Shares of Baxter International (NYSE:BAX) fell more than 12% today after the company announced preliminary third-quarter 2019 operating results. The business expects to report quarterly revenue of $2.85 billion and operating income of $503 million, but that relatively strong performance was overshadowed by two other developments.
First, the medical device company disclosed that an internal investigation was underway related to misstatements in foreign currency gains dating back to 2014. The audit doesn't concern product-related operations. Second, Baxter International disclosed that it has been named in a complaint by Fayette County, Georgia, alleging that an injectable opiate product previously manufactured by the company caused harm to the county.
As of 12:36 p.m. EDT, the dividend stock had settled to a 9.1% loss.
Before today's disclosures, shares of Baxter International had been humming along and setting new all-time highs with regular frequency. The magnitude of today's stock drop is both abrupt and shocking for investors not accustomed to such large swings for the established company. The business saw its market valuation reduced by more than $4 billion today.
Are investors getting carried away? Well, it's never great to see that an investigation has been launched into a company's finances. According to Baxter International, it had used an incorrect exchange rate when calculating the impact of foreign currency transactions. That allowed foreign currency gains -- accounted for as nonoperating income -- to be manufactured. The business posted total foreign exchange gains of $294 million from 2014 through June 2019. It never reported a foreign exchange loss in that period.
Meanwhile, investors aren't taking the company's association with the opioid epidemic lightly. While Baxter International stopped manufacturing injectable opiate products in 2011, it's possible that the complaint in Georgia won't be the last. That said, it seems unlikely for the company to be swept up in the worst of the opioid-related lawsuits, which may be nearing a nationwide settlement.
It's too soon to know the magnitude of the impact from the internal investigation or opiate complaint, but it certainly is a shame that the company's otherwise strong operations are being overshadowed by these negative developments. Investors will need to wait until Baxter International finalizes and management explains the third-quarter 2019 operating results in the coming weeks.