Baxter Beats on EPS, Net Dips - Analyst Blog

Baxter International (BAX) reported fourth quarter and fiscal 2010 adjusted (excluding one-time items) earnings per share of $1.11 and $3.98, respectively, thereby beating the corresponding Zacks Consensus Estimates of $1.10 cents and $3.97, and surpassing the year-ago results of $1.03 and $3.80.

The results were in line with Baxter's earlier guidance in the range of $1.09 to $1.11 for the fourth quarter and $3.96 to $3.98 for fiscal 2010.

Reported net income dropped 26% year over year, in the fourth quarter, to $423 million (or 72 cents per share). This decline mainly resulted from special after-tax charges of $227 million for asset impairment and costs related to Baxter's initiatives in the area of business optimization, higher reserves for litigation and in-process R&D expenses.    

Revenues

Total revenues were $3,498 million, up 1% year over year, beating the Zacks Consensus Estimate of $3,460 million. For fiscal 2010, sales rose 2%, but trailed the Zacks Consensus Estimate of $13,014 million. Domestic revenues for the quarter edged up 1% to $1,440 million while overseas sales were flat year over year (up 3% in constant currency) at $2,058 million.

Segment-wise Revenue Analysis

With regard to segment performance, Bioscience revenues totaled $1,533 million, up 1% (up 4% in constant currency) year over year. The better performance was attributable to higher demand for Gammagard Liquid, several specialty plasma-based therapeutics and biosurgery products. This strength was partly negated by the anticipated decline in recombinant protein and vaccine sales.

The largest sub-segment, Recombinants, had sales of $534 million, down 5% (down 3% in constant currency) year over year. The Plasma Proteins business, where Baxter had encountered structural problems in the past, performed well with revenues of $416 million, up 9% (up 13% in constant currency) year over year. Antibody Therapy also performed better with sales of $386 million, climbing 10% (up 13% in constant currency) year over year.

Revenues from Medication Delivery went up 1% year over year (up 3% in constant currency), to $1,330 million, riding on growth in intravenous therapies (including the company's parenteral nutrition products), injectable drugs and anesthesia items.

The three prominent sub-segments were IV Therapies with sales of $452 million, up 5% in constant currency basis; Global Injectables with revenues of $499 million, up 5% in constant currency; and Infusion Systems with sales of $230 million, down 7% in constant currency.

Renal sales were steady (up 1% in constant currency) at $626 million, as Baxter made advances with peritoneal dialysis patients in the U.S., Latin America and Asia.

Margins

Gross margin was 46.3% in the fourth quarter, down from 50.9% in the year-ago quarter. Marketing and administrative expense (as a percentage of sales) increased to 23.8% from 22.7% in the prior-year quarter while research and development expense was up to 7.5% from 7.1% in the year-ago quarter.

Balance Sheet

Cash and cash equivalents totaled $2,685 million, as of December 31, 2010, down 3.6% year over year. Net debt totaled $1,702 million, up 24.7% year over year.

Commercial and Pipeline Achievements

During the year, Baxter enjoyed a number of commercial and pipeline deals and 14 of its programs progressed in Phase III clinical development. Recent achievements include the acquisition of hemophilia-related assets from Archemix. The company also received FDA approval to market Gammagard Liquid 10%, in a 30 gram vial, for patients suffering from primary immunodeficiency disorders.  

In fiscal 2010, Baxter completed the Phase III clinical trial of HyQ an immune globulin therapy. It concluded another Phase III study considering Tisseel fibrin sealant as a hemostatic agent in vascular operations.  

Outlook and Recommendation

For the first quarter of fiscal 2011, the company expects growth in revenues in the range of 2% to 3%, on a constant currency basis, and adjusted earnings per share in the range of 92 cents to 94 cents.

After excluding the expected divestiture of the generic injectables business with annual revenue of about $200 million, Baxter anticipates growth in revenues in the range of 4% to 5%, and adjusted earnings per share of about $4.15 to $4.25 for fiscal 2011. The current Zacks Consensus Estimates are 97 cents and $4.23 per share for the first quarter and fiscal 2011, respectively. 

Baxter is a global medical products and services company with expertise in medical devices, pharmaceuticals and biotechnology. It competes with Becton, Dickinson and Company (BDX) and Talecris Biotherapeutics Holdings Corp. (TLCR), among others, in certain segments.

Baxter's focus on life-sustaining products, which are not commoditized, partly insulates it from an economic downturn. The company is able to generate consistent recurring revenues due to its focus on chronic diseases.

Further, Baxter retains a strong product pipeline with several products in late-stage clinical development. Among other factors, the company has a large cash balance, strong operating cash flow and backup lines of credit,  which provide ample liquidity.

On the flip side, despite recent improvement in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about stagnation in sales, a somber outlook for hospital spending and tightening of reimbursement.

We believe that Baxter may be back on track to produce more consistent operating and financial results while gradually improving its top and bottom-line growth. The lingering bearishness surrounding the stock can be lifted by consistent execution. Baxter is a good bet for value investors willing to wait as fundamentals improve.

However, hospital capital spending still remains weak and Baxter's significant exposure to international markets makes it vulnerable to foreign exchange headwinds and reimbursement risks. We currently have a Neutral long-term rating on Baxter. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.

 
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