Baxter International Inc. (BAX) reported fourth quarter and 2012 adjusted (excluding one-time items) earnings per share of $1.26 and $4.53, respectively, thereby meeting the corresponding Zacks Consensus Estimates of $1.26 and $4.53, and surpassing the year-ago earnings of $1.17 and $4.31, respectively. The fourth quarter result was in accordance with the company’s earlier stated guidance in the range of $1.24 to $1.27 per share.
Reported profit in the quarter increased 6.7% year over year to $494 million (or 89 cents per share). Baxter’s results in the reported quarter includes unusual after-tax amount of $206 million (or 37 cents per share) pertaining to business restructuring and settlement of pension liabilities.
Revenues for the quarter were $3,753 million, up 4% (up 5% in constant currency) year over year, beating the Zacks Consensus Estimate of $3,714 million. For 2012, sales rose 2% (up 5% in constant currency) to $14,190 million, exceeding the Zacks Consensus Estimate of $14,154 million.
On a geographic basis, U.S.-based revenues in the quarter improved 7% year over year to $1,572 million while international revenues rose 2% year over year (up 4% in constant currency) to $2,181 million.
On a segment-wise basis, Bioscience revenues stood at $1,687 million, up 7% year over year (up 9% in constant currency). Growth was led by demand for certain 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 to segment revenues.
Recombinants, the largest sub-segment, accounted for $581 million. Recombinants clambered 1% in reported terms (up 3% in constant currency) year-over-year. The Plasma Proteins revenues of $447 million was up 13% (up 13% in constant currency) year over year. Revenues from Antibody Therapy increased 5% year over year (up 5% in constant currency) to $425 million.
Revenues from Medical Products rose 2% year over year (up 3% in constant currency) at $2,066 million. Growth was driven by intravenous therapies, peritoneal dialysis and the takeover of Baxa.
Three important sub-segments are — Renal with sales of $675 million, up 2% in constant currency; IV Therapies with revenues of $500 million, up 8% in constant currency; and Global Injectables with sales of $522 million, up 8% in constant currency.
Fourth quarter adjusted gross margin was 52.4% (up 60 basis points) compared with 51.8% in the prior-year quarter. Marketing and administrative expense (as a percentage of sales) rose to 21.6% (up 80 basis points) from 20.8% in the year-ago quarter while research and development expense dropped marginally to 7% (down 10 basis points) from 7.1% in the prior-year quarter.
Baxter ended the fourth quarter with net debt of $2,660 million, up 16.2% year over year. Cash flow from operations rose roughly 5.9% year over year to $945 million.
Outlook and Recommendation
For the first quarter of 2013, the company expects growth in revenues in the range of 2% to 3% and adjusted earnings per share in the band of $1.03 and $1.05.
Baxter’s forecast for 2013 includes impact of its Gambro acquisition. For 2013, Baxter guided to reported sales growth of 10% in constant currency. The company altered its expected adjusted earnings per share to the range of $4.60 to $4.70 (earlier $4.51 to $4.54) for 2013. Baxter expects cash flow from operations to approximate $3,300 million for 2013.
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.
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