Baxter’s Healthy Glow

Health care stocks continue to perform well.

The Health Care SPDR ETF (NYSE: XLV), the largest health care ETF by assets, is up 62% in the past two years, well ahead of the S&P 500's 38% rise.

An increase like that might lead you to think the sector's biggest gains are behind it. Not so, according to Philip Springer, chief investment strategist at our Personal Finance advisory.

"I believe this sector still offers good profit potential, fueled by such factors as aging populations, growing demand for care in emerging markets and impressive medical advances," he wrote in an article in the August 27 issue.

The numbers bear that out. Consider the following: 

Global health spending is surging: According to a recent report from Deloitte, worldwide health spending rose 1.9% in 2012, but accelerated by 2.6% in 2013. Between 2013 and 2017, health care costs will rise by an average of 5.3% a year.

Emerging markets are seeing the fastest growth: Deloitte sees the biggest spending increases in rapidly growing areas like the Middle East and Africa (up 10.0%) and the Asia-Pacific region (up 7.1%).

People are living longer—and need more care: By 2017, average global life expectancy is expected to hit 73.7 years, up from 72.6 in 2013. That's fueling an ongoing increase in the number of people aged 60 and over: in the next 50 years, their numbers will more than triple, to around 2 billion.

Chronic diseases are on the rise: An older population is one factor spurring the spread of chronic conditions like heart disease, cancer and diabetes. Other causes include more sedentary lifestyles, rising obesity rates and changing diets. According to Deloitte, chronic diseases are responsible for 63% of all deaths around the world.

One company Springer believes is particularly well positioned to benefit from these trends is Personal Finance buy recommendation Baxter Internation! al (NYSE: BAX), a maker of medical devices, pharmaceuticals and biotechnology with a global reach.

(See below to discover four more companies Springer sees as poised to reap big profits from the coming boom in health care spending.)

In 2013, Baxter generated 42% of its sales in the U.S. The rest came from Europe (30%), the Asia-Pacific region (16%) and Latin America/Canada (12%).

Baxter boasts 61,500 employees and a $40-billion market cap.

The company operates through two main divisions: 

Medical Products, which supplied 57% of Baxter's 2013 revenue, makes devices that deliver fluids and drugs to patients, including intravenous products and infusion pumps. This business also sells premixed drugs, anesthetics and supplies and services for people with end-stage renal disease.Bioscience (43% of revenue) provides genetically engineered and plasma-based treatments for patients with hemophilia and other bleeding disorders, as well as therapies for immune deficiencies, burns and shock and other blood-related conditions. Its products are also used in regenerative medicine, which aims to heal damaged tissues and organs.

Big Moves Are Reshaping Baxter

Baxter shares have risen 6.8% year-to-date, below the S&P 500's 7.6% gain. But even though the stock hasn't caused a lot of buzz with investors, management has made a number of important moves in the past two years.

The first came in late 2012, when the company acquired Gambro AB for US$4.0 billion, marking the biggest acquisition in its 83-year history. Sweden-based Gambro makes dialysis products for patients with acute and chronic kidney disease. The company is the world's second-largest manufacturer of dialysis machines, after Germany's Fresenius.

Baxter already had a presence in the dialysis market but mainly focused on in-home equipment, while Gambro's products are mostly used in clinics.

This is a large and growing market for the company: according to the Baxter, approximately two mi! llion peo! ple worldwide are on some form of dialysis, and that number is growing by more than 5% annually due to rising rates of diabetes and hypertension.

Another major move came in March, when Baxter announced that it would break itself into two separate firms along the lines of its current divisions; it aims to complete the split in mid-2015.

"The breakup makes sense because the two units have separate profiles, with the medical devices business being more defensive, while the biopharmaceuticals unit grows faster, albeit with greater risk," wrote Springer.

One of those risks is rising competition. For example, Biogen Idec's (NasdaqGS: BIIB) Eloctate hemophilia A therapy received FDA approval in June. Eloctate could become a significant competitor to Baxter's Advate treatment, which controls about 35% of the market. But Advate has the advantage of being well established: it was approved more than a decade ago and is now used in 64 countries.

Eloctate is expected to cost roughly the same as Advate, but it requires fewer injections. Baxter is currently developing a longer-acting version of Advate in response; it recently reported positive results from a Phase III study and plans to apply for U.S. marketing approval by the end of the year.

A History of Successful Spinoffs

The spinoff will let each company focus on its core business and respond more quickly to new competitors and changing market conditions.

To that end, management sold the Bioscience division's vaccine business to Pfizer (NYSE: PFE) for $635 million, leaving the new firm to better exploit its main hematology and immunology products.

Baxter has a history of successful spinoffs. In the 1990s, it spun off Caremark Corp. and Allegiance Healthcare Corp., which are now part of CVS Health Corp. (NYSE: CVS) and Cardinal Health Inc. (NYSE: CAH), respectively.

A third Baxter spinoff, Edwards Lifesciences (NYSE: EW), has gained over 1,350% since it started trading as a separate firm in 2! 000.
Across-the-Board Strength in Q2

Meanwhile, Baxter continues to see strong revenue growth at home, overseas and across its business segments. In the second quarter, international sales jumped 19% from a year ago, to $2.5 billion, while U.S. sales gained 12%, to $1.7 billion.

The BioScience division's revenue rose 7%, to $1.8 billion, while Medical Products revenue jumped 24%, driven by Gambro. Excluding Gambro's contribution, this business's sales increased 4%.

It all added up to an overall sales gain of $4.3 billion, up 16% from $3.7 billion a year ago.

Without special items, such as costs related to the Gambro purchase and the breakup plan, earnings rose 5% to $692 million, or $1.26 a share, topping the consensus forecast of $1.22 and the company's own guidance.



Baxter raised its full-year revenue growth outlook from between 9% and 10% to 10% and 11%. However, it narrowed the range of its 2014 adjusted earnings per share to $5.10 to $5.20 from a previous estimate of $5.05 to $5.25.

The stock trades at a reasonable 14.4 times the $5.15 midpoint of the 2014 forecast. It also yields a healthy 2.8%, and its payout has jumped 343% over the past eight years.

4 More Ways to Profit From the Coming Health Care Boom

U.S. health care spending is set to skyrocket by 70% between now and 2021—and administrative costs are poised to surge 96.8% by 2018!

Nothing can derail the health industry's incredible momentum. Obamacare guarantees it. The law will trigger the biggest increase in the number of insured Americans since the creation of Medicare in 1965.

It all adds up to a government-legislated windfall for the 4 companies Personal Finance chief strategist Philip Springer is recommending right now.

These 4 terrific stocks are sitting right in the path of the greatest explosion in bureaucratic spending in U.S. history—and we're ready to send you everything you need to know about all of them FREE.

Full details he! re.