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Baxter International: Gambro Comes At Premium Price Despite Being A Good Fit

 December 05, 2012 04:58 PM

(By Mani) Baxter International Inc.'s (NYSE: BAX) $4 billion deal to buy Sweden's Gambro AB is a good strategic fit for the healthcare company. However, the deal comes at a premium price hinting some integration risks.

Deerfield, Illinois-based Baxter agreed to buy privately held Swedish dialysis company Gambro AB to focus on in-center treatment solutions for patients with end-stage renal disease. The acquisition does not come as a complete surprise as the WSJ reported on Nov. 23rd that Baxter was in talks to acquire Gambro.

Gambro marks the largest acquisition in Baxter's history, even larger than the company's acquisition of American Hospital Supply Corporation in 1985 for about $3.7 billion.

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"The ~$4B price tag for Gambro is a lofty ~15x forward EV/EBITDA and does add a new layer of integration risk to the BAX story," RBC Capital Markets analyst Glenn Novarro said in a client note.

Gambro, with $1.6 billion in 2011 sales, focuses on developing, manufacturing and supplying dialysis products and therapies for patients with acute or chronic kidney disease. The acquisition gives Baxter a comprehensive dialysis product portfolio, complements Baxter's global home dialysis offerings, and positions the company to meet the evolving needs of the large and growing dialysis market.

Gambro is a good strategic fit as Baxter is a large player in the peritoneal dialysis (PD) space versus Gambro, which mainly plays in the hemodialysis (HD) space. The majority (60 percent) of Swedish company's sales comes from hemodialysis monitors and dialyzers while continuous renal replacement therapy monitors account for the rest. Also, the majority of Gambro's sales are from Europe.

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Gambro's in-center HD devices include the Artis system and the AK 96 system. In the acute care segment, which includes CRRT and treatment for fluid overload, among others, Gambro offers the Prismaflex system used for the treatment of critically ill patients with acute kidney injury.

More than two million patients globally are on some form of dialysis, with dialysis treatment rates increasing more than 5 percent annually in part due to the rising rates of diabetes and hypertension.

Baxter could accelerate product sales in established markets such as Europe, where Gambro has an extensive footprint. Baxter can also expand Gambro's reach in high-growth regions of Latin America and Asia-Pacific, where Baxter has steadily grown its peritoneal dialysis (PD) business.

In addition, Baxter will also build upon its pipeline of investigational home HD and automated PD systems by adding Gambro's highly innovative and next-generation monitors, dialyzers, devices and dialysis solutions.

"Deal cost synergies look achievable, but revenue growth targets seem on the aggressive side," Novarro said.

Baxter expects the deal to reduce 2013 adjusted earnings per share (EPS) by 10 to 15 cents and be neutral to modestly accretive to adjusted EPS in 2014. Excluding the impact of special items and estimated amortization of intangible assets, the company expects this transaction to be neutral to adjusted EPS in 2013, and accretive in 2014 by 20 to 25 cents.

The company expects this transaction to be increasingly accretive to adjusted earnings per diluted share beyond 2014 and, in addition to an array of commercial synergies, projects opportunities for annual cost synergies totaling about $300 million by 2017.

Baxter, which $300 million in cost synergies from the deal, now expects over its five-year long-range financial plan to increase sales by 7 to 8 percent and to grow adjusted EPS in the 8 to 10 percent range, both on a compounded annual basis.

The cost synergies are being driven by a reduction in manufacturing footprint, integration of global instrument servicing, and easing of capacity constraints in Gambro's dialyses business.

"We are comfortable with the lower end of management's updated 7-8% top-line LRP growth, but we struggle to see how Gambro can add ~100bp of top-line organic growth beyond BAX's LRP," Novarro noted.



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