One Pharma Stock Investors Should Watch

Rashmi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Baxter International (NYSE: BAX), one of the fastest-growing healthcare multinational corporations of America, has a long history of strong financial credentials. With a single-point agenda of emerging out as a clear leader in its core area of operations, Baxter has repeatedly proven its might.

The FY 2012 growth story

With FY 2012, the company wrapped up another successful business year. It achieved 5 % year-over-year growth in revenue (exclusive of foreign exchange effect) to reach an astounding $14.2 billion. Net income for the year was $2.3 billion and cash flow from operations amounted to $3.1 billion, up 10% year-over-year.

And the story continues ….

Baxter kept up its steady performance in the first quarter of 2013, satisfying Wall Street’s earnings expectations. The company reported net income of $581 million (excluding the special items) registering year-over-year growth of 2%. The adjusted earnings per diluted share were reported at $1.05, up 4% year-over-year, meeting the company's earnings guidance.

The strategy

The recent past has seen Baxter make strategic acquisitions with a view to gain a competitive advantage and to achieve inorganic growth. The acquisition of Gambro has successfully placed Baxter in the running to achieve the top spot in the renal market space.

In addition, Baxter, through its newly established venture capital arm, has been active in occupying stakes in new entities in the healthcare segments. This will enable the company to enhance its product portfolio and promote development and innovation, which will drive future growth and profitability of the company.

Keeping inline with the above, the company has recently acquired an $8.5 million stake in Ocular Therapeutix, a growing company involved in the development of ophthalmic-therapeutic products, with the intention to achieve a significant competitive edge in the long term.

Furthermore, the company has made a $38 million investment in Naurex, an Evanston, Ill.-based start-up, which develops solutions to treat depression and other nervous system disorders such as Alzheimer’s disease and schizophrenia.

Strengths and opportunities

The demographic transition caused by declining fertility and a lower mortality rate has led to longer lives and an ageing world, which has a direct effect on the demand for healthcare facilities. The rising rates of diabetes and diabetes- induced diseases have created enormous opportunities for the healthcare players to dwell upon.

Baxter healthcare provides unique solutions for critical diseases and has developed successful therapies for treating blood disorders and renal complications.

                                                                                         Source: Annual report 2012

The company has established itself as the world leader in haemophilia care. It has recently launched the first protein-free recombinant factor VIII to treat haemophilia.

Baxter sells its products across 100 countries. Approximately 60% of sales are accounted for by countries other than the United States. The company has a fast-growing base in regions like Latin America, Canada, Asia-Pacific, Europe, Middle East and Africa, which together comprise about 57% of the total markets. This provides enormous opportunity for growth in the developing economies. The medical-products business is comprised of the medical delivery and renal segments, which together account for approximately 56% of the company's total revenue.

The healthcare giant has developed a diverse portfolio of segments over the years and its continued commitment to innovation and development provide for solid growth prospects going forward.

Competitive Scenario

Fresenius Medical Care (ADR) (NYSE: FMS) is a leading player in the healthcare industry with a market capitalization of $ 21.6 billion. With a diversified business portfolio, Fresenius is a tough contender in the healthcare segment. The company beats Baxter to occupy the leading position in dialysis care with Fresenius Medical Care, the company’s wholly owned subsidiary specializing in renal care, contributing to about 54 % of the consolidated sales of the group entity.

The company has a history of robust performance, which was reinforced by its latest quarterly results. First quarter 2013 saw the company record year-over-year growth of 11% in top line and 12% (before special items) in the bottom line. The company's historical dividend graph reveals a rising trend in dividend payouts, which have grown at a CAGR of 10.1% over the past decade. An Enterprise value of $29 billion compared to the the current market value of $21 billion indicates strong fundamental value of the company.

The company, with years of experience in this sector, has the right mix of innovative and qualitative research capabilities and a strong balance sheet to support its operations making it one of the leading competitors in this segment.

Grifols (ADR) (NASDAQ: GRFS) is yet another prominent competitor to Baxter. Grifols is a Spanish healthcare company which poses tough competition to Baxter in the bioscience business. Grifols derives close to 88% of its income through its Bioscience operations and has been successful in establishing its leadership in the North American and European markets.

In the wake of rising demand from the Asia Pacific and Latin American regions, the company has braced itself to penetrate these emerging markets. The first quarter of 2013 saw a marked rise in the company’s sales from the emerging markets. As part of its strategy to solidify its foothold in the markets and cater to increasing demands, the company has committed itself to massive investments in capital expenditures aimed at capacity expansion.

Grifols' other two business drivers are the hospital division and the diagnostic division. While the hospital division accounts for nearly 4% of the total revenue, the diagnostic division accounts for about 4.8% of the total sales generated.

The company recently acquired a 60% stake in Progenica Biopharma. Progenica Biopharma specializes in genomic and proteomic tests, which help in in-vitro diagnosis and prognosis of diseases. The move provides a strategic advantage to the company in terms of access to the latest technology and it strengthens Grifols' product portfolio offered by the division.

Considering the company’s strategic moves and competitive strengths, Grifols is peddling up the race for market leadership and comes across as a tough challenger to other players in the industry.

Key takeaway for investors

Baxter International has been consistently climbing the growth ladder over the past few years and has designed an aggressive strategy aimed at deriving robust long- term growth. The company has capitalized on both organic as well as inorganic growth opportunities to ensure diversification and expansion.

It operates in an extensively competitive environment, and its commitment to research and development will impart a strategic edge against its competitors in the future years. Overall, the company has strong fundamentals, a clear strategy and enormous growth opportunities in the developing markets and is a worthy addition to your portfolio.

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Rashmi Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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