Baxter International: Near-Term Prospects Are Actually Promising

Baxter International (BAX) makes critical and life-sustaining products for treating chronic and acute medical conditions. The company sells these products in more than 100 countries. In fact, 60% of 2008 nine-month sales came from outside the U.S.

BAX operates three business segments, each serving a specific market. BioScience is the largest, producing 43% of nine-month revenues. Utilizing the latest in recombinant DNA technology, this segment develops plasma-based proteins and therapies for addressing bleeding disorders such as hemophilia, immune deficiencies, alpha 1-antitrypsin deficiency, burns and shock, and other bloodrelated conditions.

It also develops proteins used in regenerative medicine and in the production of vaccines. Medication Delivery generated 37% of sales. Its products include intravenous and irrigation solutions, premixed drugs and drug-reconstitution systems, and pre-filled vials and syringes for injectable therapies. The Renal segment produces the rest of BAX’s revenues. This segment manufactures peritoneal dialysis solutions, in-home dialysis machines, and other products for treating end-stage renal disease.

Despite the recession, BAX delivered strong growth throughout 2008. The company is benefiting from a strategic decision made years ago to build up the BioScience business, which boasts high growth and fat profit margins. This segment helped boost BAX’s operating profit margin to 20.81% in 2007.

Q3 net sales rose 14.6% year-over-year to $3.15 billion. BioScience sales surged 23% with all major product categories enjoying double-digit growth. The company specifically mentioned robust demand for its hemophilia treatments. Medication Delivery sales jumped 11%. Renal sales increased 6%. The gross profit margin climbed to 50.56%. The adjusted operating profit margin expanded 115 basis points to 23.01%. Adjusted net income jumped 22.9% to $563 million or 88 cents per share.

Investment risks include the increasing level of competition, a risk that new products may not receive regulatory approval, and potential changes in reimbursement rates. Furthermore, even though the company operates in a recession resistant industry, it is not immune to economic problems. In fact, Q4 earnings guidance fell short of the consensus expectation. Nonetheless, Q4 sales (excluding foreign exchange) should rise 7% and adjusted earnings per share should jump 16-18%. Near-term prospects for BAX are better than they are for most companies at this time.

Long-term prospects are also promising. Continued investment in R&D, particularly in the BioScience segment, should lead to additional high-growth, high-margin revenue streams. Profit margins should benefit from efforts to bring more production of key products in house. The company has a healthy balance sheet and strong operating cash flows. Recently, management signaled its bullish outlook by increasing the quarterly cash dividend by 20% to 26 cents per share. In addition, the European Medicines Agency recently issued a positive opinion for Celvapan—the first cell culture-based H5N1 (avian flu) pandemic vaccine, which utilizes BAX’s Vero cell technology. This brings the company one step closer to being able to market a vaccine in the event a pandemic is officially declared by the World Health Organization.

Comments

[Patricia013:]

I'm a Baxter retiree and I don't know all the hocus-pocus in the numbers when selecting stocks to invest in. I only know this company is a sterling example of a well run american company. I would highly recommend them, their products and their stock to anyone.

Jan 11 02:31 PM