Baxter International Inc. (BAX) Q2 2020 Earnings Call Transcript

Baxter International Inc. (NYSE: BAX) Q2 2020 earnings call dated Jul. 30, 2020

Corporate Participants:

Clare Trachtman — Vice President, Investor Relations

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Analysts:

Robbie Marcus — JPMorgan. — Analyst

David Lewis — Morgan Stanley. — Analyst

Pito Chickering — Deutsche Bank — Analyst

Bob Hopkins — Bank of America — Analyst

Vijay Kumar — Evercore ISI — Analyst

Matt Taylor — UBS. — Analyst

Joanne Wuensch — Citigroup Inc. — Analyst

Larry Biegelsen — Wells Fargo — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to Baxter International’s Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcasted 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 and Investor Relations at Baxter International. Ms. Trachtman, you may begin.

Clare Trachtman — Vice President, Investor Relations

Thanks, Catherine. Good morning, and welcome to our second quarter 2020 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 second quarter 2020 financial results and full year 2020 financial outlook. A supplemental presentation to complement this morning’s discussion can be accessed on our website in the Investors section under Events and 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 full year 2020, new product development, business development and regulatory matters contain forward-looking statements that involve risks and uncertainties, and of course, our actual results could differ materially from our current expectations. Please refer to today’s press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today’s call, non-GAAP financial measures will be used to help investors understand Baxter’s ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. On the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange and the acquisition of Seprafilm, which closed on February 14 of this year. Now I’d like to turn the call over to Joe. Joe?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Thank you, Clare, and thanks, everyone, for joining us today. I hope that you and your families are healthy and safe. Like the last quarter, I want to begin by recognizing all of the health care providers and the first responders who continue to work tirelessly in combating COVID-19. Our deep appreciation also goes to all the clinicians and researchers who are advancing knowledge, treatment and promising vaccine candidates to address this global pandemic. Three months ago, we were hoping to see some easing in the trajectory of this deadly pandemic by now. Sadly, while the hotspots may have shifted, the infection rates and impact remain staggering. Baxter’s second quarter performance reflects the evolving impact of pandemic conditions on the global health care landscape and on our own operations. As you saw in today’s press release, Baxter reported a year-over-year decline in both net sales and earnings in Q2 2020. While demand for certain pandemic-related treatments and technologies reached historic highs within the quarter, we also saw a negative impact on our results from significantly lower rates of hospital admissions and a reduction in elective procedures. The implementation of various shelter-in-place initiatives globally as well as patient concerns regarding potential COVID-19 infection risk in the health care setting contributed to these trends.

During the quarter, we continued to experience significantly heightened demand for our Acute Therapies products due to COVID-19. According to a number of third-party sources, 20% to 30% of COVID-19 ICU patients will develop acute kidney injuries, requiring treatment with a renal replacement therapy, of which continuous renal replacement therapy, or CRRT, is the preferred option. In addition, our chronic Renal Care business continues to deliver sustained mid-single-digit constant currency growth in peritoneal dialysis product portfolio. We continue to highlight the advantages of peritoneal dialysis therapies plus our Sharesource telehealth technology as clinicians and patients look to home-based treatment to limit the risks of potential pandemic exposure. This positive performance in Acute Therapies and Renal Care as well as growth in our Clinical Nutrition business, partially had year-over-year sales declines in Medication Delivery, Pharmaceuticals and Advanced Surgery. Results for these businesses reflect the negative impact in the quarter, resulting from a decline in U.S. hospital admissions of over 20% and a reduction in U.S. surgical volumes of more than 30%. The rate of these declines was similar to what we observed in both our European, primarily Western Europe, and Latin American markets during the quarter. Our Asia Pacific business, particularly our business in China, slowly began to recover in the second quarter. While we do expect sequential improvement in both admissions and elective procedures globally, our current assumption is that both metrics will remain below prior year levels and could be further negatively impacted by COVID resurgences in markets around the world.

Sales in the second quarter also reflected pull-forward of demand into the first quarter where we saw generally more aggressive ordering and stocking patterns among hospitals and distributors, reflecting elevated uncertainty amid the pandemic’s early rapid global spread. While the current environment remains deeply uncertain, as of the end of the second quarter, we have been able to renormalize production and inventory of high demand products and have reduced the need for round-the-clock manufacturing. We also have been able to wind down our use of supplemental expedited shipping methods, which played an essential role in accelerating product availability early in the pandemic. Baxter’s resilience at this unprecedented moment continues to be bolstered by the diversity and medically essential nature of our products, combined with our market-leading positions. Similarly, our broad geographic footprint supports balance and stability, helping counter the risks of overexposure to a more limited range of geographies. The continuing momentum of our business transformation also helps to strengthen our market position. Baxter’s enhanced efficiency, speed and agility are clearly helping us navigate the impact of COVID-19. And that is just one variable we are addressing. As we anticipate a challenging hurricane season, we’re leveraging our learnings on enhanced operational effectiveness for maintaining steady supply as the season unfolds. Meanwhile, we remain steadfastly focused on driving growth through innovation.

Recent weeks have seen the launch of our new EVO IQ Syringe Infusion System in the U.K. and Australia, FDA clearance of our Altapore Shape Bioactive Bone Graft and the publication of new positive data in the journal CHEST, involving our Starling Fluid Management Monitoring System. Looking ahead, additional pipeline highlights include our NOVUM IQ Smart Pump Technology, Sharesource Analytics and additional differentiated generic injectables. In all of these efforts, our people remain our ultimate resource and differentiating strength. I’m working closely with some of the most talented and dedicated colleagues I have known. Our customer satisfaction rates as recently captured in the highest average Net Promoter Scores Baxter has recorded globally further speaks to our efforts during this period. Together, this team has helped advance dramatic change and will continue to do so. This includes new initiatives to advance racial justice within Baxter and among the communities and markets we serve. I’m proud of what we have achieved to date across our business and our culture. But even more importantly, I’m energized by our ability to address various market challenges and accomplishes still more for our patients, shareholders, employees in the diverse communities we serve. Now I will pass it to Jay for a closer look at our second quarter results and outlook for the balance of the year.

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Thanks, Joe, and good morning, everyone. As Joe mentioned, our second quarter performance reflects the resilience of our diversified portfolio, even in an uncertain health care landscape. Our unwavering focus is on meeting the needs of patients and providers globally with medically essential products and therapies. Turning to our second quarter 2020 results. Global sales of $2.7 billion declined 4% on a reported basis, 1% on a constant currency basis and 2% on an operational basis. Increased demand for our Acute Therapies portfolio, along with solid performance in Renal Care and Clinical Nutrition were offset by declines in our Advanced Surgery, Pharmaceuticals and Medication Delivery businesses, largely driven by the impact of COVID-19 on surgical procedure volumes and hospital utilization. We estimate that there was over $180 million in revenue downside for the quarter related to COVID-19. On the bottom line, adjusted earnings decreased 24% to $0.64 per share, reflecting lower sales in higher-margin businesses, incremental COVID-related operations and logistical expenses as well as higher interest expense and a higher tax rate. Now I’ll walk through performance by our regional segments and global business units. Note that for this quarter, constant currency growth is equal to operational sales growth for all global businesses, except for our Advanced Surgery business, for which we will provide both constant currency and operational growth adjusting for the acquisition of Seprafilm. Starting with our three regional segments. Sales in the Americas declined 5% on a constant currency basis and 6% on an operational basis. Sales in EMEA advanced 1% on both the constant currency and operational basis. And sales in our APAC region advanced 5% on a constant currency basis and 3% operationally.

Moving on to performance by global business units. Global sales for Renal Care were $919 million, advancing 5% on a constant currency basis. Performance in the quarter was driven by mid-single growth in both our PD and HD businesses. PD growth benefited from increased patient volumes globally, including high single-digit patient growth in the U.S. as well as solid performance in our APAC region. Our HD business returned to growth this quarter as we anniversary the prior year sales impact of our Revaclear dialyzer supply constraints. Sales in Medication Delivery of $612 million declined 9% on a constant currency basis. Within the quarter, we continued to benefit from strong execution on our Spectrum IQ and EVO IQ infusion pump placements globally. And as Joe mentioned, we were pleased with the launch of our EVO IQ Syringe Pump internationally. We also saw a solid growth for our small volume parenteral products in the U.S. during the quarter. These benefits were more than offset by the impact of COVID-19 on lower patient admissions and a reduction in surgical volumes, which drove global declines in our IV therapies business as well as lower sets and access utilization in our Infusion Systems business. As Joe mentioned, in the second quarter, we saw the rate of hospital admissions decline more than 20% and surgical volumes come down over 30% as compared to pre-COVID levels. We estimate these lower volumes negatively impacted Medication Delivery sales by approximately $100 million within the second quarter. Pharmaceutical sales were $485 million, down 7% on a constant currency basis, reflecting the expected declines from reduced demand for our inhaled anesthesia products as a result of lower elective procedures related to COVID-19. We estimate this negatively impacted inhaled anesthesia sales in the quarter by approximately $50 million. Performance in the quarter was also impacted by increased competition for Transderm Scop. These declines were partially offset by increased demand for our international pharmacy compounding business along with certain generic injectables.

Moving to Nutrition. [Technical Issues] in the U.S., reflecting the lower hospital volumes we’ve discussed. Sales in Advanced Surgery were $168 million, declining 27% on a constant currency basis and 37% on an operational basis. The acquisition of Seprafilm in February contributed $23 million to sales in the quarter. Declines in elective surgical procedures drove an estimated negative impact of approximately $80 million for the Advanced Surgery portfolio. Sales in our Acute Therapies business were $186 million, representing growth of 45% on a constant currency basis. We estimate that the heightened COVID-related demand contributed approximately $50 million to growth in the quarter. Finally, sales in our other category, which primarily includes our contract manufacturing services, were $129 million in the quarter, advancing 7% on a constant currency basis. Moving through the rest of the P&L. Our adjusted gross margin of 41.6% declined by 280 basis points over the prior year, driven by lower sales of higher-margin products as well as increased expenses we have incurred in our manufacturing operations and supply chain related to our COVID-19 response. Adjusted SG&A of $577 million declined 5% on a year-over-year basis, primarily driven by our ongoing focus on expense management, reduced discretionary spending resulting from COVID restrictions and lower bonus accruals under our annual employee incentive compensation plans. Adjusted R&D spending in the quarter of $118 million declined 16% on a reported basis, with reductions in discretionary spend due to COVID-19 being supplemented by our continued focus on operational excellence and the timing of certain project-related spend. We continue to prioritize strategic investments to fuel our innovation portfolio.

Adjusted operating margin in the quarter was 16%, a decrease of 190 basis points versus prior year. Net interest expense was $36 million in the quarter, an increase of $16 million compared to the prior year, driven by increased interest expense from higher outstanding debt balances as well as decreased interest income due to lower interest rates. Other nonoperating expense totaled $6 million in the quarter compared to $4 million in the prior year period. The adjusted tax rate in the quarter was 16.2% higher than the previous year, which included a benefit related to favorable tax ruling and higher stock compensation deductions. With respect to cash flow in the first half of 2020, we generated free cash flow of $332 million compared to $242 million in the prior year period. As Joe mentioned, we are currently carrying higher levels of inventory to ensure adequate product availability in advance of hurricane season and amidst the ongoing uncertainty related to COVID-19 demand. We remain very focused on maintaining a durable balance sheet and adequate liquidity in an uncertain market environment. At the end of the second quarter, we had approximately $4.1 billion of cash on our balance sheet, which we believe is sufficient to fund our operations and strategically execute on our capital allocation priorities. While to date, we haven’t yet experienced significant collection issues, we are closely monitoring the collectibility of our receivables in the current environment.

At this time, we’ve maintained the temporary suspension of our share repurchase program to drive further financial flexibility in the current market. Within the quarter, we announced an approximate 11% increase to our quarterly dividend payment, reflecting our continued commitment to delivering value to our shareholders. Let me conclude my comments by discussing our outlook for the remainder of the year. For full year 2020, at this time, we expect reported sales growth between negative 1% and positive 1%. We expect flat to low single-digit sales growth on both the constant currency and operational basis. In an ever-evolving landscape, some of the factors impacting this outlook, which we continue to monitor closely around the world include patient referral pipelines and willingness to return to care, pace of elective procedure recovery, impact of COVID-19 on the ESRD population and PD penetration, hospital access for our sales and technical representatives and the impact infection levels globally. As Joe stated earlier, our current outlook assumes a sequential improvement on a quarterly basis in both hospital admissions and surgical volumes, although still below prior year levels. Regardless of these uncertainties, we remain ready to address critical patient needs by supplying the market with a portfolio of medically essential products and ensuring the safety of our employees. As such, in line with our first quarter commentary, we expect to absorb approximately $150 million of incremental operations and supply chain expenses related to our COVID-19 response efforts in 2020. These costs include measures we are taking to protect employee safety, bonuses paid to our frontline manufacturing and field service employees and increased freight-related costs as we prioritize delivery of critical products. We will continue to prioritize our planned R&D investments within the year. Year-over-year operating expense reductions will be driven by continued financial discipline as well as lower travel and meeting expenses. We expect full year net income net interest expense to increase by over $60 million as compared to the prior year.

And for the full year, we also expect other nonoperating expense to be negatively impacted by approximately $50 million year-over-year due to the loss of pension-related income from the Q4 2019 transfer of $2.4 billion in pension assets and related liabilities. Given these factors and underlying assumptions, we currently expect adjusted diluted earnings per share, excluding special items, between $3 and $3.10 for the full year 2020. Finally, as we announced last quarter, we’re postponing our investor conference until 2021. As we previously discussed, we’ve withdrawn our long-term financial outlook, but remain confident in our ongoing commercial execution strategies and expect the contributions from our new product pipeline. We plan to provide an updated financial outlook at our investor conference next year. In closing, in the first half of 2020, each day brought new learnings as to how this unprecedented environment is impacting the patients and providers we serve globally. Our year-to-date top line growth is fueled by the durability of our portfolio as well as the pandemic response, which has benefited from strategic vision, financial discipline and the tireless efforts of our dedicated employees around the world. In this dynamic environment, we continue to be well positioned for sustained success. With that, we can now open the call to Q&A.

Questions and Answers:

Operator

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

Robbie Marcus — JPMorgan. — Analyst

Maybe we could start with the delta in second quarter versus your expectations coming out of the first quarter? And then what gives you the confidence to put out the guidance range that you did? With still seeming uncertainty through the balance of the year, help us understand how conservative this is? How much room for upside or downside is in the guidance range? And just any color you could provide around it.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Robbie, this is Joe. We had expected that and positively for primarily the U.S. and Europe, the widespread or shelter-in-place initiatives and concerns in the beginning of April really reduced hospital admissions. People were fearful to go to hospitals, but the shelter-in-place put a reduction in place of cases along if you remember, along the curve for the month of April and May sequentially. Those things combined created pressure on hospital admissions. So let me explain to the folks on the phone that Baxter is a little different than what you think of our peers are. We are dependent in three different segments, business, acute care ICUs, a portion of our business is driven by that, hospital admissions drive another portion of our business. And home care, primarily the dialysis business drives that too. So different than many of the peers that you usually cite, Baxter is not an elective procedure-dependent company. Hence, our resilience, hence, our performance this quarter was slightly below our expectations. But it showed to be more resilient than double-digit decline that you saw in many of our peers who reported already. And the reason for that is that we have business like acute renal care and peritoneal dialysis, which are doing extremely well for different reasons. What suffers in Baxter is the business of operating room procedures, you see, with anesthetic gases.

The Pharmaceutical business is down double digits versus prior year. That is mainly driven by anesthetic gases and the lack of use of some injectable medicines that would be used in general on the general floor for alleviating urosis. Admissions to hospitals saw a double-digit decline in the second quarter. So that created the pressure that you see in our numbers. We also transposing to your question now, we have done an extensive work on modeling with a significant amount of inputs created our own way of understanding the market. And we see in our model a modest sequential improvement. That’s why we felt a bit more comfortable in giving guidance. But if you notice our guidance, it’s pretty wide. And it contemplates a significant amount of variables that we have in place. But if you boil down to what variables drive Baxter business is the home care business, is admissions into ICU, general admissions into hospitals and the operating room affects our business, primarily the anesthetic gases and Advanced Surgery.

Robbie Marcus — JPMorgan. — Analyst

Okay. So maybe as we think about that, Joe, and maybe, Jay, you could take it. How do you think about what third quarter looks like and what fourth quarter looks like? And maybe give us some of the puts and takes around the margins, both, you had pretty material R&D cuts. How do we think about gross margin, your spending on research and development? And where you could get some of the savings to offset the incremental $150 million in SG&A?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Sure. There’s a lot to that question. So I’ll hit each of the pieces. First, as we think about Q3 versus Q4, we were reluctant. We provided a larger range than we normally do at this point in the year on both the sales and the earnings for the company. And we did so because of the very wide dispersion of outcomes that are potential in the marketplace. I’m sitting here, I just saw the headline indicating a 33% decline in GDP for the quarter, which is just a shocking number and reflective of the wide range of uncertainty that we’re currently contending with. And so as a result of that, we put forth a wider range than we normally do. And we also did not share quarterly guidance, because given how things emerge, given hotspots, movements in these in different pieces that take place, there is an inherent amount of volatility on sales in a given month. And we believe that over a longer duration of time, we have a better ability to predict. What I would say is we expect higher earnings in Q4 than Q3, and probably similar levels of sales performance in each of the quarters. Now as it relates to R&D spending, the R&D spending, we have across SG&A and R&D, we are seeing some level of savings as a result of the pandemic and as a result of discretionary controls we’re putting in place. But what’s important to note is that we are incredibly focused on advancing the R&D pipeline. So we will make those investments necessary to preserve this wherever possible. And like I said, and I think you see this in some of our commentary and discussions and progress that we’re making, we’re really happy with the progress in the R&D pipeline. So while there will be some spending savings,

I wouldn’t expect it to radically alter any specific time lines. As it relates to offsetting the $150 million. So we made significant investments because right now, priority number 1 is keeping employees safe. Priority number 2 is getting our product where it’s needed in time. This is a pandemic. It’s moving around very, very swiftly. Hotspots are emerging. Our product has to be available. And so as a result of that, we experienced some significant second quarter costs. Some of those costs will roll out in Q3 and Q4. And we anticipate this $150 million number, a lot of which is just ensuring business proceeds as usual. So now how do you offset that? Well, there are a lot of mechanisms that we will put in place to offset from a spending control standpoint, things like travel, things like other discretionary areas. Robbie, you know as well as I do, this company is incredibly focused on zero-based budgeting and really smart spending on every single dollar. That doesn’t change. The pandemic does change in terms of how we approach our business and affords us some new opportunities, but that philosophy of focusing on every cent is something that will continue to serve us well. And then the big thing is as this pandemic subsides, and we don’t know when that will be, then we’ll recover the majority of the $150 million. But that’s going to be a cost that we’ll continue to watch and we’ll continue to support. And then as things ease at some point here, then we’ll start to recoup some of those expenses.

Robbie Marcus — JPMorgan. — Analyst

Thanks a lot.

Operator

Our next question comes from David Lewis with Morgan Stanley. Your line is open.

David Lewis — Morgan Stanley. — Analyst

Good morning. Just a couple for me. Maybe, Joe, and then I’ll shift back to Jay. Joe, just can we just talk about the path for THERANOVA from here? And what you’re expecting now in terms of expectations for additional reimbursement either heading into 2021 or beyond? And then I’ll follow up with Jay.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Okay. David, good morning. We carried after we received the news from CMS. We had several exchanges with them related to our submission, and we keep them abreast of the some rapid change environment in the THERANOVA. We will submit the comments to CMS by September 4. And we plan to address CMS’ issues as well as provide new information to them since our January 2020 filing. I would say that the information will include publications of our FDA clearance trial, a randomized controlled trial with the U.S. Medicare patients, also set to be published in September in a peer-reviewed journal. Our FDA market authorization status will be shared with them and an update on our companion of studies. They include posters recently presented at some conferences in June 2020 as well as newly published manuscripts already shared with CMS. We’re confident we can address the CMS issues. This is not our decision, it’s theirs. So I don’t want to speak on behalf of CMS. But in terms of addressing what was present to us, we think we can do it as well.

David Lewis — Morgan Stanley. — Analyst

Okay. So your confidence in reimbursement for 2021, is it still would you say relatively high or…

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

David, I can’t speak on behalf of CMS. My confidence is very high that we’ll be able to address the questions that they posed as well with meta-analysis that we’re doing, but that doesn’t mean that they’re going to make a decision one way or the other, I can’t predict that. But I can tell you from our behalf that we are confident that we can produce all the product all the data and documents that seems that they are not complete from their perspective.

David Lewis — Morgan Stanley. — Analyst

Okay. Very clear. And then, Jay, just two questions for me. One is just on the surgical business, which is the business that’s sort of very similar to other medical device procedure businesses. I’m kind of curious in your guidance, what assumption you made, most of your peers are saying sort of the surgically oriented businesses will grow in the fourth quarter. What’s implicit in your guidance for the fourth quarter there? And just on spending, the $150 million, there was a sense that, that would be sort of correlated to revenue this year, but a lot of that spending got made in the first quarter. So to what extent will that spending be correlated to revenue throughout the year? And how confident are you that those spending dynamics don’t carry into 2021?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Sure.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

I will take I was going to David, your question was very long. Can you repeat the I would take the first part…

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Surgical procedures and the underlying…

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

The surgical procedures, and Jay will take the second part. The surgical procedures, we see improvement slight improvement quarter-over-quarter. We actually we don’t comment intra-quarter, but today, I’m going to make an exception and tell you that we’re seeing a slight improvement in procedure volume into the month of July. For me to sit here today and affirm that we’re going to have positive growth in the fourth quarter is very difficult. We don’t know what’s ahead of us. I don’t question other companies’ ability to do that. From our perspective, growth is anything above 0, right? So if that is the case, there is a possibility, but I tell you is a possibility. I’m not going to be sitting here today affirming that procedure growth is going to be positive in the fourth quarter. We got to have a better understanding how we are controlling the hotspots in the U.S. and Europe were the major drivers of procedure growth as well as how the vaccine will impact the immunity of large swath of the population that would be ready for surgeries. So I would say to you, there is a possibility for growth in the fourth quarter, but we are not affirming that in terms of guidance. It’s just an opinion.

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

That’s right. With the wide range of uncertainty around it, David, I mean, I think for us, one of the things that we are very respectful of is the large range of potential outcomes as it relates to the pandemic. And so that impacts things like, to Joe’s point, surgical volumes. Our crystal ball is cloudy because surgical procedures are not scheduled six months in advance. So anybody who has a really good line of sight to that, I would be very thoughtful about those expectations. But as it relates to the $150 million in spending, this too is, to a large extent, related to what happens with the pandemic. To the extent that the pandemic ends and we return to business as usual, then we will have the ability to claw back the majority the significant majority of this spending. But until such time as we have confidence that the situation is managed, our employees are safe, we’re getting the medically necessary products to our customers, we will have some level of cost resident in our P&L and, not discussed, we will have some level of excess inventory that we carry because we have to protect against things like a wave two or a resurgence or a hurricane season. So all of these things will kind of impact us, and we’re going to watch carefully. But I think when calling when these things subside becomes very challenging at this moment.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

I was just going to add that to all of you on the call, not only to David’s question, is Baxter has ultimate responsibility to our patients and our customers. So for us, having inventory on the shelf is incredibly important because as we saw during the peak of the pandemic in the Northeast, we were having volumes that were reaching 500% of our ability to produce and having that inventory independent of government stockpiles is important for us to have it. The same applied for IV solutions. All of you’ve probably noticed, there was not a shortage of IV solutions in any markets that we serve. And one of the reasons for that is because we prepared well. As the tropical storm is hitting Puerto Rico, as we speak today, I feel very upset about that. Something we can’t control because the people in Puerto Rico had suffered enough maladies and issues with weather and hurricanes and earthquakes. But nevertheless, we do have sufficient inventory in on the shelf to withstand any situation that hit us in the Caribbean. So we will carry that inventory level for a while. We will then reduce appropriately, and we are starting to reduce in some areas. Listen, there is nobody more interested to take the $150 million out of our P&L than I am. And we’ll do it as soon as we can. We have actions in place right now. We have significant actions in place, including some changes in staffing some of our plants that had needed to increase staff for the peak of the pandemic in the Northeast, and we’ll do it responsibly.

Operator

And our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Pito Chickering — Deutsche Bank — Analyst

Good morning guys. Thanks for taking my questions. The first one on PD. Can you talk about the PD business a little bit. I believe in early 2Q, it was challenging for patients to get the PD catheter, which could have impacted growth. So can you talk about how PD growth changed throughout the quarter? And where you exited it on 2Q? And do you think that COVID accelerated the patients’ interest in home dialysis?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Pito, good morning. Listen, we are very focused on business that had 5-plus percent growth in the quarter. The U.S. experienced 8% growth. We had also high growth in Asia. Europe is a spot that has not grown to our expectations. But I think some of that was related to the Middle East, the emerging markets of Europe. Europe Western Europe itself actually did pretty well. So we first of all, I don’t know if you remember that peritoneal catheters were deemed to be emergency surgery. So they were being performed in several hospitals in the U.S. The growth of our business is very encouraging. As you know, we ramped up our production of peritoneal dialysis supplies. We are implementing capital right now to shore it up. I think the dynamics of the home therapies is really something that finally is coming to the surface as a great advantage and vis-a-vis in a crisis like we just had. So we are very excited about this business. I think our partners are excited about this business. And you can see by the growth even in the middle of the worst quarter for this pandemic, the U.S. has 8% growth. So it’s that’s one of the things I talk about our business is its resilience and its reliance on different sectors of the health care continuum of care that help us mitigate some of the most acute issues of hospital admissions as well as the pandemic effects on the whole the entire health care system.

Pito Chickering — Deutsche Bank — Analyst

Great. And then going back to guidance again, I understand that predicting the bounce back of surgeries is virtually impossible at this point. But can you break out what percent of pre-COVID hospital possible visits you were assuming at the high end and at the low end of your revised guidance?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Pito, we didn’t hear the exact specific question that you asked.

Pito Chickering — Deutsche Bank — Analyst

Okay. Let me restate it. So going back to guidance again, I understand that predicting the bounce back of surgeries is nearly impossible. But can you break out what percent of pre-COVID hospital visits you’re assuming in the high end and at the low end of your revised guidance?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Yes. I’ll start I’ll share some assumptions regarding the higher end in Q4. As we think about and by the way, the area of most interest is the U.S. because I think this is the most pronounced. But what we’re expecting to see from a procedure rate standpoint is basically flattish in Q4 relative to prior year. From a procedure standpoint, we’ll see some softness in Q3, and then we’ll claw back as we move towards Q4. And then from an admissions rate standpoint, we do expect a sequential recovery, but we’re modeling down several kind of low single digits versus the prior year in Q4. And those assumptions support the high end of our range. So you can model down from there to see what a low-end assumption would be. And again, it’s we’ve done a lot of modeling on this in terms of statistical inputs. We have a variety of rich inputs to our model. But again, there is a wide range of outcomes here that makes forecasting at this point challenging.

Pito Chickering — Deutsche Bank — Analyst

Great. Thanks so much.

Operator

Our next question comes from Bob Hopkins with Bank of America. Your line is open.

Bob Hopkins — Bank of America — Analyst

Thanks and good morning. Can you hear me okay?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Yes, we can, Bob. Good morning.

Bob Hopkins — Bank of America — Analyst

Great. First question is on your guidance related to COVID. Thank you for providing that $180 million number for the second quarter. It sounds like that’s the net impact of COVID in the second quarter. I’m just curious for your guidance for the back half of this year, what do you assume the net impact of COVID is on your business and the projections you gave us?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Yes. And the projections that we shared, it’s roughly somewhere around $130 million, $140 million of negative impact related to COVID. So that’s the assumption that we put forth. And underlying that assumption or the assumptions that I laid out for Pito in the U.S. and then kind of similar assumptions, although a little bit of a better marketplace in Europe and Asia Pacific.

Bob Hopkins — Bank of America — Analyst

Okay. So that $130 million is for the back half?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Yes. That’s embedded in the guidance.

Bob Hopkins — Bank of America — Analyst

Yes. That’s helpful. And then I just also wanted to see if we can get a little more color on Medication Delivery. It sounds like the pump business did about as you expected. It sounds like the issue with infusion sets. Was that 100% related to what’s going on with COVID?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Largely, if not 100% related to the pandemic, to the hospital sensors, okay? We did not see any competitive threat in this in the pump area. As a matter of fact, I think we did as expected in terms of pump sales that we had predicted internally to the company. We don’t disclose that specific target. So as we also have launched pumps outside the U.S. EVO IQ is launched outside U.S., the syringe pump. So we’re starting to have a global portfolio of pumps, as you know. And we’ve been advancing in the U.S., our current SIGMA SPECTRUM. And we’re looking forward to hear from the FDA on our new pump platform, which we hope to hear some time in September.

Bob Hopkins — Bank of America — Analyst

Great. Thanks very much.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Thanks Bob.

Operator

Our next question comes from Vijay Kumar with Evercore ISI. Your line is open.

Vijay Kumar — Evercore ISI — Analyst

Jay, one on, I guess, a clarification on the prior question from Bob. The I guess, the assumption here is excluding COVID impact, the underlying business is growing mid-singles. So there’s no change from your LRP ex COVID. Is that the correct math here for 2Q and back half?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Yes. It’s a what I would say is relative to expectations and what we previously shared, which is, remember, there were some slight departures between what we shared in January regarding this particular business and the original LRP that we shared a couple of years ago. So relative to guidance that we shared at the beginning of the year, the primary driver of change really relates to COVID impacts. I mean so that’s and it’s substantial. And we’ve seen an incremental cost, but then also this impact on in particular on our Medication Delivery business, the combination of those two factors, cost and sales, really, that’s the big driver this year in terms of our performance.

Vijay Kumar — Evercore ISI — Analyst

Then Joe, maybe on a question on LRP here. Ex COVID, right? I mean, when I look at sort of what you guys laid out, has anything changed at all? It feels like since then, things have gotten incrementally positive. I didn’t hear talk about the President’s initiative on home care. Where are we on that? When you look at the free cash flow year-to-date performance, I’m just curious, has anything changed on free cash flows at all?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Vijay, we our long-term perspective for our business as we had outlined in our prepared remarks has changed. What we look at the R&D portfolio of the company, there are some puts and takes, but we don’t see great change from the original plan that we had in place. There are puts and takes, the things that came out, things that don’t that didn’t work, things that are new or work in a put-in. So in terms of innovation, because I think the LRP of the company has two major drivers I would say, three major drivers. One is the home care push PD. That’s a big driver for us. The second one is the whole innovation underlying push the company is undertaking. Remember, we’re looking at this year close to sales of new products over the last three years to be close to $1 billion. Even in the year of COVID, we feel very comfortable with the number that is coming out of our innovation. We’re very excited about our new pump platform. We’re excited about new things we are developing in other areas. Our PrisMax has launched well, and it was a great product for the right time. So that’s the second lever. And the third is continuously attacking the cost basis of the company. And for that, there’s two areas of focus. One is the digital transformation of Baxter which we started, and creating significant change in how we do business internally and sometimes with our customer as well as a complete revamp of manufacturing, which will be several years to do it, but will create some good opportunities. So those for me are the areas, the underlying conversation for the LRP. This is the conversation we have with the Board, and that’s what we would have with our investors. Those are the four areas, three areas with one divided into 2, that I would say are the major drivers for the company future.

Vijay Kumar — Evercore ISI — Analyst

Thanks guys.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Thanks, Vijay.

Operator

Our next question comes from Matt Taylor with UBS. Your line is open.

Matt Taylor — UBS. — Analyst

Hi. Thanks for taking the question. So the first question I had was just because there’s been a lot of focus on this on the call for the $150 million in costs that you’re talking about. Could you just parse out some of the bigger buckets, so it makes it easier for us and the investors to understand how some of that could go away? I know you’ve talked about overtime labor, PPE and shipping. Are those some of the big ones? And assuming the pandemic ended tomorrow, how long would it take some of those to dissipate?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Yes. Matt, maybe I’ll make some commentary, but we will stop short of doing line item cost review. The from an overall standpoint, you’re right, expedited freight is an important and significant driver. One of the things that we had to do is because we were seeing higher levels of absenteeism, we were also having to hire temporary workers to mitigate that shortfall in employees. And so that was another expense that we’ve experienced. PPE is another expense. Now this will be more ongoing. So we’ll look to manage this as effectively as we can because, frankly, I think that PPE will be here to stay in manufacturing facilities. And then like I said, overtime and incremental bonuses for frontline workers, those others comprise the majority of the spending that we’ve experienced. It’s important, when you get back to our priorities: number one, employees safe; number two, continuity of life-saving supply. We have to ensure that and we’ve done that. And so we’re proud of the progress there. But we’re mindful that there has been a real economic cost associated with this. And we will look to manage this down as quickly and swiftly as we can. Can I give you a time line in terms of exactly when? If the pandemic were to end today, should we be able to recoup the vast majority of those expenses in next year’s budget? I believe the answer is yes, but we’ll have to go through our budget process. And clearly, the pandemic is not ending today. This is going to be with us for a time. And it’s going to be with us in terms of the level of severity. So that’s maybe some color for you on this $150 million.

Matt Taylor — UBS. — Analyst

Got you. And then one follow-up on Med Del. You mentioned that pumps are in line with your target. One of your competitors called it a pretty large bolus of placements under EUA. Do you expect to see something like that? And maybe you could also just talk about the potential for a U.S. pump launch for the new platform and the timing of that?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Matt, I can’t comment on a competitor EUA status and what they sold or not. But I can tell you that we performed as planned in terms of our pump placements. And we remain very excited with the potential launch of our new pump platform. As you know, it is a brand new platform, very robust in terms of electronics as well as the modality of syringe pump that we never had as a company. So I think the market is ready for something new, something that is designed for the future. And we will accommodate future digital health updates. So we’re excited about that. So I can’t comment on our competitors, but I can tell you that we are ready to go back to the market with a new product despite the fact, we just launched our version 9, which is a robust and very good pump about 1.5 years, two years ago or actually two years ago into July, it was July 2017 when we launched that July 2018, I’m sorry, July 2018. So very excited about new pump platform. So and not only that, Baxter has a global platform now because the new pump platform for us is going to be a global business, despite the fact that now we went back to the outside markets with an interim product, which is EVO IQ, which is doing very well. So we’re going to position ourselves as a strong pump competitor in the future with a platform that is expansible and will allow our customers’ future expansion in digital health.

Matt Taylor — UBS. — Analyst

Thank you, Joe.

Operator

Our next question comes from Joanne Wuensch with Citi Research. Your line is open.

Joanne Wuensch — Citigroup Inc. — Analyst

I have two questions. Is it possible to quantify how much of the first quarter purchasing impacted the second quarter? And then I’ll ask my second question now. As we look forward and think about 2021, I recognize there’s many, many moving parts, but is there a way to start gating what you think the business may look like? And if not in terms of numbers, maybe qualitatively or in terms of products?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Joanne, let me take your last question first, and Jay will take the first part of your question. In 2021, it’s a little early for us to give any kind of commentary on 2021. Qualitatively speaking, we’ll everything will depend upon how back to normal is going to be. We feel that the peritoneal dialysis momentum probably will continue, and that is a good thing for Baxter. We hope by then, not affirming, but we hope that we have a new pump platform already launched and ongoing, so there are some and we have some launches of some molecules. So I think 2021 back to normality is Baxter back to normal. Very difficult to see this at the moment. Right now, the forecast is a little foggy, but we hope the great companies, which are developing these vaccines and some of the actions taken in terms of palliative health across the globe will help us go back to normal. Jay?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Sure. Joanne, we estimate around $40 million to $50 million of sales that sort of accelerated in the last couple of weeks of March, ended up being pre-buying or early buying from Q2 negatively impacting Q2 sales.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

So it is just interesting that when you look at our forecast for the year, Baxter, despite the fact that we are negatively impacted by COVID in many areas, including admissions to hospital, just to supplement your question, Joanne, we see a range of outcomes that can give us a slight positive to a slight negative performance versus prior year, which, in a situation like this, is shows the resilience of our portfolio, shows that our home care beds are done correctly and things are placed our beds are placed in the right places. One last comment I would like to reiterate on research and development is despite the fact there’s variations in research and development and those are our costs that can be postponed, there’s absolutely 100% focus and innovation at Baxter. We have no intentions to let that down one iota. So we may have changes in few millions of dollars between quarters or between 2020 into 2021. We are responsible people here. We’ll do the right thing to make sure that our expenses are in control. Everybody knows that. But there is a bigger commitment to innovation and to our research and development groups, which are doing extraordinary job in very difficult circumstances to have, data completing clinical trials, data submitted to agencies for product approval. I’d like to finish the call by just reiterating that. Thank you.

Clare Trachtman — Vice President, Investor Relations

Yes, Catherine, we have time for one more question here.

Operator

Okay. And our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Larry Biegelsen — Wells Fargo — Analyst

A quick one on injectables and one on capital allocation, Joe. Just on injectables, you talked about that. You’re excited about the pipeline there. Any major new launches this year. Sumant has talked about an attractive cardiovascular product. And on capital go ahead, Joe.

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Capital allocation, I’m sorry, I cut you off. I was going to answer your first part of the question. Just finish that, sorry, Larry.

Larry Biegelsen — Wells Fargo — Analyst

Yes. No, no. I just wanted to get them both in because we’re running out of time. Sorry. So on capital allocation, just thoughts on M&A in this environment? And when would you reconsider reinstating the share repurchase program?

Jose (Joe) E. Almeida — Chairman, President and Chief Executive Officer

Larry, we have a couple of things launched in 2021, a large bolus in 2022. So we’re excited about the pipeline. We are we have not deviated. Talk about LRP, that’s one thing that we have is holding pretty true in the last few years is the pipeline in Pharmaceuticals. Despite the fact we made drops in molecules, we’re able to add more. So there’s good momentum there. Remember, Baxter Pharmaceutical Injectables is always is renewing itself. As we leave behind the old molecules that were to be used to be the biggest drivers of sales for the company, as these products become generic and other companies come in, our portfolio is revamping itself to be able to offset that and moving on. If you notice, we speak none nothing about cyclophosphamide, and that’s a real testament to our pharmaceutical team that is starting to launch the products like dexmed or like our pre-mix injectable insulin and other products that are part of our portfolio. In terms of capital allocation, I’ll let Jay comment on share buyback. In terms of acquisitions, we’re still very focused. We have several small deals that we are looking at all the time. As you can see by Jay’s prepared remarks, we have over $4 billion in cash in the balance sheet. This is a company that has a solid, solid financial position and that afford us to continue to look for opportunities. The pandemic has slowed down a little bit because the month of April and May were very hectic across the globe, but we are engaged very much so and continuing to look ahead in organic opportunities. Jay?

James (Jay) Saccaro — Executive Vice President and Chief Financial Officer

Sure. On share buyback, I think what I would say is we are very pleased with the durability, the resiliency of our business, the ability to maintain cash. We’re over $4 billion. And if you think about it, our earnings, while down year-over-year by roughly $0.20, all of that is explained by offloading the pension, which was a smart capital allocation move along with the bond offering that we did. So if you think about it, those two items, which were really insurance policies for the company, cost us $0.20 and explain fully on the year-over-year delta. And so we feel very good about our ability to withstand this pandemic and continue to thrive over the long term. Having said that, I think it’s premature at this moment in time to begin share buybacks once again. We’ll watch as this evolves. We’ll carefully study wave 2. We’ll carefully ensure that our business continues to withstand as it has thus far. And once we have better line of sight to where this goes, I think we’ll be able and willing to reinstate the program, which has been a very important part of our capital allocation approach over the last many years. So stay tuned, but not yet.

Larry Biegelsen — Wells Fargo — Analyst

Thank you.

Operator

There are no further questions at this time. [Operator Closing Remarks]