Baxter International (NYSE: BAX) Industry: Health Care $4.31 $4.52 $4.86. Gross Margin 2012 est 51.5% PEG (Forward ) 1.51

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1 Rating: BUY Price Target: $86.46 Close 11/14/2012 Price $65.04 Shares O/S (mm) Outstanding (mm) Market Cap (bn) $35.73 Source: Google Finance Basic Information Beta.7 TEV/EBITDA 9.5 Trailing P/E 15.0 WACC 5.5% TEV/Revenues 2.6 Forward P/E (NTM) ROC 16.5% Gross Margin 2012 est 51.5% PEG (Forward ) 1.51 Source: Value Line, Capital IQ Baxter International (NYSE: BAX) Industry: Health Care Actual Revenue (mm) Revenue Growth Gross Margin % EBIT Margin % EPS Growth % Consensus EPS Forecast $13.9 $14.2 $14.8 $15.6 $16.4 $17.2 $18.0 8% 2% 4% 5% 5% 5% 5% 51% 52% 52% 52% 52% 53% 53% 23% 23% 23% 24% 24% 24% 25% 8% 5% 7% 8% 8% 9% 9% $4.31 $4.52 $4.86 BCF EPS Est. $4.31 $4.53 $4.85 $5.22 $5.66 $6.17 $6.71 Source: Company website, Thompson One, BCF estimates Company Overview Baxter International Inc. (NYSE:BAX), through its subsidiaries, develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. Baxter had 2011 sales of $13.9 billion and has approximately 48,500 employees. Source: Baxter.com Analysts BCF Healthcare Team: Maureen Lundy Dan Sisk Sarute Limapichat Investment Thesis and Valuation Key Updates since September Report: We are updating our coverage on with an upgrade to a BUY rating and a price target of $ This valuation is the average share price derived from three valuation techniques, DCF, dividend discount model and company comps analysis, which are each displayed later in this report. These models were updated using information provided by the Company during their 2012 investor conference on October 9. Key updates follow: - - the company is negotiating a long- term partnership agreement with the country of Brazil to be the exclusive provider of recombinant VIII in treating patients with hemophelia A. Brazil is the third largest hemophelia market in the world with approx. 10,000 patients to be converted from on- demand to prophylaxis. The opportunity is material for the company and further details will be available when it is finalized. The Company plans to request a meeting with the FDA before the end of the year on HyQ to discuss new preclinical data and next steps. BCF Healthcare Team, 10/26/2012 1/14

2 - - - The company will be constrained on plasma capacity through 2013 with volume improving in 2014 as certain facilities go online. The supply constraints have allowed the company to strategically focus its sales mix more on the profitable US business. A major opportunity for the company is to convert patients from on- demand use to prophylactic use. This provides a much better quality of life for the patient and results in 2-3 times the volume of product per customer for Baxter. Currently only approximately 15% of adults are on prophylactic use. The return of Octopharma to the market has not been an issue for the company due to their inferior product (5% formulation vs. Baxter s 10%) and the strong demand In the US. Baxter seems to be the company that does it all. The Company has an extremely diverse product pipeline that is as strong now as it has ever been in the Company s history. R&D investment levels have been growing steadily and are forecasted to reach record levels in The Company had a very successful 2011 with record sales and earnings, and very strong cash flow generation even after share repurchases and dividends. The Company has been returning capital to shareholders aggressively in the way of share repurchase and dividend increases. Strategic acquisitions of companies such as Baxa and Synovis have been executed to drive further growth into the Company s existing markets. Specific Investment Thesis: Alzheimer clinical trial The Company is conducting a primary Phase III trial using GammaGuard Liquid as an 18- month therapy for the chronic treatment of Alzheimer s disease. This trial succeeds the Phase II trial where positive indications were achieved. The Company is also conducting a second confirmatory Phase III trial this year. The first Phase III trial is expected to be complete at the end of Positive data from this trial could be a powerful catalyst to move this stock in a positive direction. There are over 5 million Alzheimer patients in the US, making the earnings potential for the Company significant. HyQ Antibody therapy This is an immunoglobulin product for use in patients with primary immune (PID). It offers substantial benefits to users in its three/four week dosing schedule, single site injection and ability to be self- administered. Its approval and rollout could be a significant catalyst for the Company. The product was submitted for FDA approval at the end of 2011 but the FDA has asked for further review thus the launch has been delayed indefinitely. Management is hoping for a meeting by the end of the year with the FDA to outline progress and clarify next steps. Strong product pipeline In addition to the Alzheimers and HyQ potential products, the Company has many other clinical trials ongoing that have the potential to drive growth in hemophelia, regenerative medicine and immune deficiency. In addition, they continue their commitment to invest in R&D at record levels. The charts below outline the significant R&D initiatives: BCF Healthcare Team, 10/26/2012 2/14

3 source: Baxter.com BCF Healthcare Team, 10/26/2012 3/14

4 source: Baxer.com Penetration and growth in international markets Currently, 60% of the Company s revenues are from outside of the United States, and within that 20% are in emerging markets. The Company is striving to increase their emerging market exposure to 30% over time. Emerging markets represent a significant opportunity for Baxter care levels improve and world- class therapies are more readily available. Specifically, the Company plans expansion to China in the next year and in Russia in Strong financial indications The Company is trading at a discount to all three valuation metrics used to evaluate the stock as outlined below. In addition, Baxter is favorable to the mean of its competitors on most key metrics such as P/E, PEG ratio, ROE, ROC. Shareholder friendly company The Company has been taking various actions to reward shareholders in recent years. From the Company repurchased 83 million shares and have committed $1 billion of 2012 cash flow for share repurchase. Dividends increased by 8%, 7% and 12% In 2011, 2010 and 2009 respectively. The current dividend yield is 2.95%. BCF Healthcare Team, 10/26/2012 4/14

5 Risks to Investment Thesis: While the Company has many positive attributes as it relates to investors, there are factors in the market and with competitors that could adversely affect our forecast. Investment Risks Competition in Plasma and other markets Grifolds, a competitor, recently acquired Talecris with the intention of increasing market share in the plasma market. Their stock has more than doubled this year, implying that they are gaining market share, presumably at the expense of Baxter. CSL Behring in Australia is another viable competitor that is making inroads in plasma therapy. Another potential emerging threat is in the Recombinate VIII space with Biogen entering the market potentially in 2014 with a new product to compete with Baxter s ADVATE. ADVATE is the currently the gold standard for prophylactic treatment of hemophelia A in adults and kids. Loss of market share could be problematic for Baxter as this business is very high margin and contributes significantly to profits. Foreign exchange exposure in emerging markets The Company has 20% of its revenues in emerging markets currently, and has a goal to increase that further. Emerging markets bring tremendous market share opportunity but with the volatile currency rates foreign exchange exposure is inevitable. The Company has some natural hedges to this through manufacturing facilities in those markets. The issue of foreign exchange exposure remains significant, with $1 billion in profits exposed in 2012 per management. Potential disruption at LA facility Plans have been announced to build a new plasma facility in Georgia which would come online in However, the Company intends to extend the life of the LA facility for several more years and will have to take the facility offline for several months in order to accomplish this refurbishment. This could cause backlogs and supply interruption issues, impacting profits. Octopharma, key competitor re- entering market Octopharma is a competitor of Baxter in the GammaGuard immune deficiency market. Their product was recalled during 2010 and the company did not have a presence in the market for eighteen months, allowing Baxter to increase market share. Ocotpharma re- entered the market in the fourth quarter of 2011 and could continue to take back market share from Baxter. European austerity could cause softness in markets European austerity could mean fewer surgical procedures and softer markets, in addition to pricing pressures by the governments implementing austerity. HyQ launch delayed by FDA This product was submitted for FDA approval in the fourth quarter of 2011 and Baxter was hoping to slowly roll it out during The FDA recently came back requesting additional studies and open forums on the product and so the launch is delayed indefinitely. The impact to the forecast in 2012 is immaterial, but profits in the forecast for 2013 and beyond could be in jeopardy. BCF Healthcare Team, 10/26/2012 5/14

6 BUSINESS DESCRIPTION Business Overview Baxter International Inc. (NYSE:BAX), through its subsidiaries, develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global, diversified healthcare company, Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide. Baxter had 2011 sales of $13.9 billion and has approximately 48,500 employees. The Company is more than 80 years old. RELATIVE STOCK PERFORMANCE-5 YEARS Below is a chart which compares Baxer (BAX) to the S&P 500 for the last 5 years Source: CAP IQ 30.00% 20.00% 10.00% 0.00% % % % % % % Baxter International Inc. (NYSE:BAX) - Monthly Share Pricing SWOT ANALYSIS Below is a strengths, weaknesses, opportunities and threats analysis. BCF Healthcare Team, 10/26/2012 6/14

7 Strengths strong R&D spending clinical pipeline strong debt levels low, raings high strong profits and cash flow dividend increases significant share buybacks Weaknesses - pump recalls and safety concerns with heparin and flu vaccines, QA issues? - subject to US Healthcare regulaions and FDA approval process - subject to goverment price caps - Opportuniies - Emerging market revenues growing faster than the rest of the Company - Alzheimers Phase III clinincal trial results in Acquisiions of Baxa and Synovis improving market share - HyQ product expanding from acute to chronic space Threats - Profits exposed to FX volaility - European austerity market somness - Octopharma re- entering market and compeing with GammaGuard - FDA reviewing regulatory process for approval of medical devices Valuation Price Target We are revising coverage on with a BUY rating and a price target of $ This valuation is based on the average of three valuation techniques implemented, DCF, dividend discount model and company comps. The data was updated on November 14, 2012 following analysis of the Baxter Investor Conference on October 9, 2012 and the third quarter 2012 results. The valuation model shows 33% upside from where the stock is currently trading, which does not include a dividend yield just below 3%. Conclusion The current market price for BAX is below each of the valuation methods of fair value employed, with a potential 33% upside, not including a dividend yield just below 3%. The company has a near- term catalyst with the Alzheimer s Phase III trail data coming out potentially by the end of We believe it is time to take a position in this company. BCF Healthcare Team, 10/26/2012 7/14

8 <Ε BABSON Appendix I Long Range P&L Forecast BAXTER P&L and EPS Forecast Actual Estimates > For the Fiscal Period Ending Revenues $13,893 $14,199 $14,838 $15,579 $16,358 $17,176 $18,035 Growth % 8% 2% 4% 5% 5% 5% 5% COGS Gross Margin Gross Margin % 51.4% 51.5% 52.0% 52.2% 52.4% 52.7% 53.0% SG&A % of Sales 21.1% 21.4% 21.4% 21.3% 21.2% 21.1% 21.0% R&D % of Sales 6.8% 7.1% 7.2% 7.2% 7.2% 7.2% 7.2% Other( Income)/Expense EBIT $3,237 $3,312 $3,474 $3,695 $3,929 $4,194 $4,469 EBIT % 23.3% 23.3% 23.4% 23.7% 24.0% 24.4% 24.8% Interest Expense Tax Expense Net Income $2,503 $2,513 $2,674 $2,820 $3,002 $3,209 $3,423 NI Attributable to Baxter $2,471 Net Diluted Shares Diluted EPS $4.31 $4.53 $4.85 $5.22 $5.66 $6.17 $6.71 Growth % 8% 5% 7% 8% 8% 9% 9% Source: BCF estimates, Company information BCF Healthcare Team, 10/26/2012 8/14

9 Appendix II DCF Analysis (WACC=5.5%, TV at 16X 2017 EBIT After tax) CF Projections Excl Special Items <Ε Actual Estimates > For the Fiscal Period Ending Termin Value EBIT $3,237 $3,312 $3,474 $3,695 $3,929 $4,194 $4,469 Depreciation and Amortization Incr (Decr) in Working Cap CAPEX Cash Tax (65% tax expense) Stock Comp (est 4% growth/yr) Free Cash Flow to Firm $2,025 $2,011 $1,910 $2,057 $2,197 $2,406 $2,553 $56,0 Discount factor Disc FCF $2,011 $1,811 $1,848 $1,871 $1,942 $1,953 $40,6 Total PV cash $52,094.7 total debt -cash $2, Net to equity $49,133.7 Diluted Shares Price/share $88.53 Source: BCF estimates, company info BCF Healthcare Team, 10/26/2012 9/14

10 Appendix III Company Comps Valuation Analysis (Note these were NOT updated since the September, 2012 report) COMPANY COMPS source: CAP IQ For Company P/E For PEG Ent Val/ Ent Val/ Last 12 Months Current Div Mkt Ratio Rev EBITDA ROC% ROE% ROA% CAGR% % Cap Abbott Labs % $108.8 Amgen % $62.9 Biogen N/A $36.6 Bristol- Myers % $55.2 Celgene N/A $33.2 Eli Lilly & Co % $51.9 Gilead Sciences N/A $50.8 Merck & Co % $135.6 Pfizer % $180.5 Average % $79.5 Baxter % $33.3 Conclusions from COMPANY COMPS analysis: 1. Baxter is trading at a forward PE lower than the mean of its peers and is the second lowest of its peers 2. Baxter's PEG ratio is lower than the mean of its peers, only three of its peers have lower ratios 3. Enterprise Value / Revenues and EBITDA metrics are favorable to the average of Baxter's peers 4. ROC/ROA/ROE percentages are all favorable to the mean of Baxter's peers 5. Baxter 3 year CAGR is below the mean its peers, some outliers skew the mean 6. Baxter is less than half the size of the average of its peers. Given these metrics and others such as a zero net debt, product pipeline and potential for int'l growth, if BAX can execute on its product pipeline that it could trade at 16X est 2012 diluted EPS of $4.53 This would indicate a stock price of $72.48/share. Source: CAP IQ, BCF analysis 3 Yr Rev BCF Healthcare Team, 10/26/ /14

11 Appendix IV- Dividend Discount Valuation Model and Overall Valuation Summary DIVIDEND DISCOUNT MODEL Dividend $1.80 Cost of equity 6.33% Dividend growth rate 3.60% 4.50% 5.00% Share value $65.93 $98.36 $ Conclusion: Stock is undervalued at dividend growth rates of 3.6% and above (up to cost of equity). This is conservative as dividend growth rates have historically been higher than cost of equity. Source: BCF estimates, company information Valuation summary: DCF $88.53 DDM $98.36 Compco $72.48 Average $86.46 BAX 11/14/12 $65.04 BCF Healthcare Team, 10/26/ /14

12 Appendix V- Analyst Recommendations and Disclosures WALL STREET ANALYST RECOMMENDATION TREND Analysts Recommendations current 1 Month Ago 3 Months Ago BUY OVERWEIGHT HOLD UNDERWEIGHT SELL MEAN OVERWEIGHT OVERWEIGHT OVERWEIGHT Source: Google Finance IMPORTANT DISCLOSURE Babson College Fund The Babson College Fund (BCF) is an academic program in which selected students manage a portion of the Babson College endowment. The program seeks to provide a rich educational experience through the development of investment research skills and the acquisition of equity analysis and portfolio management experience. Please visit for more information. Analyst Contact Information Maureen Lundy mlundy@babson.edu Dan Sisk dsisk1@babson.edu Sarute Limapichat slimapichat1@babson.edu Definition of Ratings BUY: Expected to outperform the S&P 500 Healthcare Sector Fund (HCX), producing above- average returns. HOLD: Expected to perform in line with the S&P 500 Healthcare Sector Fund (HCX), producing average returns. SELL: Expected to underperform the S&P 500 Healthcare Sector Fund (HCX), producing below- average returns. BCF Healthcare Team, 10/26/ /14

13 Appendix VI-References References 1. BCF Estimates 2. Company website 3. Company SEC filings, press releases and conference call script 4. CapitalIQ 5. Bloomberg 6. Discussion with Junaid Husain, Dougherty & Co. who follows the company 7. Value Line BCF Healthcare Team, 10/26/ /14

14 BABSON BCF Healthcare Team, 10/26/ /14