MOODY'S CONFIRMS RATINGS OF BAXTER INTERNATIONAL, INC.; SR UNSECURED AT A3 AND P-2 FOR COMMERCIAL PAPER
New York, 7/11/1996 -- Moody's Investors Service confirmed the A3 ratings on the senior unsecured debt of Baxter International Inc. and confirmed the company's rating for commercial paper. The confirmations recognize that Baxter will be better focused on expanding its medical technology businesses after the proposed spinoff of its hospital supply distribution business, Allegiance Corporation. However, after the spinoff, Baxter will have higher business risk than the former combined company. This higher risk will be mitigated by Baxter's broad product array, its strong competitive position, stable cash flows from intravenous systems and international hospitals, and annuity-like revenue streams from core renal and biotechnology products. This ends the rating review on Baxter International Inc. begun on November 28, 1995.
Even after the spinoff, Baxter's debt-service measurements will be strong. However, Baxter will retain the financial obligations related to litigation on breast implants, Factor VII, and Gammagard. Furthermore, Moody's expects that Baxter will pursue acquisitions to strengthen its market position and continue repurchasing common stock to enhance shareholder value.
Baxter International Inc.--notes, medium-term notes, debentures, and industrial revenue bonds at A3; shelf registration at (P)A3.
Baxter Travenol Finance Corp.--Euronotes at A3.
American Hospital Supply Corp.--industrial revenue bonds at A3.
Ratings remaining under review:
Baxter International Inc.--The following industrial revenue bonds to be assumed by Allegiance Corporation: City of Grand Prairie, Texas, 2012, and City of Eaton, Ohio, 2012.
Baxter will retain the medical-technology (biotechnology, renal therapy, cardiovascular medicine), intravenous systems, and international hospital distribution divisions. The company will continue to invest substantially to develop new products and technologies. Strong cash flows from biotechnology, renal, and in particular, intravenous systems as well as international hospital, should support increasing investment in research and development, manufacturing, and international expansion. Joint ventures and partnering with other healthcare product companies will extend its investment scope.
Biotechnology revenues and earnings have a high degree of stability stemming from Baxter's diverse array of leading plasma products, therapies, and blood collection and separation products. Baxter's HemAssist blood substitute began clinical trials in the United States and may be a significant product in a few years. Similarly, Baxter is the worldwide market leader in products for peritoneal dialysis. It maintains a healthy pipeline of product improvements to sustain its dominance, and should benefit from increasing use of peritoneal dialysis (17% of treatments worldwide) to treat end-stage renal disease. The company's investment in Nextran gives it a foothold in xenotransplant technology. In cardiovascular medicine, a much smaller division with lower profit contribution, Baxter has shifted its focus to treating late-stage cardiovascular disease requiring surgical treatment. The company is the leading provider of tissue valves and annular repair rings, oxygenators, catheters, and most recently, perfusion services. Novacor, a left ventricular assist device, is being tested as an interim means to support patients awaiting suitable hearts for transplant.
Baxter will spin off its $5 billion hospital supply company by the end of the year and receive a $1.2 billion dividend from Allegiance in exchange for Baxter retaining the liability associated with breast implant litigation. Though still unsettled, recent favorable trial results and Baxter's expectation of high insurance recoveries reduce the potential for additional significant charges over the near term. Similarly, other litigation, such as that related to Factor VIII appears close to resolution. The company, as does the industry, remains vulnerable to product liability suits. Absent legislative action on tort reform, the industry may have higher retentions of risk or encounter greater difficulty in purchasing adequate liability insurance on new products.
The company will also retain nearly all of the debt of former Baxter. Nominal leverage will be moderate at about 44% at year end and fixed-charge coverage should be strong at about seven times. However, event risk remains relatively high for Baxter. Although Baxter should enjoy double-digit sales and earnings growth, the company will likely pursue acquisitions of technologies or products to expand its product portfolio and market presence. Absent such significant investment opportunities, the company may accelerate its share repurchase program to return value to shareholders.
Baxter International, Inc., headquartered in Deerfield, Illinois, is a leading medical technology and hospital supply distribution company.
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