Baxter 3Q Mixed, Profit Inches Up

Zacks

Baxter International Inc. (BAX) reported third quarter adjusted (excluding one-time items) earnings per share of $1.14, in-line with the Zacks Consensus Estimate and surpassing the year-ago earnings of $1.09 per share. The third quarter result is at the higher end, within Baxter’s earlier earnings guidance of $1.12 to $1.14 per share.

Reported profit in the quarter inched up 1% year over year to $583 million (or $1.06 per share). Baxter’s results in the reported quarter includes post-tax research and development charge of about $45 million (or 8 cents per share) related to Oncova Therapeutics licensing agreement in Europe.

Revenues

Revenues were flat on a year-over-year basis (up 5% in constant currency) at $3,477 million. Baxter’s third quarter revenues are below the Zacks Consensus Estimate of $3,516 million.

On a geographic basis, U.S.-based revenues in the quarter improved 8% year over year to $1,513 million while international revenues declined 5% year over year (up 2% in constant currency) to $1,964 million.

Segment Analysis

On a segment-wise basis, Bioscience revenues stood at $1,522 million, flat year-over-year (up 5% in constant currency). Constant currency growth was led by double-digit growth across all major product lines in the domestic market.

Revenues were primarily driven by higher domestic demand for Advate, Gammagard Liquid and certain specialty plasma-based therapeutics. The acquisition of Synovis Life Technologies contributed $20 million to segment revenues.   

Recombinants, the largest sub-segment, accounted for $555 million. Recombinants clambered 1% in reported terms (up 5% in constant currency) year over year. The Plasma Proteins revenues of $337 million was down 9% (down 4% in constant currency) year over year. Revenues from Antibody Therapy increased 6% year over year (up 9% in constant currency) to $404 million.

Revenues from Medical Products remained flat year over year (up 4% in constant currency) at $1,955 million. Higher sales of injectable drugs, anesthesia products and nutritional therapies were primary revenue drivers for the segment.

Three important sub-segments are — Renal with sales of $629 million, up 2% in constant currency; IV Therapies with revenues of $479 million, up 12% in constant currency; and Global Injectables with sales of $509 million, up 7% in constant currency.

Margins

Third quarter gross margin was 52.1% (up 120 basis points) compared with 50.9% in the prior-year quarter. Marketing and administrative expense (as a percentage of sales) declined to 21.4% (down 120 basis points) from 22.6% in the year-ago quarter while research and development expense increased to 8.3% (up 140 basis points) from 6.9% in the prior-year quarter.

Balance Sheet

Baxter ended the third quarter with net debt of $2,756 million, up 25% year over year. Cash flow from operations declined roughly 19% year over year to $747 million.

Outlook and Recommendation

For the fourth quarter of 2012, the company expects growth in revenues in the range of 3% to 4% (up 5% to 6% in terms of constant currency) and adjusted earnings per share in the band of $1.24 and $1.27.  

For full year 2012, Baxter maintains its forecast of reported sales growth of 2% (up 4% to 5% in terms of constant currency). However, the company narrowed its expected adjusted earnings per share to the range of $4.51 to $4.54 (earlier $4.50 to $4.56). Baxter expects cash flow from operations to exceed $3,000 million for 2012.

The news regarding Baxter still remains somewhat mixed. On the positive side, Baxter’s focus on life-sustaining products which are not commoditized, partly insulate it from an economic downturn. The company is able to generate recurring revenues, and consistent cash flow, due to its focus on chronic diseases. Among other positive factors, Baxter retains a strong product pipeline with several products in late-stage clinical development.

On the flip side, despite resilience in certain sub-segments, we are concerned about relative stagnation in sales, a slightly somber outlook for hospital spending and tightening of reimbursement.

Improved execution has lifted sentiment somewhat toward Baxter. It is a good bet for value investors willing to wait as fundamentals improve further. Among others, the company competes with Becton, Dickinson and Company (BDX) in certain niches.

We currently have a long-term Neutral recommendation on Baxter. The stock carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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