How does a 100-year-old medtech company evolve yet still retain its focus on the company’s original mission? Baxter has gone through many different phases and transformations. Now it is looking forward to its next phase.
“If we think about the phases of transformation of Baxter — how did we get here — it is worthwhile looking backwards to think about how we transformed Baxter to the Baxter of today,” said José (Joe) E. Almeida, chairman, president, and chief executive officer, at the company’s shareholder conference in May.
When Almeida joined the company in 2016, Baxter examined the strength of the financial operations of the company. “We went after free cash flow, we went after expenses, we went after cost reductions. We started to put the foundation in the most important thing: patient safety and quality. That became our number one tenant in the company,” he said.
The New Baxter
To strengthen its financial position, Baxter invested in operations and innovation. That phase of the transformation set the company up for the second phase in 2018–2021, which was to execute on innovation. To do that, Baxter created an ecosystem and put in place medical affairs, clinical trials, and regulatory affairs teams focused on developing new products.
“The company was very focused on pharmaceutical [products], but prior to 2016, very few products were launched on the market,” said Almeida. “Today, we have a cadence of new products.”
Almeida said the next step was to determine how to get there. “And that was when we decided to bring Hillrom into Baxter. That acquisition was extremely important to Baxter. We closed in December , and it is pushing the company forward, creating innovation opportunities to expand the markets that were in. That created the new Baxter.”
He said the new Baxter welcomed 10,000–12,000 employees from Hillrom to make the company 60,000 people strong. But, he said, “our mission is so strong. It is one of the things that I did not change at Baxter. I spent a lot of time reflecting on what the mission of the company should be. The mission of the company was well established for many decades, and that mission is to save and sustain lives.”
With the pivoting of the company into more connected care and understanding where the markets were going, though, Baxter had to restate its vision, he said. “Our vision now says that we’re going to ‘transform healthcare with a customer focus in improving patient outcomes and enhancing workflow efficiency.’ That’s very important because we must create the future by not only connecting devices but also by creating intelligence behind them, enabling cost-effective care. And cost-effective care is two very specific vectors: The first one is the ability to provide effective clinical outcomes; the second is [to do that] cost effectively. So that combination becomes more and more important as we go forward and pivot the company in a new direction.”
Another way that Baxter broadened its markets was through the development of care sites (see Figure 2). Almeida said Baxter was always strong in both the acute care market and the home care market with peritoneal dialysis and parenteral nutrition therapies. “We are now becoming more present with other business such as PSS [patient support systems] and GSS [global surgical solutions] and frontline care, which are the legacy Hillrom businesses.”
The Effect of COVID-19 on Healthcare
“Once we went through COVID-19, we found that a significant amount of care has moved away from the hospital,” said Almeida, noting that this change will take hold in the next 5–10 years. “You’re going to see those changes, and Baxter wants to be present. And to be present there, [we’ve] got to have products and innovation that create that opportunity for us to be a participant in those markets.”
When setting the strategy for the company, he said, “The first thing we do is to look at the trends that are currently in front of us.” Because of the number of more complex disorders, he said, will accelerate the digital health transformation post COVID-19. “I’m not saying that COVID-19 is gone, but looking at the transformation took place, the circumstances of how care is delivered today is very different. The era of 2018–2019 and how healthcare was delivered is pretty much behind us. We’ve got to look forward at the factors that are driving better healthcare and better access. How things are reimbursed are changing significantly as well as shifting from hospitals to lower cost [care] settings. Access to healthcare is not equal across the globe, and Baxter is driving to create products and technologies that are more accessible in many more countries in the world so people can get treated more effectively.”
Supply Chain: Putting the Plants Where the Products Are Sold
One significant change that Almeida said the company never spoke about in the past was implementing an integrated supply chain and how supply chain plays a role in product development. In the past, the company always looked at the supply chain to deliver patient safety and quality first and then addressed the cost-effectiveness in making products to “get the right product at the right cost at the right time.”
“Things have probably most radically changed in this area more than anywhere else. We grew up with putting manufacturing locations [in areas] to drive lower costs and taxes effectively. When you look at the trend going forward, it’s that you’ve got to put the plants where you sell the product,” said Almeida. “And you’ve got to buy the components where you have your plants because of the supply chain cost of moving things around the world.
During Goldman Sachs’ annual global healthcare conference in June, Almeida noted Baxter’s philosophy is to “make where you sell.”
“That [philosophy] will guide us in the future on where to locate plants to alleviate some transportation issues. You always have this fragility that you as a company cannot avoid, so how you prevent that is by maximizing the locations versus putting the plants [in locations] that may be the most advantageous for labor or tax rates.”
Four Strategic Pillars for Growth
Baxter’s strategies for value creation are innovation, market expansion, operational efficiency, and capital allocation. Its innovation will focus on connected care and core therapies (see Figure 1). Market expansion will encompass revenue synergies, geographic expansion, channel expansion, and market development, while operational efficiency will involve cost synergies and digital transformation, as well as quality, safety, and supply chain resilience. Finally, its capital allocation will entail portfolio management, debt repayment, dividends, and share repurchases (see Figure 4).
“Bringing Hillrom into Baxter will give us really good leverage on synergies. Something that we do understand is how capital allocation will drive growth in the future. The first thing that we think about for capital allocation is that patient safety and quality are our number one priority when we allocate capital. We will continue to invest money in facilities where we are the single source to a market. We will fulfill our responsibility and obligation as a market leader in healthcare,” Almeida said.
Almeida said the company will allocate internally to businesses that are growing faster — businesses that can provide for the future and also return money to shareholders via dividends. He notes that M&A is Baxter’s preferred way to deploy cash and that share repurchasing will be used only if the company has not identified a good M&A target (see Figure 5).
“We have done this in the past when we found that Hillrom and Baxter would make a powerful combination. If you think about these strategies derived from our market dynamics, how does that affect our market growth and what markets we are in? What we found in the acquisition of Hillrom is an uptick of our weighted average market growth rates (WAMGR). So today we have a sustainable market growth of 3–4 percent,” said Almeida. “The opportunities and the CAGR [compound annual growth rate] growth of our businesses are disproportionately allocated to the Hillrom businesses that came into Baxter because the markets are shifting into more connected health rather than solely capital products. In the total market of $130 billion, we have a WAMGR of 3–4 percent in each our businesses today. In every single market, Baxter growth is above or at market growth.”
To achieve this growth, Almeida says the company will focus on connected care and then core therapies (see Figure 3). But connected care is not just jargon, he says. “It is an enablement for better insight. So how are we going to create smart devices? We’re planning to connect devices — smart devices and the ability to communicate and integrate with hospital systems and integrate amongst themselves to create sites.”
He says that although there is an advantage to connecting devices and moving data around, the ultimate goal, the aspiration, is to create intelligence behind them with algorithms that help clinicians in such a tough market, particularly as hospitals and clinics struggle in terms of human resources. “The resources in hospitals are difficult to come by. Nursing is expensive, technicians are expensive. There is significant overload on nursing staff. So we’ve got to create a pathway — the opportunity for them to do their jobs in a more effective way. And that [pathway] is to create alternate site care. It’s more so than just connecting devices.”
“We have a phenomenal lineup of new products. We will primarily grow with revenue synergies, geographic expansion, channel expansion, and market development — these four driving tenants will create $300 million in incremental sales through market expansion efforts by 2025,” said Almeida. “You will see an uptick in our R&D expenses because we’re allocating more money to businesses that are growing faster.”
While social responsibility has become increasingly important in the medtech market, Almeida says that Baxter has been committed to social responsibility for many years. The company has programs to support and protect the planet, its patients, and its people and communities. “Our commitment is to carbon footprint neutrality, clean water, to being not only environmentally conscious but environmentally protective of what we do, and to making sure that the communities that we work in are protected.”
Also important, he said, is empowering patients to understand the best therapies available and improving the company’s capabilities and quality core products, noting that Baxter is “championing our people and creating an environment where people want to come to work.”
The Future for Baxter
“We are going to grow through innovation. We are increasing our spending in innovation. We want to have the best place to work. We want employees to feel that this company socially responsible, that this is an inclusive company that values diversity and equality, that [employees say] ‘Baxter has all the ingredients to make this a place that I want to go to work.’ If we do those things right, if we fulfill our mission with ethics and compliance, we will deliver on the results — and the results are consequences. The results are a consequence of a good company with 60,000 great employees that wake up every day with one mission: save and sustain lives.”