Medical Device Industry Faces a Rising Demand Curve

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In the midst of an aging population, the United States remains the market leader for medical devices, accounting for about one-third of the worldwide market. An aging population is one of the biggest problems the U.S. is currently facing.

This leads to a bright future outlook for medical device manufacturing companies. In fact, the global medical device, technology, and equipment market is forecast to be worth more than $440.5 billion by 2018.

Baxter International Inc. (NYSE:BAX)

In the medical device and supplies industry, I have picked up Baxter International Inc. (NYSE:BAX), as the company’s high ROE instigated my interest in the stock. I wanted to analyze this company as to how it was managing to register such high returns in a staggering economy and would it continue to report such high returns for its shareholders.

Historic company performance

Source: Baxter International 10-K.

DuPont analysis breaks down ROE in a way that provides a clear insight into the whole company, the income statement, and the balance sheet — in just three ratios.

Net profit is consistently improving, from 11.06% in 2010 to 16.39% in 2012, partly due to the rising revenue. Renal product sales have increased due to the continued growth in the number of peritoneal dialysis patients in Asia, Latin America, and the United States. In 2012 and 2011, the company’s top line benefited from improved sales in the pharmaceutical partnering and pharmacy compounding businesses, in addition to the favorable contribution from the fourth quarter 2011 acquisition of Baxa.

IV Therapies sales growth in both years was driven by increased demand for IV solutions and strong sales of nutrition products. Within the anesthesia product category, sales growth in both years was primarily driven by improved international growth from increased penetration of Suprane (desflurane) and generic sevoflurane.

Asset turnover was slightly lower in 2012 as the acquisitions and capital expenditures to acquire assets were higher than the increase in sales turnover. When the expected synergies materialize, this ratio will rise.

Financial leverage has gone up by 13.62%. This can be alarming for the shareholders as it indicates higher financial risk and endangers their portion of return. The company’s debt rating was also downgraded by one notch from A+ to A, and its outlook was changed from stable to negative when the company decided to finance the acquisition of Gambro by raising a minimum of $3 million in debt. As a result, the company’s debt-to-equity ratio rose to 0.8 in 2012 from 0.66 in 2010. 

Innovation, internal growth and acquisitions have contributed to the company’s long-term growth. In 2012, the company spent $1.16 billion, or 8.1% of revenue, on research and development to enhance its existing product pipeline and to come up with new innovative medical devices. Through an active acquisition program, the company has invested billions to acquire a number of companies, products, and technologies to further drive growth.

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