Baxter International Inc. (BAX) is a $40 billion, global, diversified, healthcare company that develops, manufactures, and markets medical products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. BAX's numerous and diversified products are used in hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors' offices, clinical and medical research laboratories, and by patients at home under physician supervision. BAX has, in the last several years, been on an acquisition spree. In November 2011 it purchased Baxa Corporation for $380 million; in February 2012 it purchased Synovis Life Technologies for $325 million; in April 2012 it purchased the remaining 60% of the stock in Sigma International General Medical Apparatus, LLC (that it did not already own), for $90 million; and it is presently in the process of completing the purchase of Gambro A B for $2.76 billion. In its 2012 Annual Report, Chairman and Chief Executive Officer, Robert Parkinson stated explicitly in his letter to shareholders, that business acquisition was one of its four "Growth Vectors", thus emphasizing his intent to continue growing the company by mergers and acquisitions.
ICU Medical, Inc. (ICUI) is a $1 billion, global, healthcare company that develops, manufactures, and sells medical devices used in infusion therapy, oncology, and critical care applications. Its products are used in hospitals and alternative medical care sites. For the last several months, rumors have persisted that ICUI is looking for a buyer. On August 2, 2013, Vita Reed stated (in an article in the Orange County Business Journal), that ICUI was having discussions with J. P. Morgan Chase & Co., to sell ICUI for up to $1 billion. The article also indicated that GTCR LLC, a private equity firm, was in talks with ICUI to purchase it. In the last 52 weeks, ICUI's share price has gone from a low of $53 to a high of $85 in July 2013. It is now trading at $71. Although I have not seen any articles concerning an interest BAX might have in ICUI, it would appear that ICUI is an excellent candidate for BAX's acquisition growth strategy, and (if ICUI is up for sale) BAX will be one of the possible bidders, and is likely to pay a considerable premium for the company. BAX paid a premium of 52% per share for its purchase of Synovis Life Technologies, Inc., in 2012.
Let's look at some of the reasons that BAX would want ICUI.
- ICUI products would expand the diversity of BAX's products. BAX already has a large diversity of products, but only tangentially competes with ICUI's products. ICUI's products consist of closed delivery systems for hazardous drugs, custom infusion systems, needle free infusion connectors, catheters, and cardiac monitoring systems. Although BAX (with its recent acquisitions) has acquired some products for delivery systems, ICUI excels and specializes in these products that would greatly enhance BAX's presence in this medical specialty. Since both companies sell to many of the same type of clients, the ICUI products brought to BAX would be a natural fit for BAX's desire to expand its diversification.
- Both companies also sell throughout the global market and have facilities in a number of different countries. Although BAX has a substantial larger presence in the world market, the merger of the two should provide big cost saving through synergies. In the US, ICUI's headquarters is in San Clemente, California, but it also has a large facility in Salt Lake City, Utah. BAX's headquarters is in Deerfield, Illinois, and has numerous facilities throughout the US, including California.
- Both companies are innovators. In the last five years ICUI spent $33 million on R&D, and has a number of valuable active patents. Baxter spent $4.6 billion on R&D in the last five years.
- ICUI has a strong balance sheet. It has zero long term debt, and its annualized five year average earnings growth rate is 13.1%, compared to BAX's 9.9%; its annualized five year average revenue growth rate is 11%, compared to BAX's 4.7%.
In conclusion, if the rumors are correct, and ICUI is looking for a buyer, it is strange that BAX's name has not been mentioned. I will be very much surprised if this does not change, and BAX becomes a bidder. ICUI is currently carrying a PE of 26.87 which reflects its recent run-up since the rumors started appearing about its possible sale. Prior to the rumors being circulated, ICUI's PE had been in the upper teens to lower twenties. Although ICUI's share price may be a bit expensive, BAX's recent history indicates that it is willing to pay up for a company like ICUI. If you put a PE of 20 on ICUI's 2012 earnings of $2.80, its current price would be at $56.00. ICUI recently paid a 52% premium for Synovis Life Technologies, Inc. in 2012. Applying a similar 52% premium to $56.00 calculates to a sale price of $85.12 per share, which is a $14.12 (20%) profit to ICUI's current share price of $71.00. Using a 30% premium (which I calculate as being the low for a sale), you get a sale price of $72.80 per share, which is a $1.80 (2.5%) profit. Even though ICUI's current share price obviously has some of the sale price baked into it, if a sale does go through, an investor could see a substantial short term gain.