Earlier this month, Baxter International Inc. (NYSE:BAX) reported that the clinical trials for the treatment of Alzheimer’s disease (Gammagard) had failed. The company also announced that it would be discontinuing its research work on Alzheimer’s, following which its shares tanked by around 5%.
Alzheimer’s blow
Alzheimer’s disease impacts 36 million people annually around the globe, and any breakthrough in curing the disease would have raked in billions in revenue. Naturally, the failed trials were a big blow for Baxter International Inc. (NYSE:BAX).
Its most notable competitor, Johnson & Johnson (NYSE:JNJ) was also trying to developing a cure for the disease over the past few years. But after its Phase-III trials failed to produce any significant results, the drug manufacturer discontinued its research work on Alzheimer’s disease. Instead of testing new drugs on patients already having Alzheimer’s, Johnson & Johnson would now be testing its drugs on patients in early stages of the disease. Containing the disease instead of curing it has almost become an industry-wide trend.
However, shares of Baxter International Inc. (NYSE:BAX) recently touched their 52-week high on the back of optimistic forward looking statements.
New revenue streams
Under the deal, Baxter would provide its clinical expertise and manufacture the biosimilars, while Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA) would provide high resolution analytics. The deal was finalized last year, but the biosimilars are expected to hit the shelf in the coming quarters.
The biologic industry rakes in around $100 million in annual revenue, which is a bonus for Baxter International Inc. (NYSE:BAX), while Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA) is estimated to gain around $390 million in total royalties from their biologic products.
For FY12, Baxter International Inc. (NYSE:BAX)’s R&D expenditures stood at a massive $1.2 billion. Its management stated that the expensive R&D work has resulted in a healthy product pipeline, and the company would be launching 20 new products over the next five years. This statement suggests that its R&D expenditures could take a dip in the coming years, and new revenue streams could open up.
Investors’ delight
Besides that, Baxter International Inc. (NYSE:BAX) also hiked its dividends by 9%. At the current price, its shares yield 2.80% with a payout ratio of 62%. With such a high payout ratio, the sustainability of its yield comes becomes questionable. But those doubts fade away soon.
Its dividend payouts amount to $1.06 billion annually, which get covered around 3 times by its TTM operating cash flows of $3.04 billion. Its long-term debt aggregates to $333 million with quarterly interest expenses of just $31 million. Furthermore, its free cash flow yield of 4.59% and cash and cash equivalents of $2.69 billion are more than enough to sustain its payout for years to come.
Besides that, Baxter International Inc. (NYSE:BAX) also repurchased 8 million of its shares for $534 million in the previous quarter. Its management stated that it would be looking to purchase around $300-$400 million worth of its shares in the current fiscal year. At its current market price, this accounts to pending repurchases of around 5.5 million shares, which should reduce its dividend burden by nearly 1%.
Conclusion
Pharmaceutical industry has been, and will always be, a speculative industry. In my opinion, risk averse investors with limited or no knowledge of the biotech industry should strictly stay away from it. With that said, I believe that Baxter International Inc. (NYSE:BAX) a good income growth stock to hold. Its pending acquisition of Gambro has also received regulatory clearance, and should add significant value.
Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Momenta Pharmaceuticals. The Motley Fool owns shares of Johnson & Johnson and Momenta Pharmaceuticals.
The article Why Baxter Is Soaring Despite Alzheimer’s Disappointment originally appeared on Fool.com.
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