Baxter International Inc. (BAX) reported second quarter adjusted (excluding one-time items) earnings per share of $1.12, thereby beating the Zacks Consensus Estimate by a penny and surpassing the year-ago earnings of $1.07 per share. The second quarter result is at the higher end, within Baxter’s earlier earnings guidance of $1.10 to $1.12 per share.
Reported profit in the quarter was $661 million (or $1.19 per share), up about 7% year over year. Baxter’s results in the reported quarter include a net post-tax special benefit of about $42 million (or 7 cents per share) related to business developmental activities.
These results are inclusive of a special post-tax charge of $23 million (or 4 cents per share) associated with the company’s worldwide collaboration with Chatham Therapeutics. The charge is more than offset by a net post-tax gain of $65 million (or 11 cents per share) related to the acquisition payment of ApaTech Limited and adjustment of reserves for Colleague infusion pumps.
Revenues
Revenues edged up 1% year over year (up 4% in constant currency) to $3,572 million, sailing past the Zacks Consensus Estimate of $3,538 million.
On a geographic basis, U.S.-based revenues in the quarter increased 6% to $1,503 million while international revenues decreased 2% year over year (up 3% in constant currency) to $2,069 million.
Segment-wise Revenue Analysis
On a segment-wise basis, Bioscience sales increased 1% year over year (up 4% in constant currency) to $1,566 million. Revenues were primarily driven by higher domestic demand for Advate, healthy growth of certain specialty plasma-based therapeutics and surgical sealants. The acquisition of Synovis Life Technologies also contributed to segment growth.
The largest sub-segment, Recombinants sales accounted for $565 million, down 1% in reported terms (up 3% in constant currency) year over year. The Plasma Proteins revenues of $364 million was flat in reported terms (up 4% in constant currency) year over year. Antibody Therapy reported sales declined 1% year over year (up 1% in constant currency) to $376 million.
Revenues from Medical Products clambered 1% year over year (up 4% in constant currency) to $2,006 million.
Three important sub-segments are — Renal with sales of $635 million, up 4% in constant currency; IV Therapies with revenues of $479 million, up 10% in constant currency; and Global Injectables with sales of $539 million, up 9% in constant currency.
Margins
Gross margin came in at 51.8% in the second quarter compared with 51.9% in the prior-year quarter. Marketing and administrative expense (as a percentage of sales) inched up to 22.1% from 21.6% in the year-ago quarter while research and development expense increased to 7.7% from 6.8% in the prior-year quarter.
Balance Sheet
Baxter ended the second quarter with net debt of $2,961 million, up 24.3% year over year.
Outlook and Recommendation
For the third quarter of 2012, the company expects growth in revenues in the range of 5% to 6% in terms of constant currency and adjusted earnings per share in the band of $1.12 and $1.14.
For full year 2012, Baxter maintains its forecast of constant currency sales growth of about 4% to 5%. However, the company revised its expected adjusted earnings per share to the range of $4.50 to $4.56 (earlier $4.49 to $4.57). Baxter expects cash flow from operations to exceed $3,000 million for 2012.
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. Among other positive factors, Baxter retains a strong product pipeline with several products in late-stage clinical development.
On June 25, 2012, Baxter reported that the Food and Drug Administration (FDA) approved Gammagard Liquid 10% — Immune Globulin Infusion (Human) — as a therapeutic option for multifocal motor neuropathy (MMN). This treatment had received a regulatory nod in Europe in 2011. It is the first immunoglobulin therapy for MMN patients in the U.S. for which Baxter has received Orphan Drug Designation. Gammagard Liquid is called Kiovig outside North America.
Baxter, in November 2011 completed its acquisition of Baxa Corporation. The takeover highlights the company’s continued commitment toward patient safety and nutrition. It also permits Baxter to provide a wider set of solutions for the safe preparation and delivery of IV medication. Baxa’s know-how will benefit patients across the globe.
Moreover, Baxter struck a deal, in December 2011 to buy Synovis Life Technologies, a well-known provider of mechanical and biological products for the repair of soft tissue in a large number of surgical operations. The acquisition will further expand Baxter’s offerings in the area of biosurgery and regenerative treatment. The takeover of Synovis was completed in the first quarter of 2012.
On the flip side, despite resilience in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about relative stagnation in sales, a slightly somber outlook for hospital spending and tightening of reimbursement. We also account for the unfavorable impact of foreign exchange translation and possible dilution associated with the company’s acquisitions of Baxa and Synovis.
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 Neutral long-term recommendation on Baxter. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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