Growing Healthier Through Acquisition
02/08/2013 8:30 am EST
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. And Gambro strengthens Baxter‘s competitive advantages in renal disease beyond its current in-home peritoneal dialysis offerings, bringing Baxter‘s $2.5 billion renal business (roughly 20% of the firm‘s total sales) to a $4.2 billion level (27% of sales) and putting it at least on par with dialysis leader Fresenius FMS.
Increased economies of scale and cross-selling opportunities in geographies like Europe (Gambro sees the majority of sales from Europe, the Middle East, and Africa) and emerging markets (Baxter has a strong footprint in Latin America and Asia) should lead to higher profitability.
Our fair value estimate stands at $65 per share. Overall, following the acquisition of Gambro, we think Baxter is capable of 7% top-line growth and 9% bottom line growth through 2016.
Following the Gambro acquisition, we expect Medical Products revenue growth to outpace BioScience revenue growth. Given the slightly lower margins in the Medical Products segment, we now see gross margins expanding by 75 basis points from 2011 through 2016, largely due to manufacturing synergies.
Thanks to commercial synergies on the marketing and administrative expense line over this time period, we still expect Baxter‘s operating margin to climb to 24.3% by 2016. We continue to assign Baxter a 10% cost of equity, but we now assume $300 million in annual share repurchases in the near term (down from $1 billion previously) in our EPS forecast.