Baxter International Inc. (BAX) reported fourth-quarter 2014 adjusted EPS of $1.34, which surpassed the Zacks Consensus Estimate by 3 cents and was slightly ahead of the management’s guided range of $1.30 to $1.33.
EPS increased 2.3% year over year driven by a 3.5% increase in net sales, which totaled $4.47 billion and beat the Zacks Consensus Estimate of $4.35 billion. The sales growth was better than the management’s expectation of 3%. At constant currency (cc), net sales climbed 7% on a year-over-year basis.
The year-over-year growth in net sales was driven by strong performance in the BioScience segment. Sales increased 7.8% year over year to $1.91 billion, driven by 8.5%, 11.3% and 1.5% growth in Hemophilia, BioTherapeutics and BioSurgery, respectively.
Medical Products sales remained almost flat on a year-over-year basis to $2.59 billion. Fluid Systems, Specialty Pharmaceuticals and BioPharma Solutions increased 0.4%, 2.5% and 1.5%, respectively. However, Renal sales declined 1.5% on a year-over-year basis.
U.S. sales increased 6% year over year to $1.89 billion, driven by 6.7% growth in BioScience sales and 5.2% increase in Medical products sales. International sales inched up 1.7% to $2.59 billion in the quarter. Although BioScience sales jumped 10.7%, Medical products revenues dropped 2.7% from the year-ago quarter.
Adjusted gross margin fell 10 basis points (bps) to 50.3% in the quarter. Both Marketing & Administrative expenses and Research & Development expenses increased 10 basis points (bps) each in the quarter.
Product/ Clinical Trial Update
During the quarter, Baxter filed a biologics license application (BLA) with the FDA for the approval of BAX 111 – an investigational drug for the treatment of patients with von Willebrand disease (VWD).
In early December, Baxter filed a BLA with the FDA for the approval of BAX 855. Developed in partnership with Nektar Therapeutics (NKTR), BAX 855 is an extended half-life, recombinant factor VIII (rFVIII) protein used for hemophilia A treatment.
The company also announced positive results from its Phase III clinical trial evaluating the efficacy of BAX 855 in reducing annualized bleed rates (ABR) and expects to release additional data from the study in the near term. Upon completion of further studies, the company expects to submit an application for marketing authorization with the European Medicines Agency in 2016.
Baxter boasts a strong product portfolio for the treatment of Hemophilia A. The company’s OBIZUR drug was approved by the FDA in Oct 2014 for treating bleeding episodes in adults with acquired Hemophilia A.
Acquisitions/Divestiture Update
During the quarter, Baxter announced the divestiture of its Vero cell technology and related assets to Nanotherapeutics, Inc. for an undisclosed amount. The company also announced that the divestiture includes its production facility in Bohumil, Czech Republic.
The Vero cell platform is used to produce vaccines including H5N1, H1N1 and seasonal influenza. Baxter is also selling its investigational vaccine programs for Ross River virus, Chikungunya disease and West Nile virus.
Spin-off Update
During the quarter, Baxter filed an initial Form 10 Registration Statement with the U.S. Securities and Exchange Commission (SEC) in connection with its previously announced plan to spin off its biopharmaceuticals business.
In Mar 2014, Baxter announced its intention to separate its biopharmaceuticals and medical device segments into two independent companies – Baxter International and Baxalta Inc. While Baxter International will focus on lifesaving medical products, Baxalta will emphasis on the development and marketing of innovative biopharmaceuticals.
The filing outlines Baxter’s plans to spin off at least 80% of the outstanding common stock of Baxalta through a tax-free distribution to Baxter shareholders. The retained equity stake by Baxter of up to 20% of Baxalta’s shares will provide additional flexibility in the capital structures of the two new entities apart from enhancing shareholders’ value.
Baxter expects to complete the business separation process in mid-2015, subject to conditions.
Outlook
For the first quarter of 2015, Baxter expects revenues to grow in the range of 2% to 3%, barring the impact of foreign currency. Foreign currency volatility is expected to negatively impact overall results in 2015.
Baxter expects adjusted EPS in the range of 85 cents to 90 cents for the quarter. The Zacks Consensus Estimate is currently pegged at $1.02.
Our Take
We believe that an extensive product pipeline and strategic collaborations represent key value drivers for Baxter. However, we are concerned about integration-related risks along with a somber outlook for hospital spending. Also, Baxter has to combat intense competition, specifically in the hemophilia franchise. Moreover, higher operating expenses will continue to hurt profitability in the near term.
Zacks Rank
Currently, Baxter has a Zacks Rank #4 (Sell).
Better-ranked stocks in the same sector are ICU Medical (ICUI) and Nxstage Medical (NXTM). Both the companies sport a Zacks Rank #1 (Strong Buy).
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