Image source: Getty Images.
On Tuesday, Baxter (BAX 4.89%) delighted shareholders with a solid third quarter and increased its full-year earnings-per-share guidance.
Baxter results: The raw numbers
|
Metric |
Q3 2016 Actuals |
Q3 2015 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$2,558 million |
$2,487 million |
3% |
|
Income from operations |
$186 million |
$92 million |
102% |
|
Earnings per share |
$0.24 |
$0 |
N/A |
Data source: Baxter press release. YOY = Year over year.
What happened with Baxter this quarter?
- At constant currency, revenue would have been up 4% year over year. It's certainly nothing to get too excited about, but sales were hurt by generic competition for cancer medicine cyclophosphamide and the effect of a $20 million order of Protopam in the year-ago quarter.
- On the plus side, Baxter is seeing increased demand for its IV solutions, nutritional therapies, pharmacy injectables, and IV access administration sets, and has even been able to raise the prices of its products.
Image source: Baxter.
- Sales of nutritional therapies should continue to rise with the European launch of Numeta G13E, an IV supplement for preterm newborns that uses technology proprietary to Baxter.
- On the renal side of the business, sales of peritoneal-dialysis products grew by double digits in the U.S. and high single digits internationally.
- Despite the tepid revenue growth, Baxter was able to see substantial earnings growth as it reduces costs and becomes more efficient, hitting its highest adjusted operating margin since the Baxalta spinoff.
- The GAAP earnings number contains Baxalta-related spinoff costs and other items. On an adjusted basis, income from continuing operations in the third quarter came in at $0.56 per share, smashing through management's guidance of $0.43 to $0.45 per share.
What management had to say
Baxter continues to look for potential deals to add to its growth externally, but the company isn't willing to buy just to add to revenue growth. Chairman and CEO Jose Almeida explained, "Any lack of news on this front should be interpreted as a sign of our discipline in assessing deals with strategic fit and financial merit."
Baxter plans to accelerate growth outside the U.S. by putting decisions in the hands of local managers. "The idea that, given the diverse geographic portfolio that we have in place and the product portfolio, we really have a tremendous opportunity to accelerate growth by unlocking some of the entrepreneurial spirit outside the U.S.," Almeida said, noting that the initiatives might have a negative effect on margins in the near term but will start to benefit Baxter in 2017 and 2018.
Looking forward
Management is guiding for full-year sales growth of 4% on a constant currency basis, which includes a 1-percentage-point hit from generic cyclophosphamide competition. Fortunately, those year-over-year comparisons will get easier next year. With 2016 sales of cyclophosphamide expected to be about $210 million, the drug has become a minor part of the business.
Part of the slow growth -- about 1 percentage point -- comes from Baxter's decision to exit markets outside the U.S. that weren't particularly profitable. While that decision will hurt the top-line growth, it won't have as big an impact on earnings, given the low profitability. In fact, management increased 2016 adjusted earnings guidance to a range of $1.88 to $1.91 per share from previous guidance of $1.69 to $1.74 per share.
