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By Karen Andersen, CFA | 05-21-2015 09:00 AM

Baxter's Spin-Off Strategy Is Promising

Although 2015 may be rocky, both Baxter and Baxalta should see significant margin expansion and growth in the long term, says Morningstar's Karen Andersen.

Karen Andersen: Baxter (BAX) is a diversified health-care company that currently holds a 4-star rating and is trading at about a 15% discount to our fair value estimate.

2015 is a transitional year for the company in many ways. As a global company, it has more than half of its sales outside the U.S., so it is seeing significant currency headwinds this year from the strong dollar. It is also losing share for a very profitable cancer drug due to some new competition. Most importantly, though, investors are really busy trying to think about the future of the new Baxter, as it is planning to spin off its bioscience arm, Baxalta, in July.

We think both new firms will continue to have economic moats. The new Baxter sees cost advantages as it is part of many global medical-products markets that serve hospitals, and it's one of the two largest dialysis-products firms in the world. Baxalta is in the process of launching several new hemophilia therapies to defend its growth, as key drug Advate is starting to see new competition. Baxalta is also one of three firms that dominate the global plasma business, which we think has very steep barriers to entry.

While 2015 looks like a rocky year for both sides of the business, we think the spin-off strategy will give each new firm the ability to focus on key areas of growth, which will provide the opportunity for significant margin expansion and double-digit growth at the new Baxter and continued high-single-digit growth for Baxalta. 

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