September 3, 2021

Breakingviews: Baxter’s $10.5 bln deal is preventative medicine

by Breakingviews.

In business as in medicine, preventing an ailment can be better than curing it. Baxter International’s $10.5 billion deal for Hill-Rom, a maker of “connected” hospital beds, is a little bit about growing revenue, but more about protecting the medical products company’s existing level of health, in the face of increasingly powerful hospitals and pressures to cut medical costs.

Baxter makes everything from dialysis machines to prefilled saline bags, and expects sales to expand roughly 3% a year. Hill-Rom should grow slightly faster, over 5% annually, because its kit is helpful in more technical gear like patient monitoring systems. Baxter Chief Executive Jose Almeida’s plan is to sell Hill-Rom’s wares to its own more international clientele and cut $250 million of costs a year in the process.

If the extra sales don’t come, the 26% premium will look too high. Hill-Rom is costing $12.4 billion including debt. Analysts expect $627 million of operating profit in the fiscal year that ends September 2023, according to Refinitiv. Add those cost cuts as if they all will come through, and apply tax, and the return on investment is around 6%.

Even that sickly result could be better than the alternative, though. Hospitals, which are big customers for companies like Baxter, are growing their market power. In the United States, 70% of metro areas in the United States had highly concentrated hospital markets in 2017, according to the Health Care Cost Institute. This figure is increasing over time.

A larger firm might be better able to hold its own when big hospitals demand price concessions – spurred on by the government and insurers doing the same to them. It helps that Hill-Rom’s beds with real-time incontinence detectors, say, are less of a commodity than Baxter’s saline bags, and remote monitoring can help move patients from costly hospital wards to their own homes.

Investors seem to see the deal for what it is. The two companies’ combined market value on Thursday morning was around $50 billion, pretty much the same as what it was before their share prices started moving in July in anticipation of a merger. If the goal of preventative medicine is to at least keep things as they are, Baxter has done its job.

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