EUR 850.00 For Business Accounts Only

Morningstar | BAX Updated Forecasts and Estimates from 22 Mar 2019

With constant-currency growth of 5% and an adjusted operating margin of 17.5% (up 210 basis points from last year) during the fourth quarter, Baxter ended its fiscal 2018 slightly ahead of our expectations. The company’s 2019 outlook for 2%-3% constant-currency revenue growth and an adjusted operating margin of 18%-18.4% both fall near our forecast. Therefore, we don’t anticipate a major change to our fair value estimate as we update our model. While Baxter still has some lingering issues to deal with, such as its Claris warning letter and ongoing pressure on cyclophosphamide, we’re still encouraged by the underlying performance of the business, new product innovation, and profitability improvements. Although cyclophosphamide will remain a headwind for the pharmaceutical division, we expect mid-single-digit growth for most of Baxter’s segments in 2019. We’re leaving our narrow moat rating in place.

While Baxter’s clinical nutrition and medication delivery segments fell slightly below our forecast in the fourth quarter, strong results in the pharmaceutical and advanced surgery segments kept overall growth largely in step with our expectations. The clinical nutrition and medication delivery segments, with negative 5% and flat constant-currency sales, respectively, continue to face lingering effects noted in previous quarters from supply disruptions related to Hurricane Maria. We do expect performance to gradually improve in these segments, especially as the company faces easier year-over-year comparisons, but management also noted a longer sales cycle for infusion pumps as customers delay purchases, even though Baxter believes it is gaining some incremental share.

Baxter’s other segment sales were better than expected. Pharmaceutical segment growth of 9% benefited from new product launches and healthy demand for anesthesia and compounding services, but anticipated competition for U.S. cyclophosphamide and Brevibloc sales, which were $39 and $14 million, respectively, during the quarter will likely make this quarter’s segment growth difficult to sustain. The temporary benefit of competitor supply constraints helped boost growth for Recothrom, leading to 17% growth in advanced surgery. Lastly, renal segment sales growth of 5% matched our expectations as management noted high-single-digit PD growth in the United States was offset by the decline in sales of less profitable blood line products (the result of Baxter's focus on more profitable business).