Baxalta: A Baxter Spin-Off

07/27/2015 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Value investor J. Royden Ward, editor of Cabot Benjamin Graham Value Investor, looks at a new healthcare stock, just formed as a result of a spin-off.

On July 1, Baxter International (BAX) distributed one share of Baxalta (BXLT) for each share of Baxter held.

The new company will develop and market diagnostic and medical research products and biopharmaceuticals; the latter are active substances produced from a biological living system, such as vaccines, blood, tissues, or cells.

Baxalta will offer leading biopharmaceuticals for the treatment of hemophilia, immune deficiencies, burns, and shock.

The company will consolidate important parts of its operations and move into a new 200,000 square foot research and development center in Cambridge, Massachusetts. Headquarters for the company will remain in Deerfield, Illinois.

Baxalta will be a global biopharmaceutical leader developing, manufacturing, and marketing therapies for orphan diseases (any diseases that affect a small percentage of the population) and underserved conditions in hematology, oncology, and immunology.

Its broad and diverse pipeline includes biologics with novel mechanisms, as well as small molecules and advanced technology platforms such as gene therapy.

Baxalta sales in 2014 totaled $6 billion with 50% of sales in the hemophilia sector. The company’s products were sold in over 100 countries, including 50% of sales in the US.

The company expects to launch 20 new products generating more than $2.5 billion annual sales within the next five years, from $0.2 billion now.

Baxalta is ready to launch five new products, each with $500 million annual sales potential, within the next 18 months.

Sales growth is expected to range between 6% and 8% per year. Sales growth during the last several years averaged 6% annually, while earnings growth has been stagnant. Earnings growth is expected to exceed 8% per year with an operating margin of 30%.

Baxalta acquired four small companies recently and will purchase Oncaspar before the end of 2015. Oncaspar will accelerate Baxalta’s entry into the oncology business. Additional acquisitions are expected during the next five years.

Financial details for Baxalta are incomplete, but the company will likely generate 2015 sales of $6.0 billion to $6.4 billion with a return on equity around 20%.

Inherited debt in the new company will be modest. The split into two companies will likely add value for shareholders.

Baxter has paid dividends every year since 1934 and Baxalta will likely follow in Baxter’s footsteps.

Baxter carries Standard & Poor’s highest Quality Rating of A+, which bodes well for Baxalta as well. I expect the stock price to rise to my minimum sell price target of $42 within one to two years.

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