Serial 13D-filer Daniel Loeb (Trades, Portfolio) defended shareholder activism in his July letter and moved on to his next target, Baxter International (BAX, Financial), on Tuesday.
The company of which Loeb’s Third Point purchased 37,925,000 shares – a 7% stake costing $1.52 billion – has already shaken itself up somewhat. It spun off its biopharmaceutical business, Baxalta (BXLT, Financial), on July 1, and is focusing on home, hospital and in-center therapies. Its board has also formed a working group to search for a new CEO, as its current chief executive, Bob Parkinson, 64, has spent 11 years at the company.
Loeb has already said in the related filing that he would vie to have a hand in “succession plans and corporate governance matters” and propose his own directors to Baxter’s board, in addition to Influencing operating strategies and performance.
“We will also continue to serve as an agent of change in extreme cases, when corporate boards are unable to make necessary management changes due to incompetence or unwillingness to take action,” Loeb wrote in Third Point’s July investor letter.
He further said that he had installed “visionary leaders” at other companies in his firm’s past, naming John Higgins of Ligand Pharmaceuticals Inc. (LGND, Financial), Marissa Mayer of Yahoo Inc. (YHOO, Financial) and Tad Smith of Sothebys (BID, Financial). In the past year, Ligand shares have gained 113%, Yahoo has gained 2.4% and Sothebys has gained 3%.
He added that he had long-term gains in mind for his investments, which “have been held for well over the one year threshold identified as offensive by the critics” and which involved “turnaround plans that would take years to come to fruition.”
In response to Third Point’s aggression, Baxter said on Wednesday:
Baxter maintains open communication with its shareholders and values constructive input toward enhancing value. Baxter has engaged in various discussions with representatives of Third Point and expects to continue a constructive dialogue.
Baxter’s Board and management team are committed to enhancing value for all Baxter shareholders. Baxter has a proven track record of taking action to create significant value and will continue to evaluate shareholder input, assess opportunities and make decisions to further achieve this important objective.
Financially, Baxter comes with a stake in its spinoff, which it planned to use to repurchase shares and pay into pensions. It also wanted to reduce debt in order to improve its borrowing position to pursue growth-oriented acquisitions, which Parkinson said in a conference call would be a key component of its growth strategy in the long-term future.
Aiming for “materially accelerating growth” post-spinoff, Baxter introduced a long-range plan in May, which focused on approximately 4% sales growth on a compounded annual basis through 2020 by increasing sales of existing products, launching of new products and expanding to new geographies. A new margin improvement strategy aimed for expansion of roughly 100 basis points annually – from 9% in the second half of 2015 to roughly 14% in 2020 – by launching new products, optimizing its portfolio and streamlining costs. The effects on the operating margin might not appear until after a short-term slump due to spinoff costs, the company said.
Baxter expects flat sales for full-year 2015 compared to 2014, primarily due to the impact of one of the newly availability generic version of one of its drugs, cyclophosphamide.
For the second quarter, Baxter reported a 6% year-over-year global sales decline to $3.9 billion, or a 3% increase excluding the impact of foreign currency. Sales in the U.S. grew 1%, while internationally they declined 12%. Net income was $332 million, or 60 cents per diluted share, versus $520 million, or 95 cents per diluted share in the same quarter a year ago.
The company’s annual rates of growth over the past five years were 8.1% for revenue, 5.5% for EBITDA and 6.4% for book value. Its share price grew about 54% in the five years leading up to the spinoff, and declined about 3% in the year leading up to the spinoff, trading $41.93 per share at Thurday’s close.
Baxter has a P/E of 9.1 – hovering hear a two-year low – a P/B ratio of 3.16 and P/S ratio of 1.39.
Of Gurus who have reported their portfolio updates, those who initiated investments in the second quarter were Ken Fisher (Trades, Portfolio) and Vanguard Health Care Fund (Trades, Portfolio). John Hussman (Trades, Portfolio) reduced his position 27.5%.
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