In advance of the July 1 spin-off of Baxalta from Baxter International, executives from the companies have shared their vision, strategies and initiatives underway to drive product innovation and accelerated growth over the long-term. Each company has provided updates on its financial outlook, new product pipeline and growth prospects.
As separate, independent companies, both Baxter and Baxalta will remain focused in their respective markets, each with an established global presence. The businesses operate in distinct markets, and each possesses unique and compelling growth prospects, investment requirements and risk profiles. Both companies will have strong balance sheets and cash flows, and will benefit from enhanced financial flexibility and reduced complexity. This will allow each to prioritize and capitalize on unique opportunities presenting the highest growth potential within their respective portfolios.
As Baxter prepares for the spin-off, the company is focused on materially accelerating profitable growth. Baxter expects to grow sales approximately 4% on a compounded annual basis at constant currency rates through 2020, as a result of further penetration of existing products and therapies, expansion into new geographies and new product launches.
The company also has developed a comprehensive margin improvement strategy centered on launching new products, optimizing its portfolio and streamlining its cost structure, which will result in adjusted operating margin expansion of approximately 100 basis points annually, from approximately 9% in the second half of 2015 to approximately 14% by 2020. As a result, Baxter expects double-digit adjusted operating income growth from 2016 through 2020, and improvement in adjusted EBITDA (earnings before interest, tax, depreciation and amortization) margin from approximately 15% in the second half of 2015 to approximately 20% by 2020.
Baxter’s initial operating margin post-spin will be negatively impacted by stranded costs associated with the spin-off, pension expenses and operational investments. These will be offset in the near-term as part of Baxter’s broader margin expansion program.
Lastly, the company expects cash flow from operations to grow more than 12% annually and exceed $2 billion by 2020, and free cash flow to significantly increase to more than $1.1 billion by 2020. Baxter expects to launch more than 20 new products over the next several years, focused on improving clinical outcomes, lowering healthcare costs and enhancing patient convenience.
''The spin-off provides us with flexibility to bring our product portfolio to market more effectively and capitalize on global opportunities and emerging trends to address patient needs while enhancing profitability,'' said Robert L. Parkinson, Jr., chairman and CEO of Baxter. ''Healthcare providers are being tasked with delivering better care to greater numbers of patients in a more cost-effective manner. Baxter is a valued partner in addressing the challenges faced by governments, payers and healthcare providers around the world.''
As a stand-alone, global biopharmaceutical company, Baxalta will implement a more focused and agile business model to drive growth and enhance operational performance. The company plans to drive sustainable and profitable growth with its leading differentiated brands, new indications and product launches and personalized treatments for patients with rare and orphan diseases in three core therapeutic areas of focus: hematology, immunology and oncology.
Specifically, Baxalta expects to achieve sales growth of 6% to 8% on a constant currency basis, and growth in adjusted operating income of at least 8%, each on a compounded annual basis from 2016 through 2020. This growth is anticipated to enhance adjusted operating margin from approximately 29% in the second half of 2015 to approximately 30% to 31% in 2020, and adjusted EBITDA (earnings before interest, tax, depreciation and amortization) margin from approximately 33% in the second half of 2015 to 35% to 36% by 2020. In addition, the company expects to accelerate cash flow from operations to approximately $2.1 billion by 2020, reduce capital spending and significantly accelerate free cash flow to approximately $1.3 billion by 2020.
Ludwig Hantson, who currently is president of Baxter’s BioScience business and will become CEO for Baxalta upon the spin-off, said, ''This is an exciting time for Baxalta, as we have a solid foundation and strong momentum. Our transformation is well underway and our compelling strategy, clinical and scientific expertise, and financial strength will position us well to drive enhanced value for patients, customers and shareholders.”
The company is strengthening its leadership position in hematology with sustainable growth of ADVATE ([Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method] and FEIBA (an inhibitor therapy), advancing innovation with BAX 855 and other pipeline assets, and leveraging scientific expertise to accelerate the development of new therapies to treat rare blood disorders. In immunology, Baxalta expects to capitalize on its broad and differentiated IG portfolio with the successful launch of HYQVIA, a transformational therapy for the treatment of adults with primary immunodeficiency, while improving supply with the addition of flexible, cost-effective capacity.
Baxalta has implemented a new patient-centric R&D model, expects to launch 20 new products, which will contribute more than $2.5 billion in annual sales by 2020, and plans to further augment its pipeline through external partnerships and strategic acquisitions. The company is prioritizing R&D efforts around innovative candidates in its three core areas of focus, and recently acquired novel technologies in the field of immunology and hematology, including the acquisition of SuppreMol for immune and allergic diseases and AesRx for sickle cell disease.
In addition, the company will highlight the recently announced acquisition of the Oncaspar portfolio for leukemia, which is expected to close in the second half of 2015. The acquisition represents a strong strategic fit with Baxalta’s rapidly expanding oncology business and further accelerates the company’s innovation capabilities and commercial presence in meeting unmet needs with a targeted approach in the large and growing oncology market. The acquisition will also complement the company’s late-stage, partnered R&D programs that have successfully achieved certain regulatory and clinical milestones, including nal-iri (or MM-398) for pancreatic cancer and Pacritinib for myelofibrosis.
Baxter will receive approximately $4 billion through a cash dividend from Baxalta and will retain an equity stake in Baxalta of approximately 19.5%. The retained stake demonstrates Baxter’s confidence in Baxalta’s growth prospects and provides flexibility for Baxter’s capital structure. Baxter plans to use the retained stake and the proceeds from the dividend to reduce debt and make contributions to the company’s domestic pension plan. The company also will evaluate potential stock-for-stock exchanges once its targeted leverage ratio is achieved. The monetization of the company’s retained stake in Baxalta is expected to be tax-free when used for these purposes and executed within 18 months of the separation.
The spinoff will create two well-capitalized, independent companies with strong balance sheets, investment grade profiles and disciplined approaches to capital allocation, each with the financial flexibility to balance reinvestment in the business with returning value to shareholders in the form of dividends and share repurchases. Following the spin-off, Baxter is targeting a dividend payout ratio of approximately 35% of adjusted net income, while Baxalta is targeting a payout ratio to its shareholders of approximately 15% of adjusted net income.