Growing Healthier Through Acquisition

Focus: STOCKS

Paul Larson Image Paul Larson Editor, Morningstar StockInvestor

Paul Larson of Morningstar StockInvestor sees excellent growth potential from this health-care name's recently-announced acquisition.

Baxter International (BAX) manufactures and markets therapies for a wide range of diseases. We recently upgraded the moat rating of Baxter following its purchase of dialysis firm Gambro. The acquisition not only adds to the company‘s scale, but it also gives it a broad renal platform.

Health care remains a sector relatively rich with wide-moat companies. As a diversified health-care company, Baxter continues to witness strong global growth despite European austerity measures and reimbursement pressure. An increasing share of sales from emerging markets should continue to keep top-line growth in the mid-single digits over the long run.

Baxter‘s significant investments into its pipeline will help shield it from competitive challenges and includes products that would move substantially away from its core focus on recombinant and plasma-derived protein therapies.

Baxter‘s Medical Products segment also should be a steady performer for the firm. In addition to supplying items such as IV solutions, infusion pumps, injectables, and anesthesia gases to hospitals and their pharmacies, Baxter offers contract manufacturing services to drug firms, and is a leading provider of at-home dialysis solutions outside of the US.

With the acquisition of Gambro (expected to close in early 2013), Medical Products likely will remain Baxter's largest overall business for the foreseeable future. We think Baxter now will be able to achieve critical mass in its renal disease offerings, and recent reimbursement changes in the US and new Baxter-sourced product offerings on tap between 2013 and 2015 also will accelerate growth.

Synergies with Gambro also will prevent relatively low gross margins in the renal space from weighing on the bottom line.