How long have you held Baxter (BAX:US)

For a few months now.

What do you like about it?

Unlike CSL, which trades on a PE multiple of over 20x, Baxter is a much bigger and more diversified group (multiple under 13x).

With Haemophilia and kidney disease going undiagnosed across the world, especially in the emerging markets, Baxter has leadership positions that it can exploit for the foreseeable future.

The business characteristics are compelling and consist of biopharmaceuticals sales of $5.8 billion. Leading products for the treatment of Haemophilia A and B have sales of $3.4 billion. Bio Therapeutics sales consist of $2.1 billion. These products address human immune system weakness, for example Primary Immune Deficiency (PID), which is growing at 7-9% per annum.

Medical products sales of dialysis equipment, intravenous systems, biopharma etc are $9.4 billion.

The two businesses provide diversity and longevity, which, if split, could generate more value for shareholders. Each business segment has the characteristics for a long-term success.

Baxter is lowering its cost base by reducing costs that can then be reinvested into other areas that generate high returns.

How is it better than its competitors?

It is the market leader in nearly all of its segments.

Baxter (BAX:US)

Haemophilia A represents over 80% of all haemophilia cases globally and Baxter has a 40% market share in treatment.

Investment in new drugs for the treatment of Haemophilia will start to pay dividends in the near term, as those drugs pass the tests of the US Food and Drug Administration (FDA). The plasma business is also well placed to grow in emerging markets.

In medical devices, with the acquisition of Gambro, the company now has the geographic reach to push harder in marketing and sales to increase penetration of their products. The distribution capabilities have been strengthened significantly for other products.

Generic competition in Haemophilia treatments from Biogen will come to the market in 2014 in the US and 2016 for the EU. In the meantime, Baxter has been developing new products to fight these generic drug manufacturers and patients’ propensity to switch life saving drugs has historically been low, given the uncertainty factor.

What do you like about its management?

The standout attribute has been their ability to continue to build a pipeline of new products and complement this with acquisitions in the face of patent expires and stiffer competition. With their dominant position in the Haemophilia market under pressure, they have been working hard on research and development to negate these headwinds and the fruits of those decisions will be delivered in the next one to three years.

What is your target price on Baxter?

As we tend to look at valuations like PE, free cash flows and yield to derive a target price, our near term target price is at least $90 (FY16: EPS $6, PE 15x). The sum of the parts valuation is obviously higher, given multiples for standalone comparables.

At what point would you sell it?

If valuation becomes rich for its growth profile, we would look to reduce our position. We mostly hold positions for the long term.

Where do you see the value?

There are big underpenetrated markets across the world for haemophilia drugs/renal machines and potential breakup of the business will unlock value.

Nitesh Patel is a senior investment analyst and assistant portfolio manager for Insync Fund Managers’ Global Titans Fund.

Nitesh has over 16 years of funds management experience covering international stocks, managing both long only and long/short equity portfolios. He has managed funds with a variety of investment strategies and has considerable hedging, risk and quantitative experience.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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