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Baxter International (BAX)Stock (Medical Instruments & Supplies Industry, Pharma & Healthcare Industry)
 Headquartered in Deerfield, Illinois, Baxter International (NDAQ: BAX) is a global diversified medical products and services company with expertise in medical devices, pharmaceuticals, and biotechnology, used to treat complex medical conditions, including hemophilia, immune disorders, cancer, infectious diseases, kidney disease, and trauma. With 48,000 employees and operations in over 100 countries, the firm operates in three business segments: BioScience (pharmaceuticals derived from blood plasma), Medication Delivery (products for intravenous therapy), and Renal (dialysis equipment and solutions for patients with kidney failure). In 2006, Baxter generated $10.4 billion in revenue. Led by hemophilia drug ADVATE and immune deficiency drug IVIG, BioScience has been Baxter's fastest-growing segment in recent years. Although the company began as a medication delivery firm, Baxter has seen limited growth in this segment due to the recall of its COLLEAGUE pumps and increasing generic competition. The Renal segment specializes in dialysis machines for people with terminal kidney disease or failure and has achieved high growth in emerging markets where many people are under-treated. A variety of factors can impact Baxter's earnings, ranging from research & development, aging populations, and medical insurance, to patent expirations and foreign exchange rates. Of its competitors, Baxter is the most geographically diverse yet maintains one of the smallest R&D budgets.
[edit] Corporate OverviewHeadquartered in Deerfield, Illinois, Baxter International was founded in 1931 as the first manufacturer of commercially prepared intravenous (IV) solutions. Today, the company is a global health care company with 48,000 employees and 2006 sales of $10.4 billion. The firm operates in three business segments: BioScience (pharmaceuticals derived from blood plasma), Medication Delivery (products for intravenous therapy), and Renal (dialysis equipment and solutions for patients with kidney failure). Baxter manufactures medical products in 28 countries and sells them in over 100 countries. More than half of its sales occur internationally.
[edit] Business Segments [edit] BioScienceBioScience has been Baxter's greatest source of growth in recent years, achieving sales growth of 10% in 2005 and 14% in 2006. This division primarily manufactures pharmaceuticals derived from blood plasma. The BioScience product line includes:
This segment competes primarily against pharmaceutical and biotechnology companies for control of the blood-related and autoimmune disorder treatment markets. The leading drug in BioScience's portfolio is currently the ADVATE rAHF-PFM (recombinant Antihemophilic Factor, Plasma/Albumin-Free Method), the company’s advanced recombinant therapy for the treatment of hemophilia A. 2006 sales of the drug exceeded $850 million, and with the launch of ADVATE in Australia and Canada in 2006, ADVATE is now available in more than 30 countries. In 2006, the company introduced an ultra-high dosage strength of ADVATE, reducing the volume of drug and infusion time for patients requiring large doses of the drug. Analysts expect the drug's 2007 sales to grow to $1.1 billion. BioScience has also benefited from continued customer conversions to the liquid formulation of IVIG (intravenous immunoglobulin), a Baxter product, and improving dynamics in the plasma protein market. [edit] Medication DeliveryDespite poor division growth in recent years, Baxter has its roots in the delivery of medication and continues to be a trusted in name in the business. Today, Medication Delivery manufactures:
This segment competes against medical device manufacturers and pharmaceutical companies, particularly in the multi-source generics and inhaled anesthetics markets. In addition to a thorough product line, Medication Delivery maintains close relationships with its customers, namely hospitals and acute care facilities, customer purchasing groups, and pharmaceutical companies. 2006 and 2005 saw a decline in division sales. This can be attributed to the impact of generic competition on its anesthesia and injectable drugs and a hold on shipments of the COLLEAGUE infusion pump. As of February 2007, the company was nearing completion of its modification to the COLLEAGUE pump and had received approval from the FDA (Food and Drug Administration). There had been no sales of the pump during the last 6 months of 2005 and the first six months of 2006. The pump generated $170 million in 2004 and $85 million in the first half of 2005, before it was recalled. Bright spots in this segment include solid sales growth of IV solutions, specialty nutrition products and disposable sets used with infusion pumps. The firm also recently expanded its manufacturing facilities in Bloomington, Indiana, due to a partnership with another pharmaceutical company. [edit] RenalAs Baxter's smallest segment, Renal has generated modest growth in recent years, achieving 3% growth in both 2005 and 2006. The Renal business manufactures products for people with end-stage renal disease (i.e. irreversible kidney failure). In particular, Baxter makes products for peritoneal dialysis (PD), the process of removing waste such as urea and potassium from the blood, as well as excess fluid, when the kidneys are incapable. These products include:
Baxter aims to boost returns in renal care by making its peritoneal dialysis tools more accessible around the globe and by even expanding into home-based hemodialysis. The firm is one of the world’s leading manufacturers of PD products. Renal sales grew most rapidly in developing markets in Asia and Latin America, where many people with end-stage renal disease are currently under-treated. As of 2007, Baxter is expanding its manufacturing facilities in China in order to meet growing demand. [edit] Trends & Forces [edit] Aging populations increase demandOne macro trend that is sure to benefit the pharmaceutical industry on a mid- to long-term horizon is the world's aging population. In developed nations, increased life expectancy coupled with decreased fertility have produced a population that is, as a whole, older. In the United States, Western Europe, and Japan, the median age has been on the rise for decades now, and this trend is likely to accelerate with the upcoming wave of aging baby boomers. In the coming years, Baxter will benefit from its focus on diseases such as cancer and kidney disease, particularly in developed nations. According to the United Nations, the population of people aged over 60 in the world is expected to rise dramatically from 606 million in 2000 to nearly 2 billion in the year 2050. In developed nations, the United Nations predicts that people aged over 60 will compose almost 35% of the population by 2050 opposed to under 20% in the year 2000. Baxter will also benefit from trends in emerging markets such as China. A rapidly expanding older population represents a key growth opportunity for Baxter because this demographic forms the core of the company's revenue. [edit] Research & Development emphasisResearching and developing new drugs is the single most important consideration when identifying the prospects of any pharmaceutical company. The process is lengthy and extremely costly. During development phases, researchers and scientists must screen hundreds of thousands of compounds. Out of these hundreds of thousands of compounds, only one may be effective for treatment. This process represents the pharmaceutical equivalent of finding a needle in a haystack. The hunt for the next blockbuster drug may take in excess of 10 years and can cost as much as $800 million dollars. A successful drug pipeline is critical for pharmaceutical companies because former blockbusters losing patent protection must be constantly replaced by new viable drugs. R&D expenses increased in both 2006 and 2005, reflecting the company’s commitment to accelerate the development of new products. Increased spending on certain projects, primarily in the BioScience segment, was partially offset by restructuring-related cost savings, particularly in 2005. Contributing to the increased R&D expenses in 2006 were investments in the company’s adult stem-cell program, as well as other investments to advance the company’s pipeline of specialty plasma therapeutics and to expand the company’s product portfolio into the area of regenerative medicine. The progress of Baxter's product pipeline will be an excellent harbinger of financial success to come, especially in the firm's dominant BioScience segment. Key Developments in the Drug Pipeline in 2006:
[edit] Politics and Insurance risksLike other global pharmaceutical companies, Baxter faces constant pressure from governments and activist organizations to increase access to medications by either lowering prices substantially or by granting generic licenses. While sales would likely increase as a result, profits would decrease along with prices. Additionally, changes in health insurance plans would impact sales and profits. If an insurance program changes its policies and removes coverage for a certain treatment, sales are likely to decrease. In general, insurance programs are more likely to cover essential expenses, such as cancer, autoimmune disorder, and kidney failure medications, meaning that changes in these plans will likely impact Baxter's earnings. Most of Baxter's BioScience products, including blockbuster ADVATE, are covered by Medicaid and Medicare. Medicaid is the government's health subsidy plan for low-income individuals while Medicare is for people over the age of 65. Policies allow the government to bargain for lower prices; essentially, the government caps prices for a large number of plans. This lowers revenues while increasing the amount of medications sold. Recent federal government reforms to Medicare have reduced the reimbursement rates for many of Baxter's products. Changes in Medicare legislation could cut into revenues even more in the future, especially if advocates of nationalized or cheaper health care come into office. [edit] Global Regulatory, Trade, and Tax PoliciesBaxter generates more than half of its sales abroad, and international sales are accounting for a steadily growing percentage of total revenues, outpacing domestic growth. The company's international business focuses primarily on Europe, Latin America, Japan, and Canada, with Europe contributing the most to total sales. The firm is investing heavily in ramping up its international operations due to the rapid demand increases in emerging markets such as China, expanding its four manufacturing facilities in the country. With its growing reliance on international sales, Baxter is very sensitive to regulatory, trade, and tax policies abroad, as well as changing economic, political, and social conditions. Changes in these policies or conditions will have significant financial repercussions.
[edit] Patent expiration risk
Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years in the United States, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper than brand medication, undercutting the pricing power of the original drug producer. It is estimated that the loss of patent protection for branded drugs may reduce sales by up to 90%. Because of the stark decrease in pricing and general revenue generation that occurs with the lost of patent protection, Baxter's business model is sensitive to patent protection and the enforcement of intellectual property rights. Currently, several of Baxter's key drugs face patent expiration including Rocephin, a frozen pre-mixed antibiotic that the company manufactured for Roche Pharmaceuticals (RHHBY) (Note: Rocephin expired in July 2005). Many of the firm's other pharmaceuticals face patent infringement lawsuits, including blockbusters ADVATE, Sevoflurane, GAMMAGARD, its PD systems, and others. Significant legal defeats would negatively impact earnings and investor confidence. The recent expiration of Baxter's patent for Sevoflurane, an inhaled anesthetic agent, also resulted in the elimination of royalty income from other companies using the patent. Baxter's diverse portfolio and robust pipeline should mitigate the effects of these important patent issues.  [edit] Exposure to foreign exchange ratesProduct sales abroad represent nearly 56%, or $5.8 billion, of Baxter's total revenue. With more than half of its business conducted in a different currency and financial data reported in U.S. dollars, the company's performance fluctuates with changes in foreign exchange rates. Foreign exchange did not have a material impact on sales growth in 2006. In 2005, foreign exchange benefited sales growth by 2 percentage points, primarily because the U.S. dollar weakened relative to the euro. As the dollar weakens, each sale in euros translates to more dollars when returned to the United States. Over the past few years, the dollar's value relative to other currencies has been declining consistently; if the dollar continues to weaken, it will continue to benefit Baxter's earnings. [edit] CompetitionAlthough no single company competes with Baxter in all of its businesses, Baxter faces competition in each of its segments from international and domestic health care and pharmaceutical companies of all sizes. Competition is primarily focused on cost-effectiveness, price, service, product performance, and technological innovation. Of its competitors, Baxter is the most geographically diverse and maintains one of the lowest R&D budgets; its annual revenues, however, fall in the middle of the pack.
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