In paying about 26.5 billion Swedish krona, or roughly $4 billion, for the rights to privately held Gambro AB, Baxter is making the largest acquisition in its history and the most significant med tech buyout of 2012, hoping that a complementary portfolio of dialysis products the private equity-backed Swedish company will bring can establish it as the premiere entity in the burgeoning market for renal care devices.
"If they want to be a real player in dialysis, this deal had to be done," said Danielle Antalffy, an analyst covering Baxter at Leerink Swann LLC.
Indeed, for Deerfield, Ill.-based Baxter, the acquisition allows it to cover the expanding dialysis market more extensively in both home and hospital settings. Baxter already manufactures peritoneal dialysis systems, which help treat patients with end-stage renal disease, or ESRD. Gambro, meanwhile, offers products used in hemodialysis.
Peritoneal dialysis is a home alternative to hemodialysis, which is more costly and is typically performed by healthcare professionals in clinics and hospitals. Peritoneal dialysis uses the lining of the abdominal cavity and a solution to extract wastes and extra fluids from the body. Hemodialysis, meanwhile, uses a man-made membrane or dialyzer to filter wastes and remove excess fluid from the blood.
Though Baxter already manufactures hemodialysis products such as dialyzers, saline solutions and syringes, it does so on a limited basis.
"They were more of a niche player," said Morningstar Inc. analyst Karen Andersen, estimating that about 10% of the patient population utilizes peritoneal dialysis. "They weren't really working with the hospitals and clinics."
Enter Gambro, which Baxter believes will change that identity through a suite of hemodialysis products such as monitors and fluid overload treatment systems as well as with a pipeline of therapies for both chronic and acute patients.
Gambro's product portfolio brings in about $1.6 billion in sales annually. Baxter estimated that it can realize more than $300 million in annual synergies from the deal by 2017 due to the complementary nature of the two companies' respective portfolios.
"[Gambro] fills out their dialysis business, is accretive to their long-range plan and is a great use of [non-U.S.] cash, of which Baxter has quite a bit," said Antalffy, calling the target a "strategic and financial positive" for the buyer. "It's a little pricey for a slower-growing business, but the fact that they get to put their [non-U.S.] cash to use somewhat makes up for it."
Offshore cash accounts for more than two-thirds of Baxter's roughly $3 billion in cash, according to Antalffy.
Baxter is using $1 billion in cash and $3 billion in debt to finance the deal.
Andersen, meanwhile, estimated that the 12.5 times Ebitda Baxter is paying for Gambro is "slightly on the high side," but ultimately a fair price given the expected synergies.
Baxter is going full bore into renal care at a time when ESRD and dialysis treatments are increasing at a rate of between 5% to 6% annually across the globe due to an aging population, rising obesity levels, more prevalent cases of diabetes and hypertension and increased access to dialysis therapies in emerging markets, Baxter executives said Tuesday, Dec. 4, on a conference call.
"Gambro doesn't really have much exposure in these emerging markets," Andersen said. "They are poised to see really strong growth by using their geographic reach to filter Gambro's products through their own global [sales force]."
The deal marks the largest medical devices buyout of 2012 and is Baxter's first of the year following a busy 2011 in which it bought Synovis Life Technologies Inc. ($325 million), Baxa Corp. ($380 million) and Prism Pharmaceuticals Inc. ($338 million), according to The Deal Pipeline.
Baxter also signed a collaboration agreement with Momenta Pharmaceuticals Inc. in 2011 to develop biosimilars, which are generic biologic drugs. Baxter chairman and CEO Bob Parkinson noted on the call that the deals represent "an accelerated pace of business development activities" that Baxter has taken to use as a "plank" for growth.
As for Baxter's next potential target, Antalffy noted that Baxter has been getting more active in the oncology, and speculated that the company might look either there or further expand its presence in biosimilars.
Gambro has been owned by Swedish investment firms EQT and Investor AB since 2006. Gambro has a chronic-care business that treats patients, and an acute-care business treating those with acute renal failure who are in need of dialysis until their kidney begins functioning again.
The chronic-care business accounted for roughly 80% of its 2011 sales. But Rob Davis, the president of Baxter's medical products division, noted on the call that the higher-margin acute-care business is growing more rapidly.
Baxter's stock slumped to $64.92 during midday trading Tuesday, from a $65.80 Monday close.
Jeff Stute and Robbie Huffines of JPMorgan Chase & Co. joined with a Kirkland & Ellis LLP team led by partners Scott Falk and Roger D. Rhoten to represent Baxter.
Roger Johnson of Linklaters provided Gambro with legal counsel. Goldman Sachs & Co.'s Gregg Lemkau was its financial adviser.
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