Dive Brief:

• Baxter beat analyst estimates of its fourth quarter performance, posting revenue of $2.8 billion despite the continued sluggishness of its key medication delivery business. Fourth quarter sales at the medication delivery division fell 2% but growth elsewhere in the business, notably the advanced surgery unit, enabled Baxter to grow 5% overall.

• During 2018, Baxter spent $6 million updating its quality systems and product labeling in perpetration of forthcoming European Union medical device regulations set to go into effect in 2020. 

• The medication delivery has stumbled since being disrupted by Hurricane Maria in 2017 but Baxter expects to get back on track in 2019, leading it to forecast 6% sales growth for the year.

Dive Insight:

Going into the fourth quarter, analysts expected Baxter to post revenues of $2.8 billion and earnings per share of $0.73. Baxter met the revenue forecast and eased past the earnings target, coming in at $0.78, an increase of 22% over the fourth quarter of 2017.

The positive headline figures hide patchy performance across Baxter's six business units. As in the third quarter, sales at the medication delivery unit, which sells products such as small IV bags, fell in the most recent financials. The 2% dip on a reported basis resulted in the unit ending down 1% for the year.

Baxter had expected the medication delivery unit to recover once it resumed full production at the hurricane-affected plants in Puerto Rico earlier in 2018. But in October Baxter CEO José Almeida said the fallout from the hurricane had “fundamentally shifted” the dynamics of the IV bag market. Almeida and his colleagues spent the fourth quarter trying to shift the market back in Baxter’s favor.

"Our market share is stable ... and we have some opportunities," Almeida said on the fourth quarter conference call with investors. "Going forward we continue to expect these business to grow in line {with the market]."

Baxter thinks inventory destocking at distributors is now complete, removing one headwind, and CFO James Saccaro said efforts to regain ground lost following the hurricane "are on track." To further the recovery effort, Baxter has hired Heather Knight as general manager of its U.S. hospital business.

While medication delivery is still feeling the effects of the hurricane and suffering from problems including long pump sales cycles, other parts of Baxter’s business are performing better. Renal care, Baxter’s biggest unit, posted 1% growth, leaving it up 5% for the year. U.S. patient volumes in the fourth quarter increased by high single digits.

Baxter’s advanced surgery unit was the fastest growing division in the quarter, although the lion’s share of its 15% reported rise came from acquisitions. On an operational basis the unit, which sells devices and biologics used in surgical procedures, grew 5%. The business ended up 13% for the year on a reported basis.

Looking forward, Baxter expects medication delivery to grow 6% in 2019. If medication delivery hits that target, it will be one of Baxter’s faster growing business this year but performance will be lumpy. Baxter expects sales to fall in the first quarter due to the tough comparison to early 2018, and then grow in the back half of 2019 as the comparison becomes easier.

To drive long-term growth, Baxter is "very aggressively" looking for takeover targets, Almeida said. In describing the type of deals Baxter is pursuing, Almeida said "size is not a priority." Rather, Baxter wants businesses that are adjacent and augmentative to its existing operations.