Dialysis drives Baxter growth as it preps for Baxalta spinoff

The acquisition of dialysis company Gambro last September continues to fuel Baxter International's ($BAX) sales growth as it preps to spin out its biopharma division in 2015. But despite some stop-gap measures, it's not likely that Baxter will actually be able to meet the demand for its dialysis products until additional manufacturing capacity opens up in 2016.

It met analyst expectations with $4.2 billion in third-quarter sales, while beating the Street on earnings per share, which came in at $0.04 above expectations at $1.35.

One-quarter of Baxter's third quarter sales came from dialysis products, an increase of 41% to $1.1 billion from the same quarter a year prior. The company said it expects that these renal products will continue to grow at a rate of about 40%. Overall, Baxter sales gained 13% to $4.3 billion.

Without Gambro sales, dialysis growth was only 3% at Baxter during the third quarter. Gambro products accounted for $391 million of third quarter Baxter sales. The $3.9 billion acquisition closed in September 2013, so the fourth quarter of 2013 was the first full quarter including it.

Baxter will soon look radically different again. During the fourth quarter, the sale of its vaccine business to Pfizer ($PFE) for $635 million in cash is expected to close. Then in mid-2015, Baxter expects to spin off its biopharma business into a separate publicly traded company--already dubbed Baxalta.

Baxalta will include the hemophilia and biotherapeutic business units that grew 11% to $942 million and 3% to $546 million respectively during the third quarter. In September, Baxter said it's creating a biopharma R&D center in Boston, MA, in order to continue to propel innovation at the newly formed Baxalta.

Baxter has had difficulty meeting demand for its dialyzers and recently said it would invest its manufacturing in Opelika, AL. The additional capacity isn't expected to come online until 2016. The company is using some third-party efforts to try to address demand, but Baxter chairman and CEO Robert Parkinson said on the third quarter conference call that the new capacity will still be crucial. A dialyzer is a replaceable portion of a dialysis machine that contains a permeable membrane.

Baxter CEO Robert Parkinson

"On dialyzers, our share on dialyzers today is, I would just say, disproportionately low. So, I think there's a significant opportunity there long-term. You know, we're encouraged by the recent performance of the Gambro business," said Parkinson on the call.

"We are starting to get focused and aligned after the integration. That will represent a step function in growth when that capacity comes on in 2016, but in the meantime, we have done some other things with third party suppliers and so on which will allow us to increase the supply. Right now the demand is exceeding our ability to supply. We have some smaller interim expansions that should help that out in the short-term, but it won't be as material until the capacity comes on," he concluded.

Baxter guided to 11% to 12% sales growth for 2014, with earnings per share of $4.86 to $4.89 and operational cash flow of about $3.5 billion for the year.

Investors pushed Baxter down about 1% in premarket trading on the earnings news, but that is roughly in line with the broader market during what is shaping up to be a correction. Baxter is down 1% for the year so far, after being up as much as 11% in late July.

- here's the release

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