Baxter Hits 52-Week High on Planned Business Split-Up - Analyst Blog

Baxter International Inc. BAX revealed that it will split-up its biopharmaceuticals and medical device segments into two independent companies in order to put greater management focus on the two businesses, effectively commercialize product offerings, efficiently allocate resources to high growth areas, and bring flexibility in deciding on growth and investment strategies.

Following the announcement, shares of BAX reached new 52-week high of $75.68 to close at $72.80 on the same day.

BAX expects to complete splitting up the business in mid-2015. The transaction will take the form of a tax-free distribution to the company's shareholders of a new publicly traded stock in the new biopharmaceuticals company.

BAX expects to incur one-time charges due to the split up during the reporting periods preceding the separation. However, the company does not expect it to impact the financial guidance for 2014.

The Two Businesses

BAX's biopharmaceuticals/bioscience division includes recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treat immune deficiencies, alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions. It contributed $6.6 billion or 43.0% to overall revenues in 2013.

Ludwig N. Hantson – the current president of BioScience division – will be named as the CEO of the new biopharmaceuticals company. Baxter director Wayne T. Hockmeyer will serve as nonexecutive chairman of the new unit.

BAX's medical products division manufactures intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics.

The medical products business contributed $8.7 million or 57% to BAX's overall revenues in 2013. The business will continue to integrate the $4 billion acquisition of Swedish dialysis maker Gambro AB, completed last September, which complements its existing renal therapies franchise.

BAX's current CEO and chairman, Robert L. Parkinson Jr., will lead the medical products business in the future, retaining its international name.

Moody's Reaction

Following the announcement, Moody's Investors Service – the credit rating arm of Moody's Corporation MCO – downgraded its outlook on the company to negative from stable, while keeping its A3 and Prime-2 ratings intact. The rating agency believes that the split-up will significantly hurt BAX's profitability.

Apart from losing economies of scale and business diversity, Moody's believes separating the key biopharmaceuticals division would significantly impact the company's margin as it generates over half of the company's profitability due to the presence of key pipeline products, despite a lower contribution to overall revenues compared to the other medical product division.

Recent Split-up in Healthcare Industry

In early 2013, Abbott Laboratories ABT spun off its drug business into the new company, AbbVie. Abbott's remaining businesses market nutritional formula, generic drugs, medical implants and diagnostics.

Recently, there was a rumor that the biggest drug maker in the U.S., Pfizer Inc. PFE may split up its businesses into two or three companies. However, Pfizer negated the rumor, saying that it is not looking for any split-up until for a couple of years in the future.

Currently, Baxter retains a Zacks Rank #3 (Hold).