A Stock to Inoculate You Against Flu

05/13/2009 1:00 pm EST

Focus: STOCKS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, contributor to Personal Finance, says one major pharmaceutical company has ample cash flow and a strong set of drugs to combat influenza.

Baxter International (NYSE: BAX) is emerging as one of the most stable and growth-oriented major pharmaceutical companies.

Baxter focuses on three main businesses: bioscience, medication delivery, and renal. It develops, manufactures, and distributes a diversified line of health care products used mainly by hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers, and nursing homes. Baxter manufactures products in 26 countries and sells them in more than 100.

The swine flue outbreak has investors looking at what Baxter does in the field and calculating if the company will benefit if the incident becomes more severe. Baxter develops cell-based flu vaccines that—unlike treatments based on traditional egg-based processes—don’t require the alteration of the native virus to enhance viral proliferation in the host cell culture.

The company’s Vero cell line allows relatively quick turnaround of around 12 weeks’ worth of vaccines targeted against influenza outbreaks. The company has had solid Phase I and Phase II data against seasonal H1N1 and H3N2 strains and pandemic H5N1 (bird flu), and has received government grants for both seasonal and pandemic cell-based vaccines.

It’s also received stockpiling contracts from the UK and Austrian governments for pre-pandemic H5N1 vaccines. The latter can be used as an initial response until more appropriate vaccines, aimed specifically at the virus, can be developed.

The current swine flue is caused by an H1N1 virus, and Baxter has requested a copy of the virus from the World Health Organization to evaluate the potential of developing a vaccine. If the company proceeds, it could mean one-off revenue of around $370 million. Although this won’t make or break the year for Baxter, it would definitely be a big plus when final 2009 numbers come in nine months from now.

The company’s moves during the economic downturn should provide a great deal of confidence for longer-term investors. Baxter’s strategy is oriented toward the far horizon. As such, it continues to invest strongly in research and development (R&D), laying the groundwork for the future.

The stock is trading at attractive valuations, including a recent reading of 14x earnings; the stock’s long-term average is around 17.2x. Baxter should trade at a premium to its competition because of its higher projected growth and its ability to deliver solid organic sales growth amid difficult economic times.  We’re likely to see a rally in the stock price—a price-to-earnings expansion—because margins are growing.

For its most recent reported quarter, Baxter turned in numbers that exceeded analyst expectations. The BioScience division performed extremely well, particularly in light of economic conditions. Every major product line in the division grew by more than 10%, percent, growth engine. With ample cash flow and an attractive portfolio of critical therapies, Baxter International is a buy up to $62. (It closed around $51 Tuesday—Editor.)

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