July 24, 2024

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Baxter To Spin-Off Vantive (Kidney Care Unit) In July 2024

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On February 8, 2024, Baxter International

BAX
Inc. (NYSE: BAX, $39.64, Market Capitalization: $20.1 billion), a global medtech leader, reported steady 4Q23 results, with a mild beat vs consensus on revenues and adjusted EPS.
In 4Q23, consolidated revenue increased by 3.7% YoY to $3.9 billion (up 3% on a constant currency basis). Notably, 4Q23 sales performance from continuing operations and, in the aggregate, exceeded Baxter’s previously announced guidance, driven by better-than-expected sales in the Company’s Healthcare Systems and Technologies, Medical Products and Therapies and Pharmaceuticals, which was slightly offset by an expected decline in Kidney Care. U.S. sales from continuing operations in 4Q23 came in at ~$1.8 billion, increasing by 1.8% YoY, while International sales in the aggregate advanced 5.5% YoY on a reported basis (4% YoY on a constant currency basis) to $2.1 billion. Reported operating income improved to $329 million in 4Q23 from $290 million a year ago, reflecting a significant operating margin increase. Operating margin was 8.5%, up from 7.7% in 4Q22. Adjusted operating income, which excludes mark-to-market and one-time charges, increased by 5.9% YoY to $630 million, compared to $595 million in 4Q22. The adjusted operating margin was 16.2%, up by 30 bps compared to the prior year. Diluted EPS in 4Q23 increased to $0.48 per share from 0.36 per share in 4Q22, driven by better sales and operational performance. Adjusted diluted EPS declined marginally by 3.4% YoY to $0.85 per share compared to $0.88 per share in 4Q22. Moreover, Baxter generated $1.7 billion in operating cash flow from continuing operations and ~$1.0 billion in free cash flow (excluding capex of ~$692 million) in FY23. On 2/12, the Board of Directors declared a quarterly cash dividend of $0.29 per share of common stock payable on April 1, 2024, to stockholders of record as of March 1, 2024.

Valuation and Recommendation

We value Baxter International (BAX) using the 2024e EV/EBITDA methodology by valuing BAX (Stub) and Vantive (Spin-Off) separately. Our intrinsic value of $40.00 for BAX (Stub) is based on a 2024e EV/ EBITDA multiple of 11.0x (~5% discount to its peer median multiple of 11.6x). Our fair value estimate for Vantive (Spin-Off) stands at $8.00 per share based on a 2024e EV/ EBITDA multiple of 10.0x (~1% premium to DaVita
DVA
Inc). We arrive at a consolidated target price of $48.00 per share for Baxter International Inc., which implies a potential upside of 21.1% from the current market price of $39.64 as of 2/14. We thereby retain our ‘Buy’ rating on the stock.

FY24 and 1Q24 Financial Outlook

FY24

For FY24, Baxter expects total sales growth of 2% on both a reported and constant currency basis, as the impact from foreign exchange is currently expected to be minimal on a full-year basis. Constant currency sales guidance for the full year by reportable segments is as follows:- for Medical Products and Therapies, the Company expects sales growth of 3% to 4%, Healthcare Systems and Technology segments are expected to increase by ~3%, and Pharmaceuticals sales growth are expected to be 4% to 5%. Collectively, sales for these remaining Baxter businesses are expected to increase by 3% to 4% in FY24, and Kidney Care sales are expected to decline by 1% to 2% compared to 2023. Baxter expects adjusted operating margin to increase by at least 50 bps in FY24. Management expects its nonoperating expenses, which include net interest expense and other income and expense, to total ~$350 million in aggregate during FY24. Furthermore, the Company expects its diluted share count to increase slightly and average 510 million shares for the year. Based on all these factors, Baxter anticipates full-year adjusted earnings, excluding special items, of $2.85 to $2.95 per diluted share.

1Q24

For 1Q24, management expects a global sales growth of ~1% on a reported basis and 1% to 2% on a constant currency basis. 1Q24’s adjusted earnings, excluding special items, are expected to be between $0.59 and $0.62 per diluted share.

4Q23

Baxter’s 4Q23 consolidated revenue increased by 3.7% YoY to $3.9 billion (up 3% on a constant currency basis). Notably, 4Q23 sales performance from continuing operations and, in the aggregate, exceeded Baxter’s previously announced guidance, driven by better-than-expected sales in the Company’s Healthcare Systems and Technologies, Medical Products and Therapies and Pharmaceuticals, which was slightly offset by an expected decline in Kidney Care. U.S. sales from continuing operations in 4Q23 totaled ~$1.8 billion, increasing by 1.8% YoY, while International sales in the aggregate advanced 5.5% YoY on a reported basis (4% YoY on a constant currency basis) to $2.1 billion. Reported operating income improved to $329 million in 4Q23 from $290 million a year ago, reflecting a significant operating margin increase. Operating margin was 8.5%, up from 7.7% in 4Q22. Adjusted operating income, which excludes mark-to-market and one-time charges, increased by 5.9% YoY to $630 million, compared to $595 million in 4Q22. The adjusted operating margin was 16.2%, up by 30 bps compared to the prior year. Diluted EPS in 4Q23 increased to $0.48 per share from 0.36 per share in 4Q22, driven by better sales and operational performance. Adjusted diluted EPS declined marginally by 3.4% YoY to $0.85 per share compared to $0.88 per share in 4Q22.

FY23

In FY23, the Company reported net sales of $ 14.8 billion, up 2.1% YoY due to increased sales from Medical Products, Healthcare Systems and Pharmaceuticals. Increased sales resulted in operating income growth to $390 million, significantly up from an operating loss of $2.2 billion in FY22, ultimately improving the operating income margin to 2.6% of net sales in FY23. The improved operating performance was mainly because FY22’s operating income included $2.8 billion of goodwill impairments. The Company reported a net income of $2.7 billion, up meaningfully compared to a net loss of $2.4 billion in FY22, mainly due to higher income from discontinued operations. Adjusted operating profit, which excludes mark-to-market and one-time charges, decreased by 6.8% to $2.1 billion. Adjusted operating margin was 14.3%, down by 140 bps compared to the prior year. Diluted EPS increased considerably to $5.25 per share from -$4.83 per share a year ago. Adjusted diluted EPS, which excludes one-time charges, decreased by 16.6% YoY to $2.92.

4Q23

Medical Products and Therapies net sales were $1.3 billion, up 5.8% YoY. Infusion Therapies and Technologies net sales increased 5.5% YoY, while Advanced Surgery net sales increased 6.9% YoY in 4Q23. Sales in the quarter benefited from strength in the IV Solutions portfolio, particularly outside the United States, and solid performance in its infusion system. Operating income was $266 million, up 2.7% YoY. However, operating income margin declined by 40 bps to 21.1% in 4Q23.

FY23

In FY23, Medical Products and Therapies’ net sales were $5.0 billion, up 4.1% YoY. Infusion Therapies and Technologies net sales increased 3.7% YoY, while Advanced Surgery net sales increased 5.3% YoY in FY23. Infusion Therapies and Technologies’ sales performance in FY23 reflected strong demand for infusion systems, administration sets, and growth in IV solutions and international nutrition compounding, partially offset by lower sales of parenteral nutrition products in the U.S. The increase in Advanced Surgery net sales was driven by continued recovery in surgical procedures, partially offset by temporary supply constraints, the exit of a product distribution arrangement and a comparison against prior year periods that benefited from competitor supply constraints. Operating income was $972 million, up 1.0% YoY, mainly driven by higher sales in Infusion Therapies and Advanced Surgery. However, the operating income margin declined by 60 bps to 26.3% in FY23. The increase in segment operating income in FY23 reflected the gross profit from higher sales, partially offset by increases in SG&A and R&D expenses.

4Q23

Healthcare Systems and Technologies net sales were $795 million, up 8.3% YoY. Care and Connectivity Solutions net sales increased 11.6% YoY and Front Line Care net sales increased 3.4% YoY in 4Q23. Performance in these segments was filled by strong execution across its commercial and manufacturing teams. New product launches increased the availability of electromechanical components and a more stable supply chain and macroeconomic environment relative to the significant volatility experienced last year. Operating income was $156 million, up 22.8% YoY. Consequently, operating income margin was up by 230 bps to 19.6% in 4Q23. The jump in segment operating income in 4Q23 was primarily due to increased sales and improved gross margins, primarily driven by a favorable product mix and improved component availability.

FY23

In FY23, Healthcare Systems and Technologies net sales were $3.0 billion, up 2.5% YoY. Care and Connectivity Solutions net sales increased 0.5% YoY and Front Line Care net sales increased 5.7% YoY in FY23. The increase in Care and Connectivity Solutions was driven by international demand and sales generated from recent product launches in the U.S., partially offset by lower rental revenues and lower capital spending in the U.S., reflecting the macroeconomic environment in 2023. Front Line Care net sales increase was driven by higher demand for physical assessment tools, patient monitoring systems and cardiology products. Operating income was $483 million, down 2.2% YoY. However, the operating income margin deteriorated by 80 bps to 16.0% in FY23. The decrease in segment operating income in FY23 resulted from a lower gross margin, primarily driven by raw material inflation.

4Q23

Pharmaceuticals net sales were $596 million, up 8.0% YoY. Operating income was $117 million, up 21.9% YoY. Injectables and Anesthesia net sales increased 4.4% YoY and Drug Compounding net sales increased 13.9% YoY in 4Q23. Consequently, operating income margin was up by 220 bps to 19.6% in 4Q23. The increase in segment operating income in the third quarter of 2023 was primarily due to the gross profit from higher sales driven by recent product launches.

FY23

In FY23, Pharmaceuticals net sales were $2.3 billion, up 5.8% YoY. Operating income was $401 million, up 2.6% YoY. Injectables and anesthesia net sales increased 3.2% YoY, and Drug Compounding net sales increased 9.9% YoY in FY23. Injectables and anesthesia net sales increased 4.4% YoY, and Drug Compounding net sales increased 13.9% YoY in 4Q23. Injectables and Anesthesia growth were driven by recent launches of Zo-syn, following the transfer of the related product rights earlier this year, Bendamustine and Norepinephrine, partially offset by lower sales of Suprane, an inhaled anesthesia product. For Drug Compounding, increased net sales were driven by increased demand for international pharmacy compounding services. Foreign currency exchange rates adversely impacted sales growth for FY23 as compared to the prior year period. Consequently, the operating income margin declined by 60 bps to 17.8% in FY23. The decrease in segment operating income in the first nine months of 2023 was due to a lower gross margin, primarily driven by raw materials inflation and increased R&D expense, partially offset by income from recent product launches.

4Q23

For 4Q23, the other segment reported sales of $18 million compared to $48 million in 4Q22. These other sales primarily represent ancillary revenues certain manufacturing facilities earned from contract manufacturing activities and royalty income under a business development arrangement. The decreases in the current year, as compared to the prior year periods, reflect lower contract manufacturing volume and the termination of the royalty arrangement following the acquisition of the rights to the underlying product. For 4Q23, the Company generated operating income of -$1 million compared to $25 million in 4Q22. Operating income margin was -5.6%, compared to 52.1% in the prior year.

FY23

For FY23, the other segment reported net sales of $87 million compared to $177 million in FY22. Similarly, the segment generated operating income of $18 million compared to $77 million in FY22. Operating income margin was 20.7%, compared to 43.5% in the prior year.

4Q23

Kidney Care net sales were $1.2 billion, down marginally by 0.6% YoY. Chronic Therapies sales decreased 2.1% YoY, while Acute Therapies net sales increased 6.7% YoY in 4Q23. Strong growth in acute therapies was offset by flat growth in chronic therapies, reflecting a difficult year-over-year comparison due to certain discrete items that benefited sales in the prior year as well as lower sales in China due to the impact of government-based procurement initiatives and the lower patient census due to the pandemic. The decline in Chronic therapy sales led to an Operating income of $92 million, down 8.9% YoY. Consequently, operating income margin was down by 70 bps to 8.0% in 4Q23.

FY23

In FY23, Kidney Care net sales were $4.5 billion, up marginally by 0.1% YoY. Operating income was $300 million, down 26.5% YoY. Chronic Therapies sales decreased 0.8% YoY, and Acute Therapies net sales increased 4.8% YoY in FY23. Chronic Therapies’ sales performance in the current year was primarily due to lower sales in China, driven by government-based procurement initiatives and the impact of COVID-19 on China’s renal patient population, and the termination of distribution agreements in the U.S, offset by patient growth in PD, pricing initiatives and recent government tender awards in EMEA. Sales growth in Acute Therapies was driven by strong demand for CRRT offerings. Consequently, the operating income margin deteriorated by 240 bps to 6.7% in FY23.

Business Highlights and Other Updates

Healthcare Systems and Technologies

• Announced the launch of digital image capture capability for eye exams using Baxter’s current Welch Allyn PanOptic Plus Ophthalmoscope. The iExaminer Pro System allows a clinician to connect a smart device to capture eye images for further examination. When used with the iExaminer Pro app, clinicians can save and share images for tracking and trending and initiate more informed consultations with specialists.

• Launched its next-generation Hillrom Progressa+ ICU bed in the U.S. Progressa+ offers new technology and features to help address complex critical care needs, including in-bed pulmonary therapies designed to aid in the reduction of pulmonary complications, improved protection of the patient’s skin to help prevent pressure injuries and support for early mobility protocols. Baxter plans to continue launching Progressa+ in additional global markets in 2024.

• Launched SpotConnect, an electronic medical records (EMR) application for the Welch Allyn Spot Vision Screener device. Spot Vision Screener allows healthcare providers to detect and treat six vision risk factors in children. SpotConnect helps streamline clinical workflows through secure EMR connectivity and allows access to screening results across the care team.

• Introduced the ReadyConnect System for Baxter’s Centrella Smart+ Bed. This innovative system delivers reliable, cable-free connectivity between the hospital bed and most nurse call systems on the market and requires no wireless network, incremental server software licenses, or other IT resources from the customer.

Medical Products and Therapies

• Announced the FDA Premarket Approval and subsequent U.S. launch of PERCLOT Absorbable Hemostatic Powder. This represents Baxter’s first passive hemostat in the U.S. market, broadening Baxter’s portfolio to include a full range of active and passive solutions.

• Launched Floseal + Recothrom, the first and only active flowable hemostat with recombinant thrombin, resulting in 1.5 times faster preparation. Floseal + Recothrom has a thrombin component manufactured using recombinant DNA technology, which contains no human blood components, eliminating reliance on human blood donations.

• Advanced its intravenous (IV) bag recycling program pilot in the U.S. with Chicago’s Northwestern Memorial Hospital, successfully demonstrating proof of concept with more than six tons of plastic IV bag waste diverted from landfills. Baxter is now expanding the pilot program to support scalability.

Pharmaceuticals

• Launched ZOSYN (piperacillin and tazobactam) in the U.S. Zosyn premix is indicated for the treatment of multiple infections caused by susceptible bacteria and is available in Baxter’s proprietary single-dose Galaxy containers, which enable premixed medications to have a longer shelf life. Its frozen premix formulation helps support patient safety, simplify medication preparation and improve operational efficiencies.

• Launched a range of additional injectable pharmaceutical molecules, including the anti-infective daptomycin premix, antiviral foscarnet premix, oncolytic bendamustine and anti-hypertensive norepinephrine in the U.S., and the anti-infective vancomycin in Australia. Collectively, these injectables reinforce Baxter’s focus on differentiated molecules and expand the pharmaceuticals segment portfolio in critical therapeutic areas.

Kidney Care

• Chris Toth, executive vice president and group president of Kidney Care and designated chief executive officer of Vantive, continues to build out his senior management team. Recently, he named Matt Harbaugh as vice president, Finance, Kidney Care and designated chief financial officer of Vantive. Mr. Harbaugh was previously chief financial officer at NuVasive Inc.

• Announced new data at Kidney Week indicating Baxter’s Sharesource remote patient management digital platform, when used with an automated peritoneal dialysis (PD) system, is associated with a 77% reduction in the risk of PD technique failure.

• Announced a collaborative research agreement with life sciences company Miromatrix to help support additional treatment options for patients with acute liver failure.

Valuation

We value Baxter International (BAX) using the 2024e EV/EBITDA methodology by valuing BAX (Stub) and Vantive (Spin-Off) separately using the EV/EBITDA valuation methodology.

A] Baxter International (Stub): Baxter International Inc., through its subsidiaries, provides a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products, advanced surgical equipment; smart bed systems; patient monitoring and diagnostic technologies; and respiratory health devices. For FY24, the Company expects adjusted earnings from continuing operations, before special items, of $2.85 to $2.95 per share. The Company expects sales growth from continuing operations at 2% on a reported and constant currency basis.

EV/EBITDA Valuation: Our intrinsic value of $40.00 for BAX (Stub) is based on a 2024e EV/ EBITDA multiple of 11.0x (~5% discount to its peer median multiple of 11.6x). Our valuation factors in the divestiture of Biopharma Solutions, upon which the Company received cash of $3.96 billion, which BAX has allocated towards debt repayment. We have anticipated FY24e adjusted EBITDA of $2.4 billion, with Net Debt of $5.9 billion. Risks to our target price include below-average operational performance, delay in executing management’s plans for intermediate and long-term goals, delays or failures of key pipeline products or clinical programs, and greater-than-expected impact from macro challenges.

B] Vantive (Spin-Off):

Post Spin-Off, Vantive, or currently the Kidney Care segment of Baxter, will include sales of chronic and acute dialysis therapies and services, including peritoneal dialysis, hemodialysis, continuous renal replacement therapies (CRRT) and other organ support therapies. Vantive operates in a market segment totaling approximately $15 billion, estimated to grow between 3% to 4% on a compound annual basis over the next three years.

EV/EBITDA Valuation: Our fair value estimate for Vantive (Spin-Off) stands at $8.00 per share based on a 2024e EV/ EBITDA multiple of 10.0x (~1% premium to its closest comp of DaVita Inc of 9.9x). We have anticipated an FY24e adjusted EBITDA of $536 million, with a Net Debt of $1.3 billion.

C] Consolidated Valuation: We arrived at a consolidated target price of $48.00 per share for Baxter International Inc., which implies a potential upside of 21.1% from the current market price of $39.64 as of 2/14. We thereby retain our ‘Buy’ rating on the stock.

Company Description

Baxter International (Parent)

Baxter International Inc., through its subsidiaries, provides a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products, advanced surgical equipment; smart bed systems; patient monitoring and diagnostic technologies; and respiratory health devices. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices, and patients at home under physician supervision. Baxter’s global footprint and the critical nature of its products and services play a key role in expanding access to healthcare in emerging and developed countries. For FY23, the Company reported net sales of $14.8 billion.

Vantive (Spin-Off)

Vantive, or currently the Kidney Care segment of Baxter, includes sales of chronic and acute dialysis therapies and services, including peritoneal dialysis, hemodialysis, continuous renal replacement therapies (CRRT) and other organ support therapies. Chronic Therapies (formerly Renal Care) include sales of peritoneal dialysis (PD), hemodialysis (HD) and additional dialysis therapies and services. Acute Therapies include sales of continuous renal replacement therapies (CRRT) and other organ support therapies focused in the intensive care unit (ICU). For FY23, Vantive (Kidney Care segment) recorded revenues of $4.5 billion. Vantive would continue to serve as a trusted partner to providers and clinicians worldwide and operate in market segments totaling ~$15 billion, estimated to grow between 3% to 4% on a compound annual basis over the next three years.

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