Baxter Meets Earnings, Misses Revs

Zacks

Baxter International Inc.’s (BAX) third-quarter 2013 adjusted earnings per share grew 4% to $1.19, but were in line with the Zacks Consensus Estimate. The third-quarter results were also within the company’s earlier stated guidance of $1.18-$1.21.
 
Reported net income in the quarter decreased 6.7% year over year to $544 million or 99 cents per share compared with $583 million or $1.06 per share in the prior-year quarter. Baxter’s results in the reported quarter include an unusual after-tax amount of $111 million or 20 cents per share pertaining to the takeover of Gambro AB, which was completed as scheduled in the third quarter.
 
Revenues for the quarter went up 9% to $3,774 million but slightly missed the Zacks Consensus Estimate of $3,795 million. On an organic basis (excluding Gambro that contributed $100 million), revenues climbed 6%. Foreign currency did not impact revenues in the quarter. On a geographic basis, revenues in the U.S. as well as internationally improved 9% to $1,642 million and $2,132 million, respectively.
 
Third-quarter adjusted gross margin decreased 10 basis points (bps) to 52.0%. Adjusted marketing and administrative expenses rose 11% to $827 million, while adjusted research and development expenses increased 10% to $265 million in the quarter.
 
Segment Analysis
 
Bioscience revenues came in at $831 million, up 5%. Revenues were primarily driven by higher demand for Advate used in Hemophilia and Feiba, along with benefits from government collaborations and the timing of international tenders.
 
Hemophilia, the largest sub-unit, accounted for $851 million, up 9% from the prior year. BioTherapeutics revenues grew 3% (2% at constant exchange rate or CER) year over year to $532 million. Revenues from BioSurgery increased 5% to $173 million and from Vaccines escalated 8% (up 5% at CER) to $64 million.
 
Revenues from Medical Products improved 10% (11% in constant currency) to $2,154 million on the back of the Gambro acquisition. Barring foreign currency and the contribution from the acquisition, Medical Products revenues grew 6%. Peritoneal dialysis products along with anesthesia offerings and injectable therapies led to growth in revenues.
 
The four sub-units are: Fluid Systems with sales of $792 million, up 13% at CER; Renal with sales of $746 million, up 21% at CER; Specialty Pharmaceuticals with revenues of $372 million, up 1% at CER; and BioPharma Solutions with sales of $244 million, down 4% at CER.
 
Financial Position
 
Baxter’s cash and cash equivalents were $,376 million as of Sep 30, 2013, down from $3,191 million as of Sep 30, 2012. Total debt stood at $9,066 million as of Sep 30, 2013, compared with $5,947 million as of Sep 30, 2012.
 
During the first three quarters of 2013, Baxter generated cash flow from operations of $2.1 billion. It returned an impressive over $1.6 billion to shareholders through share repurchases of 12.4 million shares worth $863 million and dividends totaling $757 million, reflecting more than 35% increase in dividend payments from the prior-year period.
 
Outlook
 
For the fourth quarter of 2013, the company expects revenue growth in the range of 14% to 15% (12% to 13% at CER). This includes the impact of the Gambro AB acquisition, amounting to $400 million. Adjusted earnings per share are expected to be in the band of $1.24 to $1.26. The Zacks Consensus Estimate for revenues and earnings per share are pegged at $4,336 million and $1.26 respectively, for the quarter.
 
Baxter confirmed its earnings forecast for 2013, which includes the impact of its Gambro acquisition. For 2013, Baxter expects reported revenue growth of 6% (7% at CER). Excluding the impact of foreign exchange rate and the Gambro acquisition, Baxter continues to expect sales growth of approximately 4% (or 3% including the impact of foreign currency). The company expects to generate revenues from the Gambro acquisition of approximately $500 million for the year. 
 
Moreover, the company anticipates adjusted earnings per share in the range of $4.65 to $4.67 for 2013. The Zacks Consensus Estimate for 2013 earnings per share of $4.67 lies at the top end of the guided range. Baxter continues to expect cash flow from operations to be $3,300 million for 2013.
 
Our Take
 
We remain on the sidelines regarding Baxter’s mixed third-quarter results with earnings in line with, and revenues missing the Zacks Consensus Estimate. However, long-term prospects of the company appear to be accretive following the strategic acquisitions and collaborations. Further, milestone achievement for pipeline products represents significant future top line acceleration for BAX.
 
Baxter has a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding BAX, medical product companies such as INSYS Therapeutics, Inc. (INSY), Bio-Rad Laboratories, Inc. (BIO) and Boston Scientific Corp. (BSX) are also expected to do well. While INSY and BIO carry a Zacks Rank #1 (Strong Buy), BSX has a Zacks Rank #2 (Buy).
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