Baxter International Inc. (BAX) reported third-quarter 2011 adjusted (excluding one-time items) earnings per share of $1.09, just beating the Zacks Consensus Estimate of $1.08, and surpassing the year-ago earnings of $1.01. The results were in line with Baxter’s earlier guidance of $1.07 to $1.09.
Baxter reported a profit of $576 million (or $1.01 per share) for the quarter versus $525 million (or 89 cents a share) a year ago. The company’s results in the reported quarter included a special item (after tax) of $48 million (8 cents per share) related to the settlement of litigation on average wholesale prices and other issues.
Revenues
Total revenues were $3,479 million in the third quarter, up 8% (up 3% in constant currency) year over year, beating the Zacks Consensus Estimate of $3,416 million. Adjusted for the divestiture of the domestic multi-source generic injectables segment, overall sales increased 10% (up 4% in constant currency).
Domestic revenues for the quarter increased 1% (up 5% with adjustment for the divestiture) to $1,403 million while overseas sales were higher 13% (up 4% in constant currency) to $2,076 million.
Segment-wise Revenue Analysis
On a segment basis, Bioscience revenues amounted to $1,517 million, up 9% (up 4% in constant currency) year over year. The better performance was attributable to higher demand for Gammagard Liquid (Immune Globulin Intravenous – Human, marketed as Kiovig ex-U.S.), several specialty plasma-based therapeutics and vaccines.
The largest sub-segment, Recombinants, had sales of $552 million, up 5% in reported terms (down 1% in constant currency) year over year. The Plasma Proteins business, where Baxter faced structural issues in the past, again did fairly well with sales of $372 million, up 8% (up 4% in constant currency) year over year. Antibody Therapy also provided robust results with revenues of $380 million, higher 13% (up 11% in constant currency) year over year.
Revenues from Medical Products increased 7% year over year (up 1% in constant currency), to $1,950 million. Adjusted for the divestiture, segment revenue was up 10% (up 4% in constant currency) benefiting from robust growth in intravenous therapies and injectable drugs, anesthesia products in overseas markets and peritoneal dialysis therapy.
Three important sub-segments were Renal with sales of $646 million, up 2% in constant currency; IV Therapies with revenues of $453 million, up 3% in constant currency; and Global Injectables with sales of $494 million, flat in constant currency.
Margins
Gross margin stood at 50.9% in the third quarter, down from 51.5% in the year-ago quarter. Marketing and administrative expense, as a percentage of revenues, was up 180 basis points (bps) to 22.6% while research and development expense was up 50 bps to 6.9% from the year-ago quarter.
Balance Sheet and Other
Cash and cash equivalents aggregated $2,338 million, as of September 30, 2011, down 16.1% year over year. Net debt totaled $2,204 million, up 5.2% year over year.
Baxter’s R&D expenditure was up 15% year over year, in the third quarter, partly reflecting advances of investigational therapies in late-stage clinical development.
Outlook and Recommendation
Baxter issued guidance for fourth-quarter fiscal 2011 and reiterated its estimates for 2011. For the fourth quarter, the company expects revenue growth in the range of 2% to 3% in constant currency and adjusted earnings per share in a band of $1.15 and $1.18.
For fiscal 2011, Baxter still forecasts growth in revenues in the range of 3% to 4% in constant currency and maintains its projection for adjusted earnings per share in a band of $4.29 and $4.32. In addition, the company forecasts cash flow from operations of about $2.8 billion. The current Zacks Consensus Estimates are $1.17 and $4.30 per share for the fourth quarter and fiscal 2011, respectively.
The news regarding Baxter still remains mixed. On the positive side, Baxter’s focus on life-sustaining products, which are not commoditized, partly insulates it from an economic downturn. The company is able to generate recurring revenues, and consistent cash flow, due to its focus on chronic diseases.
On the flip side, despite recent stability in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about stagnation in sales, a slightly somber outlook for some hospital spending and tightening of reimbursement.
Improved execution has lifted sentiment somewhat toward Baxter. Baxter is a good bet for value investors willing to wait as fundamentals improve further. Among others, it competes with Becton, Dickinson and Co. (BDX) in certain niches. We currently have a long-term Neutral rating on Baxter.
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