UPDATE: July 30, 2021: Hillrom CEO John Groetelaars declined to respond to questions about the M&A reports on a Friday quarterly investor call. He did highlight the growing importance of connected care to its business, the focus area of Baxter's current M&A strategy.

Baxter CEO Joe Almeida on Thursday laid out his current thinking on M&A emphasizing that Baxter is "doing a lot in connected health and we need to make sure that we have the ability to deploy capital in that area." A Baird analyst said Almeida's remarks "sure sounded to us like a non-specific defense of a Hillrom deal," while observing that Hillrom's Friday earnings slides included for the first time a diagram of the company’s "ongoing mix shift toward connected care solutions."

Groetelaars said 30% of Hillrom's revenue is from connected care and the company wants to grow that to 80%. Among analyst objections to a potential deal is Hillrom's 2-3% weighted average market growth rate. However, Hillrom on Friday reported its post-COVID-19 WAMGR is 5% in what the Baird analyst called a new and "curious" upward adjustment.

Dive Brief:

• Baxter on Thursday reported 14% second-quarter sales growth on a reported basis, hitting the bottom end of its target range. That growth was supported by a 48% jump in advanced surgery sales as U.S. procedures rose to at or slightly above pre-pandemic levels. 
• Still, revenue from renal care, the largest unit at Baxter, was flat on a constant currency basis. CFO Jay Saccaro said the renal business in the second quarter grew 4% and that internationally there was a decline, which the company does not expect to continue in the second half of the year.
• Baxter released results the day after Bloomberg and The Wall Street Journal reported it's in early talks to buy Hillrom. A Baird analyst expressed surprise though noted Hillrom could give Baxter "a more diversified portfolio to call on hospital customers with." However, a J.P. Morgan analyst wrote that while Hillrom would be accretive, with lower-end market growth, it is "not the deal we want to see."

Dive Insight:

Baxter is less exposed to elective procedures than some companies active in the medtech space but it still took a hit when the pandemic disrupted healthcare in the second quarter of 2020. The declines seen last year created an easy comparison for Baxter in the second quarter.

After seeing advanced surgery sales jump, Baxter estimated that "U.S. surgical procedures were at or slightly above pre-COVID levels" in the second quarter. However, other parts of the business are still returning to normal.

Baxter reported 12% growth in medication delivery, its second biggest division, on the back of a rise in hospital admissions compared to the second quarter of 2020. Even so, Baxter estimated that "U.S. hospital admissions were down high single digits compared to pre-COVID levels."

Baxter results came a day after Bloomberg and The Wall Street Journal reported it bid to acquire Hillrom for $144 a share, which would value the company at approximately $9.6 billion. Hillrom, a manufacturer of medical equipment, reportedly rejected the offer as too low but early talks are ongoing and Baxter could return with an improved offer, the reports said.

News of a potential deal took the Baird analyst by surprise. 

“Not a deal we would have been likely to write up on a list of likely deals for our coverage. We do not have coverage of Baxter or know the portfolio terribly well. But… initial gut was, huh?" the analyst wrote in a note to investors. "Would seem to largely be a platform extension play for Baxter. Perhaps there would be some commercial synergy opportunity for Baxter in having a more diversified portfolio to call on hospital customers with."

The Baird analyst compared the $144-a-share offer to the multiples paid in other takeovers in the sector and found Baxter's bid is below average. Based on the analysis, the analyst said it is not surprising to hear that Hillrom reportedly rejected the initial offer, adding that "there is room for the multiple to flex higher."

Baxter has been looking for a meaningful M&A target since Joe Almeida took over as CEO in January 2016, according to the J.P. Morgan analyst, who said the news reports weren't a surprise and that while there are "synergies" with Hillrom there is not an overwhelming strategic benefit.

"Financially the deal makes sense to us, strategically we could make the case, but it isn’t rock solid, but what gives us some pause is the 2-3% Hillrom [weighted average market growth rate] and lack of meaningful organic sales growth acceleration," the analyst wrote. "Ideally we'd like a deal to raise Baxter's growth profile, beyond just improving margins, and we don't think this is the asset for that job."

None of the analysts on Thursday's investor call asked Almeida about a potential Hillrom deal. However, the CEO laid out his current thinking on Baxter's M&A strategy. Size of deals is a "secondary" consideration to "strategic fit" for Baxter, he told investors.

"We look at the areas of growth for the future and what is going to make a difference" in five to 10 years, Almeida said. "Sometimes we get attached to growth rates and where things are. We've got to look where things are going. Baxter is doing a lot in connected health and we need to make sure that we have the ability to deploy capital in that area as well as adjacencies."

Baxter on Thursday announced it has completed the acquisition of certain assets related to CryoLife's PerClot polysaccharide hemostatic system for up to $60.8 million, including $25 million paid upfront. The company said the move is meant to expand its advanced surgery portfolio.

PerClot, an adjunctive hemostatic device used to control bleeding during multiple open and laparoscopic surgical procedures, is sold in more than 35 countries. However, it is not currently cleared for sale in the U.S. 

With reported growth hitting the bottom end of its 14% to 15% range, Baxter trimmed its forecast for the full year. Baxter now expects reported growth of 8%, the bottom end of the range it shared three months ago. The company lowered its earnings per share range by a few cents, too.

Greg Slabodkin contributed reporting.