Baxter International Inc. (BAX) reported third quarter 2010 adjusted (excluding one-time items) earnings per share of $1.01, thereby beating the Zacks Consensus Estimate of 97 cents, and surpassing the year-ago quarter’s 98 cents. The third quarter result exceeded Baxter’s earlier guidance in the range of 96 cents to 99 cents.
Total revenue was $3.2 billion, up 3% year over year, exceeding the Zacks Consensus Estimate of $3.16 billion. Domestic revenues were $1.4 billion, up 4%, while overseas sales moved up 1% (up 4% in constant currency) to $1.8 billion.
Segment-wise Revenue Analysis
With regard to segment performance, Bioscience revenues totaled $1.4 billion, flat (up 3% in constant currency) year over year. The better performance was attributable to growth in Advate, higher demand for Gammagard Liquid and specialty plasma-based therapeutics such as Feiba and Aralast.
The largest sub-segment, Recombinants, had sales of $526 million, flat (up 2% in constant currency) year over year. The Plasma Proteins business, where Baxter had encountered structural problems in the past, performed better with revenues of $346 million, up 5% (up 8% in constant currency) year over year. Antibody Therapy also performed better with sales of $336 million, flat (up 2% in constant currency) year over year.
Revenues from Medication Delivery went up 5% year over year (up 7% in constant currency), to $1.2 billion, riding on growth in intravenous therapies (including the company’s parenteral nutrition products), certain multi-source generic drugs, anesthesia items and sales of the Sigma SPECTRUM infusion pump.
The three prominent sub-segments were IV Therapies with sales of $417 million, up 4% in constant currency basis; Global Injectables with revenues of $469 million, up 8% in constant currency; and Infusion Systems with sales of $213 million, up 2% in constant currency.
Renal sales were up 3% (up 3% in constant currency) to $594 million, as Baxter made advances with peritoneal dialysis patients in the U.S., Latin America and Asia.
Gross margin, as reported, was 51.5% in the third quarter, down from 51.9% in the year-ago quarter. Marketing and administrative expense decreased to 20.8% from 21.4% in the prior-year quarter while research and development expense declined to 6.4% from 7.2% in the year-ago quarter.
Balance Sheet and Cash Flow
Cash and cash equivalents totaled $2.8 billion, as of September 30, 2010, up 8.4% year over year. Net debt totaled $2.1 billion, up 31.3% year over year. Reported cash flow from operations was about $1.0 billion in the third quarter compared with $875 million in the prior-year quarter.
Commercial and Pipeline Achievements
During the quarter, Baxter enjoyed a number of commercial and pipeline deals. The company signed a five year contract with Novation, which provides the latter’s members access to Baxter’s broad portfolio of products.
Moreover, it has inked an agreement with Kamada to produce and sell Glassia, which is the only liquid alpha1-proteinase inhibitor. Under this agreement, Baxter acquired commercial rights to Glassia in the U.S., New Zealand, Australia and Canada. Under a separate license, Baxter was granted the right to process Glassia and it will seek regulatory approvals.
Outlook and Recommendation
Baxter provided its fourth quarter outlook and updated its fiscal 2010 guidance. For the fourth quarter, the company expects growth in revenues in the range of 1% to 2%, on a constant currency basis, and adjusted earnings per share in the range of $1.09 to $1.11. Baxter maintains growth in revenues in the range of 2% to 3%, and adjusted earnings per share of about $3.96 to $3.98 for fiscal 2010.
Baxter is a global medical products and services company with expertise in medical devices, pharmaceuticals and biotechnology. Its focus on life-sustaining products, which are not commoditized, insulates it from an economic downturn. The company is able to generate consistent recurring revenues due to its focus on chronic diseases.
However, hospital capital spending still remains weak and Baxter’s significant exposure to international markets makes it vulnerable to foreign exchange headwinds and reimbursement risks. Our long-term Neutral recommendation on the stock is supported by a Zacks #3 Rank (Hold).
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