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Wednesday, November 20, 2024

Baxter’s Spinoff

Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.

Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).

The Baxalta Spinoff

By Ilene with Trevor of Lowenthal Capital Partners and Paul Price

In its recent filing with the SEC, Baxter provides:

“This information statement is being furnished in connection with the distribution by Baxter International Inc. (Baxter) to its shareholders of approximately 80.5% of the outstanding shares of common stock of Baxalta Incorporated (Baxalta), a wholly owned subsidiary of Baxter that will hold directly or indirectly the assets and liabilities associated with Baxter’s biopharmaceuticals business. To implement the distribution, Baxter will distribute approximately 80.5% of the shares of Baxalta common stock on a pro rata basis to the Baxter shareholders in a manner that is intended to be tax-free for U.S. federal income tax purposes.”

“As a result of the separation, each Baxter shareholder will receive one share of Baxalta common stock for every Baxter share of common stock held on June 17, 2015, the record date for the distribution.”

Trevor Lowenthal at Lowenthal Capital Partners, Paul Price and I have been reviewing Baxter and its upcoming spinoff of Baxalta. We believe that the spinoff will unleash value from the Baxalta bioscience division of the company and that the sum of the BAX parts will prove to be greater than the whole.  Baxalta should benefit from growing market penetration for Advate, the number one selling therapy in its hemophilia franchise, along with the approval of important new products. This should enhance long-term value for current BAX shareholders as Baxalta's new products hit the market and as the independent company gets priced more in line with its growth prospects. 

In April, Trevor Lowenthal shared his thoughts on BAX in Going Long On Baxter For An Optimistic 2016. To summarize:

  • Baxter has experienced several lackluster quarters, but the company's revenues are growing and its positive outlook is intact.
  • The Baxalta spinoff in June should drive future shareholder value.
  • While Baxter’s core medical products business is not growing at the desirable rate, Baxalta is doing well. In addition, Baxter’s acquisition and integration of Gambro’s dialysis product line should add revenue to its core business in the future:

Screen Shot 2015-06-10 at 7.00.19 PM

Screen Shot 2015-06-10 at 7.00.01 PM

[Images from Baxter’s Note to Shareholders]

“Baxter's acquisition of Gambro has provided it with significant earnings growth potential. Notably, Gambro's dialysis products generated $1.6 billion for Baxter in 2014… With over 2 million dialysis patients worldwide and a projected 5 percent annual rate of increase, Baxter's growing dialysis franchise should continue to add market share. This is already evidenced by the fact that from 2013-2014, revenue generated from Gambro's product line increased from $513 million to $1.6 billion… While it is difficult to predict what revenues will be generated from Gambro products in a few years time, we think it is safe to assume that revenues will increase coinciding with the growing overall demand for dialysis products worldwide.

“With the Gambro acquisition, Baxter has outlined a five-year plan to increase sales by 7% to 8% on a compounded annual basis.”

Trevor concludes that the high $60s is a reasonable buy level for BAX. (Today’s price is slightly lower than Trevor's wait-to-buy price, as BAX closed on Wed., June 10, at around $66.)

Screen Shot 2015-06-10 at 7.06.55 PM

Not hedging

Paul Price is also bullish on BAX and has been been buying shares and selling puts. In discussing the valuation of BAX, Price writes:

“On its own, Baxalta should command a higher multiple than it does as part of the more mundane medical products company. It is likely that the sum of the parts will be worth more than the whole.

"Both Morningstar and Standard & Poors see BAX with 4-star (out of 5) BUY ratings. Each sees fair value above today’s quote [around $68/share, May 20].

"Standard & Poors noted Baxter’s top 1% ‘invest-ability’ ranking which is in harmony with Value Line’s view. The only thing lacking had been the absence of a sustained share price increase. I believe management is spinning off the glamour part of the business to finally accomplish that missing link.

"Owning BAX today is like getting a free lottery ticket on Baxalta. At worst the combined valuation figure to stay about level. A best-case scenario could see a nice pop once the companies separate.”

Screen Shot 2015-06-10 at 7.06.38 PM

Morningstar, Standard & Poors and Value Line charts courtesy of Paul Price.

Investment/trade ideas

Buy the shares. We think BAX and its spinoff at $66/share is priced well right now. We prefer not to write calls which would limit our upside.

Sell puts. As a long-term speculation, selling the Jan. 2017 puts gives BAX some time to reach its higher potential.  Here are two ideas:

1) Selling one January 2017 put with a strike price of $60 will bring in approximately $3.75 per share and obligate you to buy 100 shares of BAX for $60 if the stock trades below $60 on the put’s expiration date, Jan. 20, 2017.

Worse case scenario: if BAX is below $60 on the expiration date, your net cost will be $56.25 per share for 100 shares of BAX. You will only lose money if BAX is below $56.25 — your breakeven point.

Best case is if BAX is at $60 or above on expiration, in which case you keep the $3.75 per share ($375 total) with no further obligation.

2) Here's an idea from Phil: Sell a January 2017 put with a strike price of $57.50 for about $3.30, which is as much as the dividend would be over the same period, but you don't have to bother owning the stock and you have a built-in 10% cushion to the downside.

****

Disclaimer: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Market Shadows, Lowenthal Capital Partners, PSW Investments, LLC d/b/a PhilStockWorld (PSW), Paul Price, or Ilene, or affiliates, warrant its completeness, accuracy or adequacy and it should not be relied upon as such. None of the above contributors are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes at PSW, is not necessarily indicative of future results. None of the contributors to this article are financial advisers, and they may hold positions in the stock mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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