Diversified health care player Baxter (BAX 0.18%) has done alright so far this year, up almost 10% and ahead of the S&P 500, but there is still a fair bit of skepticism on the name. Analysts continue to fret that Biogen Idec (BIIB +1.79%) will grab considerable market share in hemophilia and that generic competition for other products will add to the revenue erosion. Although this is a challenging period for the company ahead of data on is own long-acting hemophilia product, approval of HyQ, and real leverage in the renal business, Baxter shares continue to look a little undervalued for patient long-term investors.
A solid Q2 helps the tone
Baxter did itself no harm with a solid second quarter, though I've already seen bearish analysts defending their positions by claiming the strength seen here is temporary.
Revenue rose 16% as reported (and about 5% organically) and beat the average Wall Street guess by about 3%. Better still, the strength was broad-based, with several outperformers and no glaring laggards.
Medical Products revenue jumped 24%, helped by the inclusion of Gambro in the renal business, though Renal was down about 3% on an organic basis due to weaker overseas tenders that offets good US-based peritoneal dialysis growth. Fluid Systems revenue (up 8%) was quite solid on better cyclo performance, while Specialty Pharma (up 9%) also did quite well.
Bioscience revenue rose 6%, helped by the 6% growth in Hemophilia from strong Advate sales (up double-digits) and 6% growth in Biotherapeutics from strong IVIG performance. Vaccines were also strong this quarter (up 6%), but this tends to be a more volatile segment.
Gross margin weakened as expected this quarter, but operating income (which rose 4%) outperformed on better overall expense control. Management did not make any major changes to guidance after this result.
Hemophilia doing better, but can it last?
The question of how Baxter's hemophilia business will perform over the next year is one of the key debates on this stock. For this quarter at least, the company benefit from Advate approvals in Turkey and Russia and tender wins in the U.K. and Australia – both of which have previously been tiny markets for the company.
While that is nice to see, it doesn't address the biggest issue for Baxter – that Biogen is going to be pushing hard to gain share with its new long-acting hemophilia products Eloctate and Aprolix. The FDA approved Eloctate in June and Biogen has since revealed that it will price it similarly to Advate. As I have written before, there are reasons to believe Baxter management's guidance that it won't lose as much share as the Street believes (doctor/patient hesitancy to change what is working, and the fact that many Advate patients are on a longer dosing schedule). Still, Baxter will have to prove it can hold its own.
Investors will also be keenly interested in the data coming out in the third quarter on Baxter's 855 – its own long-acting FVIII treatment. A lot of companies are trying to move into the long-acting hemophilia market (including Novo Nordisk), but if 855 data are good, Baxter will significantly improve its odds of holding on to market share.
Generics not biting ... yet
Baxter also got a boost this quarter from a lack of generic competition to Endoxan (cyclophosphamide or "cyclo"), a $400M/yr product used to treat cancer and certain autoimmune conditions. Baxter has also benefited from the lack of a generic rival to Suprane, an inhaled anesthetic. Both of these generic launches are almost certainly "when, not if" events, so it is understandable that analysts aren't assuming the strength seen this quarter from these products will last.
The bottom line
Baxter still has a lot going for it for the long term. The company has a deeper pipeline of hemophilia therapies than seems to be commonly appreciated, including some experimental gene therapies that could fundamentally alter the treatment of those conditions. Baxter is also looking at the upcoming FDA panel meeting for HyQ and should see this new immunoglobulin product on the market this year. There is also the upcoming split/spin of the business, which will largely separate the hemophilia and immunoglobulin businesses from the rest.
At present, I continue to believe that Baxter is undervalued and weighed down by excessive pessimism. Baxter should not only fair better than expected in hemophilia and IVIG, but also now has an opportunity to drive meaningful synergy from its expanded renal operations. It will take some time for the clouds to clear, but there's still upside here for patient long-term investors.
