Baxter Announces Renal Spinoff to Unlock Value in Discounted Shares

Business Strategy & Outlook:

Following the spinoff of Baxalta in mid-2015, Baxter’s new management team has focused on increasing efficiencies and innovating in medical products. That focus has resulted in much-improved profitability and cash flow generation since then. In the intermediate term, the company aims for mid-single-digit sales growth primarily through new product launches and for double-digit adjusted earnings per share and free cash flow growth compounded annually. Acquisitions, like the recent combination with Hill Rom (medical equipment like hospital beds with digital connection capabilities), could add to those prospects. Baxter’s renal and acute care technology supports patients with failing organs, most often kidneys. Baxter generates most of its revenue in these segments from at-home patients using its peritoneal dialysis, or PD, tools. However, it also sells hemodialysis products to dialysis clinics and continuous renal replacement therapy and other organ support equipment to intensive care units, which saw a boost in demand during the coronavirus pandemic. While some new product launches were delayed during the pandemic, this segment should continue to benefit from new hemo-and peritoneal-dialysis launches in the future. Additionally, increased demand for at-home dialysis tools should benefit Baxter in PD generally. Baxter also provides many injectable therapies. In pharmaceuticals, Baxter is pursuing an ambitious growth strategy to roughly double the number of molecules it sells through a variety of delivery options, including premixes. In advanced surgery, Baxter sells wound closure and bleeding control products. New products aim to help clinicians save time in the operating room. In medication delivery and nutrition, management has turned around these operations after recent hurricanes and regulatory concerns damaged Baxter’s reputation as a reliable supplier of these critical therapies. New product launches, including several infusion pumps, may boost growth in these segments in a post pandemic environment, too.

Risk and Uncertainty:

It is believed that Baxter shed its riskier assets through the Baxalta spinoff, leaving a well-diversified company that participates in markets with limited risk of significant disruption. However, some of Baxter’s product lines, particularly IV solutions, nutritional products, and generic injectables, have been commodified and face significant quality control issues that contribute to the firm’s environmental, social, and governance risks. If new competitors decide to make the substantial up-front and ongoing investments needed to participate in these markets, it is thought pricing pressures, which have been manageable through volume increases or mix benefits on differentiated delivery systems, may accelerate, especially in an increasingly cost conscious healthcare system—another one of Baxter’s key ESG-related risks. It is also believed that Baxter must innovate to maintain its competitive advantages, particularly in renal care, infusion pumps, acute therapy, and advanced surgery. If the company does not invest appropriately in these product sets, its peers may surpass Baxter’s technology enough to affect market share eventually. The Hill Rom acquisition has also put some pressure on Baxter’s ROICs and added leverage to its balance sheet, which highlights another ESG risk for Baxter: corporate governance-related risks surrounding acquisitions.

Bulls Say:

New management has revved up Baxter’s growth engine, primarily around evolutionary goals in all of the major business lines.
Emerging markets are a prime source of growth for many of Baxter’s products, especially its peritoneal dialysis and nutrition solutions.
The company continues to strive for even higher profitability, which should keep earnings growth above sales growth for the foreseeable future

Company Description:

Baxter offers a variety of medical instruments and supplies to caregivers. It enhanced its portfolio of hospital-focused offerings by acquiring Hill Rom in late 2021. Legacy Baxter offers tools to help patients with acute and chronic kidney failure. It also sells a variety of injectable therapies for use in care settings, such as IV pumps, administrative sets, and solutions; nutritional products; and surgical sealants and hemostatic agents. The company offers contract manufacturing services to pharmaceutical companies. The Hillrom transaction has added basic equipment, including hospital beds, to the portfolio, although about half of Hillrom’s 2021 revenue came from more digitally connected offerings like its smart beds and Voalte medical communications app.

(Source: Morningstar)

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