3 Reasons Baxter International Inc.'s Stock Could Rise

Take a deep breath, Baxter International (NYSE: BAX  ) investors. You're about to live through that well-known saying, "Crisis equals opportunity." If history is any indication, Baxter's forthcoming split will unleash a tsunami of changes for this company.

Baxter's "opportunity crisis" will officially arrive in mid-2015, when investors will receive shares in two new companies. Baxter's BioScience unit, with $6 billion in 2013 revenue, will focus on hemophilia and immune disorders. The other company, with $9 billion in 2013 revenue, will continue to sell medical products.

If all goes as planned, here are three reasons the stock could rally into the spinoff.

Addition by division

Baxter's split will hopefully pan out much like Abbott Laboratories' did in 2013, when it shed what was viewed as a risky pharmaceutical business. Like Abbott before the split, Baxter's growth and shares have been weighed down by uncertainty. As any analyst worth their salt will tell you, it's difficult to accurately and fully value the stock of a company that's in two very different businesses.

From a business perspective, Baxter's two divisions have long struggled with competing interests. Opportunities are being missed, as Baxter's CEO pointed out when announcing the split. In particular, CEO Robert Parkinson zeroed in on the potential for greater growth in BioScience in emerging international markets, where only 15% of sales now occur.

Baxter is fully focused now on the split, to the point that management has taken some surprising steps recently. A few days ago the company sold their vaccine franchise to Pfizer for $635 million. Vaccines contributed 6%, or $110 million, of last quarter's net sales in the biosciences unit, up 12% from the year-ago quarter.

Selling the vaccine franchise makes sense in the context of the split. The BioScience unit has a robust pipeline in hemophilia and immunology, and the sale will allow them to focus on what they know best. That should be good for the stock long term.

Continued revenue growth

Baxter reported solid revenue growth for its second quarter this year. Both the biotech and medical product divisions impressed, with a 5% rise in adjusted net earnings to $692 million. Revenue was up 16% to $4.3 billion globally.

Medical Products gains were driven by a big surge in sales of dialysis products from Swedish company Gambro -- which Baxter bought for $3.9 billion last year.

The global dialysis market is highly competitive, but Baxter has an edge in home dialysis, which has tremendous potential. Home-based dialysis has shown better patient survival, better quality of life and less exposure to infections, according to the American Association of Kidney Patients. Utilization of home dialysis is still relatively uncommon, but nearly 78% of end-stage renal disease patients are eligible, according to a Nephrology Dialysis Transplantation study.

In its most recent earnings call, Baxter's management noted that global demand for hemophilia drug Advate continued to grow. The drug is now available in 62 countries after winning regulatory clearance in Russia and Turkey. These products will be key to watch for more potential revenue surprises in the future.

Strong pipeline potential

Competition is always around the corner. In Baxter's case, both Biogen Idec and Novo Nordisk have longer-acting drugs that could threaten the firm's dominant position in hemophilia A. It's a definite risk, but I think that the threat has been accounted for in Baxter's stock price.

In addition, Baxter's end-stage pipeline scored some nice gains recently. On August 4, the FDA gave its blessing to Baxter's Flexbumin, which is human albumin solution in a flexible container. It should start selling later this year.

Just a week before that, Baxter's BioScience unit scored an FDA advisory committee recommendation for HyQvia (partnered with Halozyme), a drug for immunodeficiency. HyQvia was shot down in 2012, but additional data has better demonstrated HyQvia's safety and hopefully set the stage for its approval in the United States (The drug is already approved in Europe).

A launch of the drug in the United States is possible later this year, which could translate into both revenue gains and better pricing power. Baxter has also focusing on developing its long-acting factor VIII protein BAX 855 (partnered with Nektar Therapeutics), aiming for a 2015 launch.

Not 'just' a dividend stock

Baxter pays out quarterly and the annualized dividend yield is about 2.8%. For many investors, the dividend has given them a reason to hold on to the stock, despite relatively weak share price performance over the past few years. But with Baxter facing an "opportunity crisis" in the coming spinoff, the company is about to become much more than a reliable dividend stock.

There's always some risk when a company loses diversity, but Baxter has an established history of successfully spinning off companies. This spinoff will net Baxter investors the chance to own both a high-reward/high-risk drug company, and a much less risky medical products company with steady growth.

The decision for Baxter's management wasn't easy, but it seems right. The company was facing a crisis, and biggest danger is crisis situations is that fear will make us miss the huge opportunity in them. With growing revenue, new pipeline opportunities, and a re-focus of its business, I think Baxter's underlying business could be in good shape. Does that mean the stock price will necessarily rise? Of course not. Predicting the future is impossible. But I like what I see for the business over the long haul.

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