Baxter Gets Pumped Up

It appears that Baxter's (NYSE: BAX  ) two FDA recalls have not affected the financials: The medical-device maker just posted a stellar quarter. But what's to become of that hoard of money it has sitting around?

Adjusted earnings per share rose 23% year over year for the quarter on just 8% growth in sales. Where did the rest on the bottom-line growth come from? Margins, my friend, margins -- oh, and a stock buyback to the tune of $827 million helped lower the earnings-per-share denominator.

The gross margin climbed 250 basis points to 50%, thanks to increasing sales of high-margin products and services, greater efficiency in manufacturing, and subsequent better prices -- especially for plasma-based products. As you can see below, an increasingly improved gross margin has been the trend for the company over the past year and a half -- during which time it's also been keeping sales, general, and administrative costs relatively in check.

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Q1 2007

Q2 2007

Q3 2007

Gross Margin

42.8%

43.7%

45.1%

45.6%

46.5%

47.8%

48.6%

SG&A Margin

21.0%

21.3%

21.7%

22.0%

22.0%

22.0%

22.5%

Q1 2006-Q2 2007 figures are trailing-12-month values, as indicated by Capital IQ, a division of Standard & Poor's. Figures for Q3 2007 were calculated by the author.

Baxter's bioscience division continues to be on fire. Year-over-year sales growth of 14% included transferring back international marketing rights for the BeneFIX drug to Wyeth (NYSE: WYE  ) . Excluding those sales from both quarters, BioSciences' sales grew a whopping 19%.

In other drug-therapy news, Baxter announced during the quarter that it will form a new collaboration with Halozyme Therapeutics (Nasdaq: HALO  ) to develop a subcutaneous delivery for Gamaguard, its intravenous immunoglobulin (IVIG) product. A subcutaneous injection would make the product more patient-friendly and might be especially useful if Baxter is able to get Gamaguard approved for use in Alzheimer's patients.

Baxter is sitting on a big wad of cash. Management mentioned that although it's interested in using some of that money to buy companies, it's not likely to make any "large-scale" acquisitions. That probably means Baxter won't go around buying companies like they're a dime a dozen, the way Inverness Medical Innovations (AMEX: IMA  ) has done over the past year and a half. That's a good thing. But I continue to think that Baxter needs to do something with its money. Share buybacks are all well and good, but as the stock price continues to appreciate, other places for the cash look as though they'd be a better investment of stockholders' equity.


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