Investors, who are seeking long term investments and would like to see a consistent increase in their earnings, should focus their attention on equities which have a great return (ROE). One company currently being traded well below its fair value estimate and has demonstrated positive ROE's for the past ten years is Baxter International Inc. (NYSE:BAX).
It would be incredibly naïve of me, however, to invest in a company without taking a closer look at other financials and pertinent valuations used to assess its progress relative to its peers. We must also analyze the current and future projects of BAX and the hurdles it may face.
Changes Between 2011-TTM
Free Cash Flow
BAX vs. Industry
Operating Margin % TTM
Net Margin % TTM
BAX is one of the most profitable companies in the healthcare sector. It has a net profit margin of around 15%. The healthcare equipment and supplies industry has a 1.3% net profit margin. It is generating much more revenue than its competitors and has enough liquid assets to cover its liabilities. BAX pays its shareholders an annual dividend of $1.96/ share. At BAX's current stock price, this dividend payment is 2.8% above its own industry average and around 2% above the average stock in the S&P 500. BAX's ROE TTM, comes out to be 20% greater than the industry's average. The ROA TTM and the ROI TTM also exceed the industry by 4.82% and 6.37%, respectively.
The concerning figures are BAX's debt, free cash flow trend, and net income trend. However, given the profitability for shareholders demonstrated in the earnings above, one can see that BAX is currently trading at a bargain price.
During the TTM, there have been plenty of SEC 4 filings. Executives were acquiring shares around March 2013, and dumping shares along with option exercise after a July dividend pay date. This exchange amongst the executives, were miniscule compared to the 48.5 billion shares of BAX bought by different funds and institutions during 2013.
BAX develops, markets, and manufactures products primarily in the fields of: Anesthesia, BioSurgery, Critical Care, Hemophilia, Immunoglobulin, Pulmonology, Nephrology, and vaccinations.
Innovations in Anesthesia
Inhaled anesthetics are used every day. Three of the most commonly used inhaled products in general Anesthesia are: Suprane (desflurane, USP), Sevoflurane USP , and Forane (isoflurane, USP). Currently these anesthetics are mostly used in the operating room. Inhaled anesthetics are slowly moving out of the operating room into critical care settings. Most of these settings currently use injectable anesthetics. This transition can cause BAX to benefit tremendously.
Innovations in BioSurgery
Many times during surgery, uncontrolled bleeding can occur. If left uncontrolled, operative blood loss could cause a need for re-operation, blood transfusions, post-op anemia leading to congestive heart failure, and many other complications. Hemostatic agents and cauterizing tools can be used to control the bleeding. If all of the above fails, BAX has created an adjunct tool to aid in hemostasis; Floseal Hemostatic Matrix. This tool has a 96% success rate (149/156) in attaining hemostasis within 10 minutes.
Innovations in Critical Care
Burns, Fluid loss, Adult Respiratory Distress Syndrome, Nephrotic Syndrome, Cardiopulmonary bypass surgery, and Hemolytic Disease of the Newborn, are all conditions intensive care units battle every day. All these conditions result in a loss of the main protein in human blood plasma, albumin. Produced by the liver, the compound is responsible primarily for maintaining colloid osmotic pressure or oncotic pressure. When an adult has an albumin level below 3.5 g/dL, and a child having less than 2.9 g/dL, albumin therapy may be needed. The human body being unable to maintain an oncotic pressure will make blood less viscous. Oncotic pressure helps pull blood into the circulatory system from tissues. If this can't be done, the body can easily accumulate waste products such as carbon dioxide. BAX provides albumin therapy for this emergent situation.
BAX also provides protein C therapy to prevent thrombosis and IV beta blocker therapy used in patients with emergent cardiovascular conditions such as severe hypertension.
Innovations in Hemophilia
There are many types of Hemophilia. The disease is hereditary and affects the clotting cascade; primarily causing a deficiency in factor VIII (Hemophilia A) and factor IX (Hemophilia B). Being a genetic condition already gives a clue that the treatment needs to be personalized to the individuals need. Humans are known to react differently to medications simply based on their genotype. The field of pharmacogenomics, tailoring drugs to best suit the genotype of the patient, is growing. With Google (NASDAQ:GOOG) and other large companies such as Abbott Molecular heavily involved in providing this personalized care; we can safely assume that this will play a large role in the future of medicine. BAX has been doing much research on this personalized healthcare design and producing products for Hemophilia through this research. Hemophilia patients now have a greater life expectancy; above the age of 60.
Innovations in Pulmonology
Alpha-1 Antitrypsin (NYSE:AAT) deficiency is an incurable condition clinically evident in obstructive lung diseases such as emphysema. BAX has formulated a therapy to maintain serum levels of AAT above the recommended 11 µM.
Innovations in Nephrology
Aside from addressing the common kidney failure concerns including dialysis treatment, BAX is heavily invested in R&D for addressing critical conditions such as Acute Kidney Injury (AKI), including but not limited to providing resources for filtering blood when the patients kidneys are unable to.
Innovations in Vaccines
Baxter focuses much of their vaccine R&D expenditure on polysaccharide carrier protein conjugation. Conjugate polysaccharide vaccines have tremendous benefits in protecting against viral and bacterial infections. They can provide longer-lasting protection compared to unconjugated polysaccharide vaccines, reduce the number of individuals who carry the infectious agent in their nose or throat, and help develop a long lasting immune response if given to infants. The downside is that this form of vaccine is difficult to develop for most conditions. BAX has invested much of its assets to help implement this technology not only in new vaccines, but also to previously created vaccines.
The Bull's within the Bull
With all the products discussed above, what is really going to put BAX above its industry competitors for the years to come? One large player is its drug Advate. Advate is the only prophylaxis treatment for Hemophilia A approved by the FDA. Its efficacy is off the charts with a 98% reduction in bleeds. As of yet, no other company can match this figure. International sales of this drug have also improved. With Brazil, Russia, and China still having unmet needs for Hemophilia A, growth in emerging international markets for Advate will be seen in the next few years.
BAX was also approved in 2013 by the FDA to treat Hemophilia B prophylactically. The drug RIXUBIS is the first compound ever approved to treat a factor IX deficiency by routine prophylaxis. Due to the recent approval, the marketing and growth, both domestically and internationally, will be seen in 2014.
BAX also recently acquired a Swedish dialysis firm, Gambro. When Gambro's revenue was included in BAX's financials, a growth of 9% was seen.
With the geriatric population increasing at a fast pace, the incurable prevelance of Alzheimer's will also be increasing. BAX offers a therapy, Gammagard, which has been shown to halt the progression of Alzheimer's. It has yet to be approved by the FDA for treatment of Alzheimer's in particular, but is on the market for treatment of various immune system disorders such as Leukemia.
Medical supplies, including but not limited to IV solutions and dialysis equipment has helped BAX sale grow 10% TTM.
Unfortunately, Advate's monopoly might not hold for long. Companies like Biogen Idec and Novo Nordisk are trying to create a similar product with less frequent dosing. This will make the treatment less of a hassle and more affordable. If this happens, BAX's edge will have been compromised. Given that this is already public news BAX may already be working on a new and improved form of Advate to match its competitors plan.
With so much diversity in its products, BAX stands out amongst its peers with a wide and confident economic moat.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.