID hit in Europe. Europe was starting to recover and start to gain really good momentum until COVID hit.

So we are optimistic even for PD this year, different than HD, 6.1% outlook for the year. And the dynamics are correct to your point, a PD is shown to be a home therapy that in crisis like a pandemic shows an increased value of convenience and safety for the patient by staying home instead they have to travel to the clinic.

And I think I believe that the ESRD disease state in the U.S., the change in guidance for home therapies, you are going to continue to see this therapy gaining momentum. So even though we had closed in the beginning of the year affecting heavily a lot of areas in the U.S., we still see good growth going forward. Thank you.

Pito Chickering

Great. Thanks so much.

Operator

Lawrence Biegelsen of Wells Fargo is online with a question. Please state your question.

Lawrence Biegelsen

Good morning. Thanks for taking the question. One on NOVUM IQ, one on BPS. So, Joe, on NOVUM IQ, just what’s your confidence in that second half 2021 approval? Is it still the three, 510(k)s that you filed last year and what’s in the 2021 guidance? And I had one follow-up.

Joe Almeida

Larry, thanks for asking me questions. I was starting to see a little lack of lag here. Pito and you were the only ones asking the question. So I am huffing back on the call again. So we believe NOVUM IQ, what we did is, we clarify a lot of questions and made a much better application for the NOVUM IQ.

So remember, NOVUM IQ is a platform. So we launched -- we have three products that are in this 510(k)s. We still have two or three more products that will come down the back toward the end of the year, our PCA pump, we also have ambulatory pump and other accessory.

So when we look at this market, we are -- we don’t first of all, we speak on behalf of the FDA. We are very happy with the way we put together the 510(k) application for the FDA, but that doesn’t mean that we speak on behalf of the FDA. The FDA will do what the FDA has to do, when they are ready and at least they approve, we have some sales in the second half of the year, modest, but we have some. I don’t know if, Jay, wants to give a bit more color on that.

Jay Saccaro

Joe, I -- yeah. In terms of sales guidance, we do have sales included for NOVUM IQ in the second half, it’s sort of north of $30 million, but it’s nothing -- it’s sort of similar to levels that we had expected last year.

Lawrence Biegelsen

That’s helpful. Joe, I will continue to give you more love here on BPS. Why break that out now, kind of is this a strategic business for Baxter. So high level thoughts on it and just more near-term, the vaccine -- COVID vaccine opportunity still $50 million to $100 million on an annual basis, but you also have that other $50 million investment in November 2020 that I think is not related to COVID vaccine. So just talked about why breaking it out now and the kind of near-term opportunities, you seem to have quite a few tailwinds in that business? Thanks for taking the questions.

Joe Almeida

So, Larry, I will speak, but I will let open also for Jay to chime in on this. I -- we did for management purpose. We did this because it’s the way we manage the business. And was always in the other and there’s a large number in others, so we prefer to have that separate. So, Jay, any more color on the reason.

Jay Saccaro

No. That’s exactly right. It’s an important business unit for us, one that we focused on, made some investments in and I think it really does leverage numerous core competencies of Baxter. It was hiding in this other category. So we wanted to take the opportunity to shed the light on it and allow investors to see specific performance for this without being clouded by other items.

Joe Almeida

Yeah. And Larry, our guidance has $50 million to $100 million possibility in it for incremental vaccine for 2021. So we stay with that number. We made investments in BPS. We have two facilities, one in Europe, one in the U.S. that are benefiting from some of this investment. And we believe that that’s the right place to create capabilities. We have unique capabilities there. We do a very good job. We have very happy customers.

So we believe that it is a good profit margin for the company is accretive to Baxter overall and it takes very little SG&A to run. So we have a really good technical group, it is a good business, good customer reputation. So why not invest more and benefit from such capability we have in-house.

Lawrence Biegelsen

Thank you very much.

Operator

Joanne Wuensch of Citi is online with a question. Please state your question.

Joanne Wuensch

Good morning and thank you for taking the questions. I have two. The first one is, it seems like there were a couple of ebbs and flows from COVID-19 in the quarter. If you could just pull this apart a little bit more. And then also similarly there -- looks like there are a number of drivers to the increased guidance for the year, if you could just sort of highlight what those may or may not be? Thanks.

Jay Saccaro

Sure. Sure. Maybe I will start with these, Joe, and then you can chime in. And I will answer your first -- second question first, in relation to puts and takes with respect to the full year guidance. Overall, if we take the full year and disregard the quarters for a moment, the strong operational performance that we have seen from a sales standpoint, plus some incremental vaccines adds roughly $0.10 to our overall guidance. In addition to that, we have some OpEx savings that’s about $0.04.

But one of the things that we highlighted in the script was the supply chain cost that we have seen in the short term and really with the highly volatile environment from a global logistics market standpoint, from a raw materials pricing standpoint, resin prices.

Some of this is impacted by the freeze in Texas, some of this impacted by the global supply chain challenges along with Suez Canal. We are expecting a fairly substantial increase in supply chain costs related to those discrete items and that really eats up the vast majority of those upsides that I characterized a little bit ago.

And then in addition, we have added the Doxil acquisition that’s a little north of $0.10 in terms of full year impact. FX and other items, all of that stuff kind of washes on a full year basis, although we do see some movement among quarters.

So that really is the overall drivers of the full year performance and what I would say is very excited about the strong operational performance, very mindful of the current environment that we are faced with, with respect to shipping and container costs, resin costs, et cetera.

We do expect that will alleviate over time. But we have tried to put the right projections in given the acute situation that we have seen over the last several months and we anticipate for at least the next several months.

Clare Trachtman

And Joanne, I will take the second or the first part of your question, which was on the impact of COVID in the quarter. So if you recall, last year in the first quarter, we had about $45 million to $50 million of a benefit from COVID-related purchases of hospitals prepared for the pandemic. So we had about $45 million to $50 million of that.

Now this quarter, it negatively impacted sales north of -- by north of $50 million. So that’s why we called that about a 400-basis point impact on our growth this year -- this quarter from COVID.

Now again, we saw positive benefits in our acute therapies. We saw some vaccine-related revenues in our BPS. But then in general across the remainder of the businesses, we saw a negative impact from COVID during the quarter. So, hopefully, that addresses your question.

Joanne Wuensch

Thank you.

Operator

Matt Taylor of UBS is online with a question. Please state your question.

Matt Taylor

Hi. Thank you for taking the question. So I wanted to just ask one about the acute therapies business. The growth there continued to be really strong as you called out the demand for CRT. How long do you expect that to persist? I know you are saying it’s going to go down over the course of the year. Do you still think there’s a strong quarter or two or do you expect a big fall off here in the second quarter?

Joe Almeida

Matt, we still see COVID unfortunately ranging across the globe. I think you have two things going on. One is we do have this therapy more being expanded and understood across the globe, even more than once before, it’s benefits.

Second, you have countries which still have issues, you can still see demand coming in and even in the United States, you still have a good number of people unfortunately being treated with this technology because COVID.

So, but we expect that to come down. This is a high single-digit, sometimes very low double-digit growth as a technology as a product line and we expect to see a reduction of the current levels to what’s more normal with the high-single digits as time goes by this year into next year.

Jay Saccaro

Yeah. And Matt, just to add to that, we will see declines because of the very substantial comp issues in Q2 and Q3. So we will see a decline starting in Q2. And to Joe’s point, this is a solid high single-digit growth engine for us. That’s kind of how we view it.

But the peculiarities of this year, despite continued COVID demand in the second quarter, we saw just an unbelievable unprecedented level of demand in Q2 and Q3 of last year. So it does lead to declines.

Matt Taylor

Got you. Got you. Can I just ask one on the in licensing of that, it seems like a nice little pickup for you. And in the context of you also investing in BioPharma Solutions, you got like two sides of the house, right, pharma and device kind of broadly speaking. Maybe just talk about strategically how you see those fitting together and are we going to see more on the pharma side or is it just that the last couple increases in investments have been there?

Joe Almeida

Matt, we do have two sides of the house, but they are very connected. The way we go to market. The way we understand contracts and our devices also are devices that are becoming more intelligent, but they are transporting fluid from point A to the body. So the combination of our devices and our injectables and pharmaceuticals come together.

When we look at business, development with of business development across the spectrum of Baxter, what is the objective of business development is to expand into adjacencies, short up our core and sometimes go away from the adjacencies into an area that may benefit the company in the future, always really thinking where is the puck going, right, instead of going at the puck where it is today. So that’s our philosophy in M&A.

You are going to continue to see the tuck-ins, because those are good for the company, leverage our sales and marketing organizations, as well as our manufacturing groups. So these two tuck-ins were very beneficial.

One, primarily Caelyx version of Doxil in Europe help us create a structure to add more pharmaceuticals organically and inorganically there. So our philosophy is always enforced and makes the core stronger, going to adjacencies and also look what the tuck [ph] is going in healthcare and make sure that we don’t miss that trend.

Matt Taylor

Great. Thanks. That’s helpful insights. Thanks, Joe.

Operator

Vijay Kumar of Evercore ISI is on the line with a question. Please state your question.

Vijay Kumar

Hey guys. Congrats on a nice start here. Maybe I will start one on the guidance and apologies if this has been asked. Jay, I guess, you beat the quarter, right? The expectation was for low single decline constant currency, you guys came in up low single. And if I understand the annual guide correctly, the constant currency guide raise was mostly a function of Caelyx. So I guess my question is, is the underlying business coming in better than expectations in Q1, why wouldn’t that flow through in the back half?

Jay Saccaro

Sure. Vijay, we did see a little bit of operational strength in the first quarter and some of that relates to slightly better admissions than we experienced in the -- than we had originally modeled, and so as a result, we did see a little bit better performance in the first quarter.

But given where we are in the year, given some of the challenges that the renal patient sensors is faced with at this point. It’s a little difficult to call full year strength at this stage. We will have to continue to watch. If the renal patient sensors stabilizes, if admissions and surgical procedures come in line or better than what we have modeled, we will certainly update. But at this point in time, I think, it was our reasonable guidance for the balance of the year.

Vijay Kumar

Understood. Then, Joe, one for you, mostly around capital deployment, I wasn’t sure if you guys bought back any stock in the quarter, but the larger question around M&A philosophy. Maybe could you just recap to us on how your thought process around M&A has changed, if it has over the past few months?

Joe Almeida

Vijay, good to hear from you. How are you doing?

Vijay Kumar

Well, thank you.

Joe Almeida

So the philosophy in how we are disciplined about how we deploy cash has not changed. As I actually answered a little bit of your question before, we will continue to look for tuck-ins in our core businesses, not very easy to find them, because the size of our businesses and the particular area of our businesses, we will continue, we just did a couple of small ones in the pharmaceuticals business. We will continue to look for those opportunities. We are going into adjacencies. We are looking at things to shore up where we can have advantage.

But more importantly also, we are starting to look at the healthcare theater in general and trying to anticipate with what we saw last year and how healthcare is moving in the direction is moving, I said, where should Baxter go? And we have always talked about intelligent devices. We are talking about the integration with the hospital systems, with the deployment of our own gateway for the new pumps.

So if you think about how do you participate where actually the tuck is going, not the tuck is today, so the company can revitalize itself as well. So these are all areas that we look. We are very eager to continue to explore opportunities.

But as I always say, if we do not find the right opportunity, we are not going to sit on cash and have cash burn a hole in our pockets. We will bring either share buyback, as well as increase in dividends.

Vijay Kumar

Understood. Thanks, guys.

Jay Saccaro

And Vijay, we repurchased approximately $300 million in shares in the quarter.

Vijay Kumar

That’s helpful, Jay.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call with Baxter International. Thank you for participating. You may now disconnect.