Medical Device Industry Faces a Rising Demand Curve

The acquisition of Gambro
Joining hands with Gambro further strengthens Baxter’s position as a global provider of dialysis products for remedying kidney disease. The company perfectly fits in with Baxter’s existing global home dialysis offerings.

The takeover of Gambro places Baxter in a better position now to meet the ever increasing needs of the large and growing dialysis market. According to the US Renal Data System, the incidence of end-stage renal disease has increased at an average annual rate of 1.5% over the past five years. At present, globally more than 2 million people are undergoing some form of dialysis treatment, and patients are expected to increase every year due to the increasingly aging population. Comprehensive dialysis offerings are facing a steepening demand curve as the population ages, and this is what makes this acquisition a sensible move by Baxter at the right time.

Comparison with competitors
Where Baxter is busy in equipping itself to be able to cater to the rising demand for dialysis, its competitor Fresenius Medical Care AG & Co. (ADR) (NYSE:FMS) also plans to achieve organic growth through expansion of its dialysis clinic network, initiation of innovative dialysis products, and making acquisitions. It will focus on particularly attractive regions, horizontal expansion, and a boosted activity in home therapies. The company intends to spend approximately $1.2 billion in 2013 on acquisitions and capital expenditures.

Despite having a higher debt profile, with a debt-to-equity ratio of 0.88, Fresenius’s net profit margin was lower at 8.6% in 2012 as compared to 16.4% of Baxter’s. The results were inconsistent with the phenomenon of high risk, high return.

Conclusion
Although Baxter’s leverage level may seem to have increased, it is still below the industry average of 2.7. Also, the company has proven that it is utilizing the funds efficiently. With the prevailing low interest rate environment, it may be better to finance the company’s expansion programs with debt as the cost of raising equity can be quite high.

To sum up, in the light of the rising demand for dialysis, I foresee a bright future for Baxter.

The article Medical Device Industry Faces a Rising Demand Curve originally appeared on Fool.com and is written by Awais Iqbal.

Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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