Is Baxter's Outlook Worrisome?

Baxter International  remains in a period of lackluster earnings growth, and questionable prospects. As a result, we must question whether Baxter is a viable investment. Here is what you need to know.

The stability of the health care equipment sub-industry is well documented, with limited downside susceptibility to recessions. Baxter is no exception, as the company has sustained robust growth for more than a decade. Of course, there are any number of potential headwinds -- including the new medical device tax introduced with the health care reform law, which placed additional top-line pressure on Baxter, leaving investors concerned over whether management will reduce costs by aligning its cost structure to offset the impact of the tax increase.

My Foolish take
Baxter's outlook is more encouraging than it seems. For instance, aging populations should increase demand for elective and non-elective procedures, dictating the need for specialized medical devices and driving growth at Baxter.

In the meantime, Baxter's efforts to penetrate emerging markets should supplement earnings growth. Another notable effort includes the recently announced plan to spin off of its BioScience division, which will be run by Ludwig Hantson, who is the current president of Baxter's BioScience division. 

The spinoff will grant Hanston the freedom to develop an independent strategy and determine which projects to invest in, while retaining Baxter's flourishing hemophilia franchise among other product lines. In addition, the spinoff will enable both companies to commercialize new and existing products more effectively, as well as accelerate revenue and enhance profitability.

In addition, the Gambro acquisition provides Baxter with a comprehensive dialysis product portfolio. More importantly, it offers long-term opportunities where Gambro products retain significant market share, such as developed markets like Europe, as well as emerging markets in Latin America and the Asia-Pacific. As Baxter struggles with flat earnings, support from Gambro's dialysis products should offer significant relief. Other than that, Baxter's continued pipeline development will hopefully help bolster earnings to achieve modest overall performance through 2015.

Here's what investors can look forward to in both companies
The progress of ADVATE is encouraging, and it should benefit the new BioScience company as it strives to reaffirm its dominance in the market space for hemophilia.

Speaking of ADVATE, Australia's National Blood Authority (NBA) issued a four-year award for ADVATE as Australia's preferred recombinant FVIII product. Once it becomes effective in early July, 2,300 people diagnosed with hemophilia A will receive access to ADVATE.

Other noteworthy achievements for ADVATE include the continued success in expanding commercialization in the UK, which now treats 5,600 people; regulatory approval in Russia and Turkey; and the impressive 30% uptake in Brazil. As ADVATE is now available in 62 countries and product uptake increases, revenue should put the new company in a favorable position in 2015.

Without its BioScience division, I believe Baxter's outlook strictly as a medical device company is promising nonetheless. In its most recent earnings report, Baxter achieved a 22% rise in global sales for its medical products, compared to a 5% rise in biopharmaceutical products developed by its BioScience division over the same period. It should be noted that the vast majority of that 22% increase was due to new revenue from the Gambro acquisition.

Medical devices make up the bulk of Baxter's revenue, and investors should look forward to continued penetration of existing products in international markets as a solid way to earnings growth. By 2017, Baxter estimates that the market for its medical products will have grown to $50 billion, affording the company numerous opportunities in industries like biosurgery, anesthetics, nutritional therapies, and fluid systems. For example, Baxter's fluid systems products reached $757 million last quarter, and inhaled anesthetics and nutritional therapies reached global sales of $367 million. 

While overall growth was minimal for the above products in the first quarter, I think investors can look forward to improvement as overall demand rises for elective and nonelective procedures coinciding with aging populations.

My Foolish final thoughts
Baxter, with a tasty 2.8% yield and excellent prospects for continued earnings growth, has some great opportunities ahead. In the months to come, investors should watch ADVATE's uptake closely. Also, impressive global sales of its medical products should reinforce Baxter's earnings growth strictly as a medical device company after the spinoff takes effect in mid-2015. As a result, I think this is a stock that Fools should follow closely.