Image source: The Motley Fool.
Baxter International Inc (BAX 1.53%)
Q3Â 2020 Earnings Call
Oct 29, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Baxter International Earnings conference call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Clare Trachtman. You may begin.
Clare Trachtman -- Vice President, Investor Relations
Thank you. Good morning, and welcome to our third 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 third 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 & 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 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 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. 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, Claire, and thank you to everyone joining us on the call. I hope that you and your families remain healthy and safe. I will begin with a quick review of Baxter's third quarter performance. Jay will provide more detail on the financials. Then we will wrap up with your questions. I want to start again by acknowledging all of the healthcare providers, first responders, researchers and personal caregivers who are rising to enormous challenges every day in the ongoing fight against COVID-19. And as always, I want to express my deepest appreciation to Baxter's employees, who are navigating these unprecedented times in the unwavering spirit of our mission to save and sustain lives. Just as COVID-19 continues to impact all of our daily lives, it naturally also influences the trajectory of Baxter's operations and performance. During the third quarter, all three of our geographic regions observed sequential improvement in both hospital admissions and surgical procedures, but volumes remained below pre-COVID levels. For the third quarter, we estimate the hospital admissions and surgical procedures in the U.S. declined low-double digits and mid-single digits, respectively. Jay will discuss our 2020 outlook in more detail, but this guidance assumes volumes remain at these levels throughout the fourth quarter.
Turning to our results. Baxter delivered third quarter sales growth of 4% at constant currency rates and 3% operationally. On the bottom line, adjusted earnings per share were $0.83, up 12% year-over-year. All three of our global regions contributed to positive performance for the quarter. Growth was led by Asia Pacific, which was up 7% at constant currency rates, reflecting the geography's global leading virus containment and recovery to date as well as our portfolio mix in the region. five of Baxter's six global business units also delivered positive constant currency sales growth in Q3. Among them, Acute Therapies grew 35% year-over-year, adjusting for FX. This business continues to experience heightened demand for its continuous renal replacement therapy or CRRT products in the midst of the pandemic. In Q3, Baxter was granted U.S. FDA Emergency Use Authorizations for our Regiocit replacement solution, select set to help address increased demand for CRRT supply and treatment options. This quarter, we also announced a distribution agreement with bioMerieux for the NEPHROCLEAR CCL14 diagnostic test currently in development for use assessing the risk of developing persistent severe acute kidney injury. Renal Care delivered mid-single digit growth at constant currency rates for the quarter, driven by continued demand for our portfolio of peritoneal dialysis products. Pandemic conditions continue to underscore the advantages of home-based PD treatment as well as Baxter's share source remote monitoring technology for both clinicians and patients. Late in Q3, CMS announced the finalization of the end-stage renal disease treatment choices payment model, a core component of the advancing American Kidney Health initiative.
This is a key step forward in increasing U.S. adoption of home-based dialysis care, and Baxter stands prepared to support patients and healthcare providers as the new model take effect in 2021. Also during the quarter, Baxter received FDA de novo authorization for our THERANOVA dialyzer for expanded hemodialysis or HDx therapy. We have a TPNIES add-on payment application pending with CMS for this novel Renal Care technology and expect an update when the final rule is published in November. While at this time, we're not going to speculate on CMS final determination, we continue to believe in the benefits this product offers ESRD patients. Continuing among our attributes. Clinical Nutrition achieved constant currency mid-single digit growth. Performance here reflects sustained demand, new product introduction and the impact of the competitive supply issue in the U.S. Last month, we announced FDA approval of new higher-protein formulations of CLINIMIX and Clinimix E for parenteral nutrition. These offerings further expand the diversity of our U.S. nutrition portfolio, offering physicians new options and flexibility to meet their patients' needs. Advanced Surgery grew 9% at a constant currency rate, bolstered by our February acquisition of Seprafilm. Adjusting for the acquisition as well as FX, Advanced Surgery declined mid-single digits operationally, in line with the lower rate of surgical procedures as compared to the prior year period. On a constant currency basis, Pharmaceuticals increased low single digits and Medication Delivery declined low-single digit. Performance in both businesses reflect lower rates of emergency room utilization and associated hospital admissions for a range of acute and chronic conditions. In medication delivery, we remain optimistic about our NOVUM IQ smart infusion pump technology. We are making progress addressing the open questions from FDA on the NOVUM IQ 510(k) applications and remain on track to update the submissions within the next three months. We are working collaboratively with the agency and currently expect to launch the pumps in the U.S. next year. In Canada, the NOVUM IQ large volume pump was recently approved, and we hope to receive approval for the syringe pump in the fourth quarter.
And finally, we anticipate obtaining CE Mark for the entire NOVUM IQ platform by the end of this year. By now, it goes without saying that we are operating in a largely unpredictable environment. We are experiencing an unfortunate resurgence of COVID-19 in many geographies, which resonates across the broader treatment landscape. Baxter continues to respond with a sustained focus on efficiency and effectiveness, which has become second nature across the enterprise. Our strategic emphasis on medically essential products and our broad geographic footprint reinforce the underlying stability of our business model. We remain focused on advancing innovation as a critical growth driver and are actively evaluating opportunities to augment this performance through strategic capital deployment, including business development and opportunistic share repurchases. Despite today's challenges and unknowns, I remain confident in Baxter's trajectory and potential. We are reigniting a legacy of innovation, building upon our leadership in corporate responsibility and implementing new racial justice efforts that are rooted in our long-term emphasis on inclusion and diversity. By executing across all dimensions, we will deliver enhanced value and make a meaningful impact for all stakeholders we serve over the long term. Now I will pass it to Jay for his comments on the quarter and our outlook for the remainder of the year.
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
Thanks, Joe, and good morning, everyone. Although COVID-19 continues to present unique challenges, not only to our business, but the overall healthcare landscape, our third quarter results demonstrate a level of resilience during these unprecedented times. As we move forward, we must continue to evolve our business strategies and identify new opportunities to deliver enhanced value for all of our stakeholders over the long term. Turning to our third quarter 2020 results. Global sales of $3 billion advanced 4% on both a reported and constant currency basis and 3% on an operational basis. Growth among Baxter's GBUs was led by Acute Therapies, reflecting the ongoing demand due to the COVID-19 pandemic. As Joe mentioned, sales in both Medication Delivery and Pharmaceuticals continue to be affected by lower rates of emergency room utilization and hospitalizations in the wake of the pandemic, particularly in the United States. We estimate COVID-19 negatively impacted net revenues by over $65 million in the quarter. On the bottom line, adjusted earnings increased 12% to $0.83 per share, reflecting our top line performance, reduced discretionary spending and the benefit of a lower tax rate. Now I'll walk through performance by our regional segments and global business units.
Note that this quarter, constant currency growth is equal to operational sales growth for all global businesses, with the exception of 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 advanced 2% on a constant currency basis and 1% on an operational basis. Sales in Europe, Middle East and Africa advanced 3% on both a constant currency and operational basis. Sales in our APAC region advanced 7% on a constant currency basis and 5% operationally. Moving on to performance by Global business units. Global sales for Renal Care were $955 million, advancing 4% on a constant currency basis. Performance in the quarter was driven by global growth in both our PD and HD businesses. PD benefited from 6% patient growth in the U.S. and Asia Pacific regions. Sales in medication delivery of $680 million declined 3% on a constant currency basis. In the quarter, we continued to see strong execution of our infusion pumps led by EVO IQ placements internationally. As Joe mentioned, although we saw a sequential improvement from the second quarter, hospital admissions and surgical procedures remained below pre-COVID levels.
We estimate these lower volumes negatively impacted medication delivery sales by approximately $40 million within the quarter. Pharmaceutical sales were $540 million, up 1% on a constant currency basis, increasing demand for our international pharmacy compounding business as well as a onetime U.S. government purchase of approximately $20 million contributed to the growth in the quarter. This was partially offset by the impact of reduced hospital utilization, lowering international demand for our inhaled anesthesia products and enhanced competition for Transderm Scop in the U.S. We estimate a net negative impact of approximately $40 million related to COVID-19 in the quarter. Moving to Nutrition. Total sales were $237 million, increasing 5% on a constant currency basis. Strong performance in the quarter was driven by the benefit of recent new product launches, increased demand for our automated nutrition compounding business and competitor shortages in amino acids. We estimate that growth in the quarter was partially offset by approximately $5 million related to COVID-19. Sales in Advanced Surgery were $236 million, advancing 9% on a constant currency basis, plus declining 5% on an operational basis. The acquisition of Seprafilm in February contributed approximately $30 million of sales in the quarter. Declines in surgical procedures drove an estimated negative impact of approximately $14 million for the Advanced Surgery portfolio. Sales in our Acute Therapies business were $177 million, representing growth of 35% on a constant currency basis.
We estimate that heightened demand for COVID-related products contributed over $30 million to growth in the quarter. Finally, sales in our other category, which primarily includes our contracting manufacturing services, were $147 million in the quarter, advancing 4% on a constant currency basis. Moving through the rest of the P&L. Our adjusted gross margin of 42.6% declined by 310 basis points over the prior year, driven by lower sales of higher-margin products as well as approximately $60 million in increased operations and supply chain expenses related to our COVID-19 response. Adjusted SG&A of $574 million declined 7% on a year-over-year basis, driven by continued financial discipline, 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 $122 million declined 9% on a reported basis with reductions in non-project spend being supplemented by our continued focus on operational excellence. We continue to prioritize strategic investments to fuel our innovation pipeline. Adjusted operating margin in the quarter was 19.2%, a decrease of 30 basis points versus the prior year. Net interest expense was $39 million in the quarter, an increase of $26 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 $16 million in the quarter compared to $9 million in the prior year period. The adjusted tax rate in the quarter was 15.7%.
With respect to cash flow, year-to-date we generated free cash flow of $686 million, compared to $776 million in the prior year period. As of the end of the third quarter, we had approximately $4.4 billion of cash and cash equivalents on our balance sheet, along with $6.5 billion of long-term indebtedness. Subject to market conditions, we regularly evaluate opportunities with respect to our capital structure. We expect to recommence our share repurchase activity in the fourth quarter of 2020, generally consistent with our capital allocation philosophy. Baxter's Board recently also authorized an incremental $1.5 billion to our existing share repurchase program, bringing the total share repurchase authorization to $2.4 billion of common stock, generally consistent with prior authorization increases. Let me conclude my comments by discussing our outlook for the remainder of the year. For full year 2020, we now expect low-single-digit sales growth on a reported constant currency and operational basis. As we see resurgences of COVID-19 cases across many geographies, we anticipate a sustained impact on our business, particularly in Medication Delivery and Pharmaceuticals in the U.S. Nevertheless, we remain ready and committed to addressing patient and physician needs globally with our portfolio of life saving and sustaining products. In line with our previous 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 expect year-over-year reductions in operating expenses driven by continued financial discipline as well as lower travel and meeting expenses. In line with the previous commentary, we expect net interest expense to increase by over $60 million as compared to the prior year. And for the full year, we also expect adjusted 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 now expect adjusted diluted earnings per share, excluding special items, between $3.02 and $3.05 for the full year 2020. In closing, the third quarter continued to demonstrate the durability of our medically necessary portfolio and the importance of our multiyear transformation journey. The commitment of our employees and the speed at which the organization has responded to the pandemic has fueled our year-to-date top line performance. 2020 has certainly brought many challenges. And through it all, we believe we remain well positioned for continued financial stability and long-term success. With that, we can now open the call to Q&A.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Robbie Marcus from JPMorgan. Your line is open.
Robbie Marcus -- JPMorgan. -- Analyst
Congrats on a good quarter.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Thanks, Robbie.
Robbie Marcus -- JPMorgan. -- Analyst
Not sure if this is for Jay or Joe, but I was hoping maybe we could start with the guidance outlook here. You're not the first company to point to worsening trends. We see the COVID rates ticking up. And I was hoping you could walk us through -- was this fourth quarter your projection didn't improve as much as you originally thought? Or are you seeing worsening trends coming into fourth quarter here? And if you could just walk us through down the P&L, how the lower top line outlook affects down the EPS, the different changes versus expectations?
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
Sure. Robbie, overall, Q4 is a little bit below the previous expectations that we shared on the last call, both with respect to sales and then also with respect to earnings, while we didn't sort of have specific guidance on Q4, we did have some assumptions. And really, I would say, the largest driver relates to admissions in the U.S. Our prior expectation, you'll recall, I said in the fourth quarter, we expected admissions to be down approximately 3%, we are now modeling roughly 11% decline in admissions in the fourth quarter. And if you think about it, each point of admissions is worth a couple of million dollars per month. So in totality, this impact is roughly $50 million to the sales line. The second factor, again, we believe this to be a temporary item is we did have some sales in the fourth quarter related to our NOVUM IQ platform. And while Joe commented around this and our expectations about this being a long-term driver for us, we did remove those sales from the fourth quarter roughly $25 million, $30 million, representing a couple of cents. So admissions, as I said, roughly $50 million, approximately $0.06, then you also have this pump factor of roughly $30 million, a couple of cents as well. So those are the primary drivers. From our perspective, the good news is these should correct over time. The pace of that correction is the real question at hand.
Robbie Marcus -- JPMorgan. -- Analyst
Great. And just a follow-up question. It's great to see the share repurchase program coming back online in the fourth quarter. You have authorization up to $2.4 billion, over $4 billion in cash right now. How should we think about the impact in fourth quarter? What's in guidance for share repurchase? And with the share price at 78, is this something we could see a pretty aggressive move here over the next several months? Thanks.
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
Certainly, we were pleased to announce the increase to the stock buyback authorization and that the Board approved that recently. And from our perspective, one of the things that we put on hold over the last six months was the share buyback program. We did that in large part because of uncertainty around the pandemic and its impact on our business. I think now having reported a couple of quarters of solid results in the face of a pandemic, we now have confidence to start to get back to share buyback as a vehicle for returning value to shareholders. It's something that we've done over the last five years. As we think about amounts, the way we assess it is we look at what we believe the shares are worth evaluating that against an intrinsic value model we keep here. And depending on how shares trade relative to that intrinsic value model, that's when we end up making purchases. We talk about it after the end of each quarter. So we didn't repurchase anything last quarter. And so for the fourth quarter, we'll talk about this on our -- when we report fourth quarter earnings in February. So stay tuned for that. And that's the standard program that we have in place. Again, it was a severe departure from our normal protocol, but we had that in light of the pandemic. We wanted to make clear what we were trying to optimize during this time frame.
Robbie Marcus -- JPMorgan. -- Analyst
Appreciate it. Thanks.
Operator
Your next question comes from the line of Pito Chickering from Deutsche Bank. Your line is open.
Pito Chickering -- Deutsche Bank. -- Analyst
Just a follow-up on Robbie's question on your fourth quarter assumptions. Specifically, the publicly traded hospitals have been seen improvement throughout the third quarter on emission trends. So the fourth quarter run rate should be higher than what they saw during the third quarter. Are you seeing or hearing about things getting worse? Or are you just making assumption? And also, as you talk about emissions impacting volumes, the patient data through AC in tenant were actually positive. So how should we think about the interplay between lower emissions versus longer length of stays and the impact on medication delivery?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Good morning, everyone. Pito, good morning and I hope everybody is healthy and well. Let's divide. This is not -- you can't just make one assumption. We are a hospital company, but within the hospital, there are several different drivers of our business. So if you look at some procedures in general are largely stabilizing, right? So they're coming up. They're a little bit below last year's, but it's coming, coming perhaps in the fourth quarter, more to a same level. Now we have a flare-up in the pandemic right now, so we're watching that very closely. In hospital admissions has more to do with Medicare patients being admitted in hospitals and how hospitals are taking patients through the ED, the emergency department. So we don't see a significant deterioration between Q3 and Q4. We have indicators that are very reliable because we are in those accounts, we are in these businesses. So we don't see that as a huge deterioration in the fourth quarter, but we've got to watch what is coming with this new wave of infections and how that's going to be dealt at the hospital level. But the main drivers for a hospital today, the way we see it is, is the OR which is largely stabilizing. And then the admissions of patients through the General Florida Hospital -- and that is what you see the biggest deficit in those patients are usually Medicare patients. So we're going to watch it closely, and that we'll inform how we are not only think about the fourth quarter, as we're living into the fourth quarter, but 2021.
Pito Chickering -- Deutsche Bank. -- Analyst
Okay. And then on the margin guidance again for fourth quarter. It looks like pretty substantial margin guidance that you're giving us on fourth quarter versus third -- what we saw in the third quarter. Can you walk us through what are any new costs being added in sequentially? Is it all just margin pressure coming from product mix? Or just help us understand why the margin difference is so big in fourth quarter versus third quarter? Thanks so much.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Sure. There is some margin deterioration in the fourth quarter. And really, that relates to a few things. First of all, we are expecting to see flat or slight decline in the U.S. business sequentially from Q3 to Q4. And again, it's going to be a temporary impact in nature, but it certainly is a decline. So the result of that, when your ex-U.S. business is growing faster than the U.S., you tend to have a fairly substantial mix impact on gross margin. And then the second factor is because of some lower volumes we're now anticipating, we are expecting some incremental manufacturing absorption impacts, again that flow through to the bottom-line. So really, those are the primary drivers of the Q3 to Q4 margin story.
Pito Chickering -- Deutsche Bank. -- Analyst
Great. So much.
Operator
Bob Hopkins from Bank of America. Your line is open.
Bob Hopkins -- Bank of America. -- Analyst
Just first off, just wondering, Joe, if you wouldn't mind giving us your sense for the progress that you're making on the filings for NOVUM IQ and the syringe pump? Just maybe express how confident you are in your time lines and any update on the progress would be great?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Bob, we are working very diligently with the FDA. We have meetings with the FDA scheduled, and we are still very confident in our platform. I can speak on behalf of the FDA and how long it's going to take in the questions. But I think we have a very good idea what are the issues that the FDA had with our previous submission, and we're addressing them very, very quickly. And we hope we can address them to the satisfaction of the FDA. As you know, this is an important platform for us because this is a platform, not only with two pumps coming up, but also a PCA pump coming later as well as ambulatory pump coming in 2022. So we are very excited about that. But also as a company, very focused not only medication delivery, we have a companywide effort to make sure that we got the most experts in place, helping the group answer all the questions satisfactory to the FDA. We, as a company, don't think that those are unsurmountable questions and issues, and we're working very hard. And probably in the next two or three months, we'll refile and go through the process. We hope to launch this product next year. I think it's going to be a great product for not only for Baxter, for -- also for the market.
Bob Hopkins -- Bank of America. -- Analyst
Okay. So it sounds like you still plan on filing this year, no change there. And then my second question is just maybe for Joe, for Jay. For 2021, the Street model is 19% earnings growth over 2020 aided in large part by much lower COVID relating spend. I assume you're not going to give guidance on this call, but any directional comments on where the Street is for next year? Or on just kind of year-over-year spend levels?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Bob, it's really hard to comment on that, at this point in time. We're still in the middle of our annual operating plan process, understanding market trends in the fourth quarter, with respect to the pandemic is going to be a critical input to our 2021 guidance. The plan is to provide the guidance on the earnings call, on February 4th. The one thing I will tell you is we do anticipate some level of sustained impact from the pandemic on our business, potentially through the first half of 2021. This is -- it's really hard to assess, at this point. It's really hard to assess, what's going to happen to admissions. But we're watching that very carefully, as it's a critical driver of our growth. So we're going to take all of the time. And we're actually spending a lot of energy and effort really trying to model out expectations around patient admissions and procedures, because that's such an important driver for us. As you know, we've had about $150 million in COVID-related costs. But we've had a far bigger impact, on the sales line. Over time, the COVID-related cost will dissipate. So as the pandemic ends, we expect to claw back the vast majority of those spend items. But we're watching carefully the sales line. And these -- the two key drivers are the ones that I mentioned, admissions and surgical procedures. And it's early to say, but we do expect some impact in the first half of the year.
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
Bob, we're working very hard in modeling this. We have modelers. We have people working relentlessly in creating a sustainable way of looking through this pandemic and how it affects, not only the U.S. but also affects Latin America and affects Europe at the moment. We see much less effect of the pandemic in Asia, as everybody knows. Now we had a pretty healthy growth in the third quarter, in our APAC business. But we are working 24/7 in getting this model complete. And we hope to have something for you guys when we give guidance, that we feel confident, in standing behind it in January. Thank you.
Bob Hopkins -- Bank of America. -- Analyst
Great. Thanks very much.
Operator
David Lewis from Morgan Stanley. Your line is open. Maybe, I'll just stay high level, because I don't think we're going to get much on 2021 specifically. But Joe, people entered this year, enthusiastic about the pump launch, there a NOVUM and other various drivers. And as you know, we didn't get the benefit of the Analyst Day. I think the key question we're getting from investors is what is the growth thesis for Baxter on a go-forward basis? Maybe just -- I may take a help of minutes and sort of as you see the intermediate term growth outlook for Baxter. What investors should be enthusiastic about, as it relates to the growth portfolio. What are the things that are getting you excited? And what should they be focused on?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
David, Good morning. We are still very excited about the NOVUM IQ. This is the first time Baxter has a global platform, as we in the prepared remarks, this is not a U.S. product only. We're expecting the syringe pump approval in the fourth quarter. In Canada, we expect at the end of the year, that we're going to have the platform approved in Europe, for CE marked. By the way, we start already hiring people for the sales force, to launch this product in Europe. Remember, we were not present in Europe for, I don't know how many years, probably 20, 30 years that we have not sold the product. We just started about two years ago selling our Evo IQ pump that replace the old colleague pumps there. So this is something new. The European folks are super excited. So I'm very excited about the pump because I think it is a transformation for Baxter and is going to be a transformation in the U.S. market as well. I'm also excited about the PD business in the U.S., AAKHI opened the door for this business to grow.
We were growing at 5% to 6%. We start to see the growth hitting now 7%, 8%, 9%, 10% as last quarter. So we think high single-digits to about 10%. It is a great place for this business to be. We made investments already for the short-term capacity need. We're going to be looking at more investment if we need to. We also look in a new technology eventually to come into the cycler business that will change our ability to service even better our customers. China, PD is a great business that is also growing 8% to 10% a year. We're number one there. It's a good business for us, and it's a very profitable business for us. So this is a driver that excites me. And actually, I have a call this week looking at more capacity for the renal business in Asia. Also, we have some molecules like mix rattling that we were not able to roll out well in 2020 because the pandemic as you know this is a new way that the product is configured insulin, premix insulin. And we need to service the accounts and be able to promote that. And we were not able to get into hospitals for the longest and I would tell you that this is going to be almost like a relaunch in 2021. And we're excited about that.
Also, going back to normal, I think the ability to be participant in the vaccine business as a field finished company that we are between our plant in Bloomington, Indiana and Halle in Germany will be able to be a participant in this business. So we look at all of this as drivers for 2021. But beyond 2021, we also have some notable launches that I'm excited about ambulatory pump in 2021, few advanced surgery businesses new products -- rather new products coming out some pharmaceuticals as well. So our innovation has not stopped. We took a little a little break in our labs in the beginning of the pandemic, but we're backing on our labs operations pretty intensively, and we're getting things out there. The employees of back have been relentless in the innovation. We're going to transform this company's innovation pathway.
David Lewis -- Morgan Stanley. -- Analyst
Okay. Super helpful, Joe. And just maybe, Jay, a quick one for you. Just -- I'm not going to get you to comment on Theranova what CMS will do next week. But just in terms of kind of risk mitigating the AAKHI, it were to happen. Just given where you see the plant manufacturing today, what type of revenue ranges could we be expecting for 2021, if you had the approval and you began to scale up sort of from here? Thanks so much.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
David, I would say that first of all, if -- we're contemplating both scenarios. The approval and being included or not included, OK? We have a good momentum going on outside the U. S. with Theranova. It's a matter of factor is a little bit of a downer for our colleagues outside the U.S. because the way if this gets approved in the U.S., U.S. is going to take most of the volume of the world. And they were giving pretty good momentum until we up the capacity to supply them. So our plan B is if it doesn't gets reimbursed. It doesn't mean that we're not going to sell it here. We're going to continue to sell. We actually had the first sale of THERANOVA about three weeks ago in the U.S. We will the press forward with outside the U.S., and that sales growth in the double digits with really good margins. I will refrain now to give you a number for 2021. We'll be more precise about this number. If this product gets included in the tippiness coming up early November, we then become more clear about what that impact is in the U.S. But I want our investors to know that despite the fact it may or may not get tippiness approval in the U. S. We'll continue to sell it in the U.S., and we will expand and accelerate the sale of the products overseas. So in the -- at the end of the day, the product is still a great product for our patients. We believe in the product and the clinical evidence is there as we were able to show to the government.
David Lewis -- Morgan Stanley. -- Analyst
Okay. Very helpful. Thanks so much guys.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Thank you.
Operator
Vijay Kumar from Evercore. Your line is open.
Vijay Kumar -- Evercore. -- Analyst
Hey, guys. Thanks for taking my question. I had one quick on the quarter. I know a big picture question. Maybe, Jay, for you on the queue itself, when you talk about the higher manufacturing variance, is that signaling gross margin flattish to down sequentially Q4? And when you look at the incremental expenses you guys incurred, $150 million incremental was below the line, another $50 million. How much of that is going away or moderating next year?
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
Yeah. So we do expect a sequential step down in gross margin from Q3 to Q4. From a Q4 standpoint, thinking for a second year-over-year there's roughly 100 basis points of COVID cost impact. The fact that we've lost sales is about -- and some of those sales are higher-margin in the U.S. Its 130 basis point impact there some FX impact in the fourth quarter, maybe 70 basis points. We are seeing some incremental manufacturing costs as well. So there's a combination of items that do take the gross margin down from Q3 to Q4 even absent the COVID impact. But like I said, many of these items are short-term items, which we do expect to recover. Now as it relates to when that really is the critical question for us. And so at this point in time, we do expect some continued impact certainly through the first half of next year both in terms of sales and in terms of incremental manufacturing costs. My hope is that in the second half of the year, we see a more normal environment, but I can't say that with certainty at this stage. As I said before, we expect admissions to recover over time, and we also expect the vast majority of those COVID costs to go away over time. But it's hard to say is that Q1, Q2, Q4 next year, that's the question that we're working through right now. And it's difficult to model, but we're spending a lot of time really trying to model it. Joe.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
I'll add as well that we have a new head of Manufacturing in Gymboree it comes in with tremendous experience and already making a difference. We're looking to significantly alter some of the ways we do things in the engineering groups and parts of the company. So we will be looking for efficiency and productivity in operations throughout the fourth quarter and next year. So this will contribute when we think about back to a normal gross margin, it has to do with mix, it has to do with COVID, it has to do with efficiencies because if you produce in less in some of our factories, the cost is actually much higher because the lack of efficiency of running plants 24/7. As we adjusted already our capacity down without affecting at all the customer at the end because we're holding inventory for any kind of spike in demand due to the COVID situation. We are relentless looking for productivity improvements. And we have put a tremendous faith that Jim and the team in global supply chain, we'll continue to look for those efficiencies throughout 2021 to offset some of the losses until the situation comes back to normal, and then we'll continue to progress in our quest for improving gross margin.
Vijay Kumar -- Evercore. -- Analyst
That's helpful. And Jay -- Joe, sorry. A big picture for you. This buyback versus M&A debate, I'm curious on how your thoughts change. And the reason I ask is, look, your balance sheet is stellar, but I think investor perception has changed on M&A. Investors are willing to look at a longer time horizon for ROIC to be above WACC. I'm just curious on how you think about M&A in a zero interest rate environment when investors are willing to look at longer time licensure turns?
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
Sure. Vijay, good question. For us, we expected to do a mix of both buyback and M&A going forward, as we've seen in the past. And so from a capital deployment standpoint, we think Baxter can be a great acquirer of a lot of different assets, especially ones that have some strategic relevancy to what the company does. It's harder to stretch out into completely new areas. But what we're finding is we are able to generate adequate ROIs in those areas that have some strategic relevancy to the company where the company becomes a logical buyer. So you never say -- you never know what's going to happen with business development, but we are very active. The pipeline is rich. And while we have -- while ROI is an important strategic and financial criteria for us, we are seeing a rich pipeline today. Joe, do you want to add anything?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
I think you'll answer it very well. I'll simply supplement the answer with the fourth pillars of transforming Baxter, the last one is transformation of the portfolio to outdo our weighted average market growth rate. Now with a solid balance sheet, with our cost structure and SG&A in place with the innovation pathway set internally for organic investment and talent and culture being one that we've tackled first. Now our focus is undivided on how do we alter our portfolio in a way that will continue to provide value to our patients and customers, but also create a good return for our investors. And we always look at the ROIC and in the IRR and NPV on these deals, we're very stringent sometime ago, not that we changed how we look at them, but we were in a position in the very beginning when I started here five years ago with a very low free cash flow and very low cash reserves. Now we feel that we have a solid balance sheet, and that actually help us understand the Landscape data, open the opportunities. So it doesn't mean we're doing something. I'm not indicating that. I'm just saying that we are relentless looking for those opportunities.
Vijay Kumar -- Evercore. -- Analyst
That's helpful. Thanks guys.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Thanks, Vijay.
Operator
Larry Biegelsen from Wells Fargo. Your line is open.
Larry Biegelsen -- Wells Fargo. -- Analyst
Good morning, guys. Thanks for taking the question. One on the Q4 guide, one on Joe, on your vaccine comments a minute ago. So Jay, on the Q4 guide, I've gotten a couple of inbound we thinking about the implied Q4 operational growth, negative 2% to plus 6%. Is that the right way to think about it? And what kind of gets you to the high end versus the low end?
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
There is a fairly wide range, but we are expecting some level of decline, low-single-digits in the fourth quarter. And really what that comes down to is the admissions gap versus prior year but then also a very challenging comp as we look at last year's sales growth. You'll recall, I believe the fourth quarter operational was in the range of 9% growth. And so tough comp, we always knew that was going to be a challenge for us, but then we have the added fact that we are now assuming admissions down double-digits year-over-year, roughly 11%. So that's kind of the high end of the guide range reflects some low-single-digit sales decline.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
And Larry, also we were planning to launch Novo IQ in the fourth quarter, and that carries a higher-margin as well, as well carry the sales. So, the combination of two are the ones that created a little bit of headwind in the fourth quarter that we'll see easing off throughout next year.
Larry Biegelsen -- Wells Fargo. -- Analyst
That's helpful. And Joe, I've heard you talk about the vaccine opportunity a couple of times recently. Are you talking about COVID vaccines? Or is that the flu vaccines and my understanding is you've generally operated at capacity there with the flu vaccines in Baxter Pharma solutions. Are you thinking -- do you see this COVID vaccine opportunity? And do you have to add capacity? Any color there would be appreciated. Thank you.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
So, we have the ability to do that. It's a matter of fact we have two different plants, one in Germany, with a little bit more capacity and Bloomington. And we have the ability to help the country and the manufacturers of the vaccine developers in this process. We are part of this network of companies that fill/finish vaccines. We have that ability and we cannot comment on who and what and why. But we are in part of this effort, and we hope to be part of this effort continuously throughout this pandemic. I'm talking about coronavirus, COVID-19. I'm not speaking about flu.
Larry Biegelsen -- Wells Fargo. -- Analyst
Thank you.
Operator
Danielle Antalffy from SVB Leerink. Your line is open.
Danielle Antalffy -- SVB Leerink. -- Analyst
Good morning, everyone. Thank you so much for taking the question. I had a specific question on the renal business and PD. I think you guys saw a 6% PD patient growth number. That's very strong. And I'm just curious how to think about where that patient growth number can go as the AAP tie rolls out? And how we should be thinking about the trajectory of that business as the AAKHI moves into implementation?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Hi, Daniel. Throughout this pandemic, early on in the pandemic, I think the insertion -- catheter insertion for PD was deemed emergency surgery. So our fear was if you -- in the very beginning, people don't have an opportunity to have the catheter they will straight -- go straight into hemodialysis and that's it. We see 6% even throughout this pandemic as a very good number. If you think about the AAKHI and you just do the math, the growth would go between 8% and 10%. You know that's where we should be looking at for the future. So it represents a really good opportunity for the patients to take advantage of this therapy. And also for Baxter, which has been for three or four decades behind this therapy that finally is being more understood and infused in the U.S.
Danielle Antalffy -- SVB Leerink. -- Analyst
Got it. And then just one follow-up from a technology perspective. And where we are with the sort of point-of-care dialysis PD system? And how that could change the adoption trajectory here?
James (Jay) Saccaro -- Executive Vice President and Chief Financial Officer
Listen, the point-of-care was a project that we actually proven that works. We have the technology to make a work. We are focusing right now in developing new technology for cyclers as well as we have some investments, minority investments in companies in the wearable space. So Baxter is playing in all these spaces, not only point of care, but also in technologies that will make more affordable cycler -- the issue that I think we have with the cycler is not one that affects much the U.S. as much as it affects the penetration of APD across the globe, it's a very expensive cycler, which you don't see adoption in most countries they are in development today. So to give access to healthcare and access to that technology, our teams are developing very interesting technologies that eventually will be global in nature and used. Also, I think wearable technology offers a promising future. And we have minor investment in that kind of technology. We also are very focused on point-of-care in terms of technology that can be used with some of those that are being developed in conjunction, not as itself been launched but being added to other technologies that we're currently developing. We have a pretty healthy spend in our Renal care business, and we don't plan to ease off on that and continue to develop those products.
Danielle Antalffy -- SVB Leerink. -- Analyst
Thank you.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Thanks Danielle.
Operator
Matt Miksic from Credit Suisse. Your line is open.
Matt Miksic -- Credit Suisse. -- Analyst
Thanks so much. So I just had one follow-up. Just to clarify something that we talked about a little earlier in the call, and this is the difference. I think, Joe, you answered the question around difference in types of admissions. Jay, in your prepared remarks, you had mentioned a couple of times the importance of ER visits or the fall off of ER visits. Could you just -- is that sort of the difference, fewer people coming in through the emergency, service and other types of admissions that we see in the press kind of not really being what drives your businesses. Just one clarification on that and then I have one follow-up.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Well, the admissions in hospitals come from few places, one of them is the ED and the other one is procedures, it's OR. People who have schedule or scheduled procedures, either scheduled procedures through normal routes or a knee replacement or a gastric bypass or Colin procedure oncology. That part, the procedure levels are coming back to normal levels. And I think we'll normalize, as you can see now, even with the pandemic research in so many places, hospitals are more reluctant now to stop the procedures altogether, so if you feel doing that more of them are saying that they will be able to accommodate COVID patients as well as procedures in the other side of the hospital. That is unaffected, and we see healthy pickup and going into the fourth quarter, not perhaps at the same level as we saw pre COVID, but close to those levels.What we see as issue is the ED has 20% to 25%, 30% reduction in visits. Those visits are the ones that generate admissions into hospitals as well for the general floor. So -- and we see primarily Medicare patients who are more reluctant because they age to go to an ED visit even to be admitted. So they are presenting themselves later with more severe issues. So that is how we look at this. We also look at surgery centers, and we look at alternate sites for procedures, and those actually are doing well.
Matt Miksic -- Credit Suisse. -- Analyst
Super helpful color, Joe. And then the -- just some additional question made on the pace and change that we're seeing in Europe for time. Some of these European geographies, markets we're moving in the right direction over the summer. Now obviously, we're very focused in the U.S., but there is also these changes in policy there. I guess, anything that you're seeing there? Is that factor into Q4? Any comments or color would be helpful.
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Yes. We saw a pretty good recovery in Europe. If you remember our second quarter numbers were affected. And now the third quarter, even with issues is not -- is still showing growth. The concern that we have is the two largest markets that we have in Europe right now is one of them, France, the other one in Germany. Those are the two largest markets in Europe, followed by Spain, U.K. and Italy. So you see a resurge in the lockdown for 30 days just announced by Angela Merkel. You will see that may affect the way people are treated in Europe in, in the health system. Remember, uninsured and non-insured patients is not an issue in Europe. So you don't see the reluctance to go to the ED, but you see a concern in people having procedures is hospitals continue to fill up would be for us to watch very closely. When we do modeling here, we don't do modeling only for the U.S. We're doing modeling for U. S., in Europe in a very deep level, even with variations of vaccine approvals and sentiment of the population in terms of going to the hospital. As I said, the numbers that people are seeing right now is Medicare patients are more reluctant to go to the hospital today for a chest pain and other elements, and telemedicine has helped some of this alleviation because you can do that remotely. In Europe, we see that coming up as a trend as well. We're keeping our eyes very close in Europe, but that's part of our analysis as well.
Matt Miksic -- Credit Suisse. -- Analyst
Thanks so much, Joe.
Operator
Our last question comes from the line of Matt Taylor from UBS. Your line is open.
Matt Taylor -- UBS. -- Analyst
Thank you for taking the question. So I just wanted to follow-up on two key points that you've been talking about on this call. And Jay, the first one is the $150 million in cost, I know, you said that we could be under these kind of COVID conditions for a while. If that does occur, can you talk about what proportion of the costs you could still work off? And how long would it take post, sort of, normalization to get rid of the remainder, clawback to remainder in those costs?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Well, post normalization, I would say, within one to two quarters, we should be back to -- we should have been able to alleviate the vast majority of these costs. So -- or mitigate, I should say. So post normalization, it's something that we'll see go away over time, the vast majority. There will be some that remain because for example, all of our employees in facilities today now use PPE. In the past, that was not the case. And so that has a daily cost of tenant with it that we'll live with. But like I said, post normalization of the vast majority of costs will be mitigated. As it relates to next year and how much we can do in the interim to mitigate some of this $150 million impact that's an open question we're working through, and we believe there is some opportunity, but it's hard for me to quantify that at this stage.
Matt Taylor -- UBS. -- Analyst
Thanks. And just a follow-up. I think a lot of people are surprised by the emissions comments. And I guess, I was wondering, is that reflective of what you've seen quarter-to-date? Or are you assuming any deterioration as we move forward given the cases rising, if you could give us any color, that would be helpful?
Jose (Joe) E. Almeida -- Chairman, President and Chief Executive Officer
Sure. Last quarter, from an admission standpoint, I would estimate roughly a 12% decline Q3, that's Q3. Q4, our assumption is roughly 11%. And October to-date, that's kind of what we're seeing. The wildcard is what happens to escalating cases around the U.S. and in Europe. But look, we think we have a sufficient range that we've shared that encompasses a wide swath of potential outcomes. So we think we've got it correctly called with the range that we've shared. But we're looking -- we're not expecting deterioration from -- in our high case, we're not anticipating deterioration from the current level of roughly 11% decline.
Matt Taylor -- UBS. -- Analyst
Okay. Great. Thanks a lot.
Operator
[Operator Closing Remarks]
Duration: 62 minutes
Call 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
Robbie Marcus -- JPMorgan. -- Analyst
Pito Chickering -- Deutsche Bank. -- Analyst
Bob Hopkins -- Bank of America. -- Analyst
David Lewis -- Morgan Stanley. -- Analyst
Vijay Kumar -- Evercore. -- Analyst
Larry Biegelsen -- Wells Fargo. -- Analyst
Danielle Antalffy -- SVB Leerink. -- Analyst
Matt Miksic -- Credit Suisse. -- Analyst
Matt Taylor -- UBS. -- Analyst
