The performance of Baxter International Inc. (NYSE:BAX), the world’s second-largest maker of dialysis products, has been lagging the market with 7.38% gain YTD as of Aug 2, 2013 compared to the 21.91% increase of the S&P 500. However, Baxter is in a transition year as it begins to digests its recent acquisition, Gambro, while preparing for some major new product launches.
Approved acquisition
In July, Baxter International Inc. (NYSE:BAX) won conditional approval from the EU to buy Swedish competitor, Gambro, for $2.8 billion to expand its kidney equipment business based. Approval was based on the condition that Baxter agreed to divest its continuous renal replacement therapy (CRRT) business, which accounts for about 2% of Baxter’s renal product sales. Gambro, with annual sales of about $1.6 billion, makes dialysis products for patients with acute or chronic kidney disease.
Mixed earnings, in line outlook
For the outlook, including Gambro, Baxter International Inc. (NYSE:BAX) expects 7%-8% sales growth. Baxter’s guided EPS of $4.60-$4.70 is in line with previous guidance and analysts’ expectations.
Product highlights
Baxter International Inc. (NYSE:BAX) and its partner, Halozyme Therapeutics, Inc. (NASDAQ:HALO), won approval for HyQvia in the European Union in May. HyQvia is designed to replace immunoglobulin in patients with blood cancers or immunodeficiency syndromes. HyQvia offers patients the ability to administer treatments in a single, subcutaneous site every three to four weeks. HyQvia combines key benefits of intravenous and subcutaneous administration into one product, which is a significant advancement for managing a chronic disease.
The companies are preparing to roll out the product in Germany and Scandinavia. On the other hand, the companies are still waiting for U.S. FDA approval, and management is hoping for a mid-2014 launch. Baxter International Inc. (NYSE:BAX) is on track to submit additional data to the FDA before the end of this year to address questions raised in the complete response letter.
Baxter International Inc. (NYSE:BAX) recently won FDA approval for its drug, Rixubis, as a routine prophylaxis for hemophilia B. Furthermore, Baxter continues to work on expanding its single largest therapeutic area, hemophilia. Although Baxter already dominates in the U.S. with Advate, the company is working on a longer-acting version of Advate to counter the expected launch of Biogen Idec Inc. (NASDAQ:BIIB)’s hemophilia treatment. In March, the FDA accepted Biogen’s Biologics License Application (BLA) for its factor IX candidate, Alprolix, for use in patients with hemophilia B. In May, the FDA also accepted Biogen’s BLA for Eloctate for the treatment of hemophilia A. Karen Andersen, an analyst at Morningstar, estimated the market for the hemophilia A drug to be about $6 billion. Anderson stated, “Baxter and Bayer have long-acting versions of their current blockbuster recombinant proteins that could reach the market in 2015, and Novo Nordisk could enter as early as 2014.”
Recent development
On August 7, Halozyme Therapeutics, Inc. (NASDAQ:HALO) reported 2Q13 results with revenue of $14.5 million and a net loss of $22.9 million, or $0.20 per share. Analysts are expecting revenue of $11.29 million with a net loss of $0.13 per share. With Baxter International Inc. (NYSE:BAX)’s launch of HyQvia into the first EU country in July, and the upcoming introduction of the product into additional EU countries over the coming quarters, the first commercial sale of HyQvia in Europe triggered a $4 million milestone payment to Halozyme. At the end of Q2, the company had cash and equivalents of $76 million, whereas net cash used in Q2 was about $11.4 million. This year, the net cash burn is expected to be between $45 million-$50 million. Although Halozyme Therapeutics continues to burn cash, its revenue continues to grow rapidly and will continue to benefit from sales of HyQvia, as well as the positive development of other pipeline products.
In late July, Biogen Idec Inc. (NASDAQ:BIIB) reported a better-than-expected Q2 with a non-GAAP diluted EPS of $2.30, beating analysts’ estimates of $1.93. For 2013, revenue growth is expected to be approximately 22%-23%. Biogen has a strong start for Tecfidera in the U.S. and continues to generate strong sales for its other major products. Along with the positive development of its pipeline, Biogen continues to enjoy a wide economic moat and more solid revenue growth is expected.
Bottom line
Despite the mixed earnings report, the recent acquisition of Gambro and the solid pipeline give Baxter International Inc. (NYSE:BAX) a bright outlook. Baxter is reasonably valued with a forward P/E of 13, which is below the S&P 500’s average of 15.4. Baxter remains a solid long-term holding with stable free cash flow and solid ROE.
Nick Chiu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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