Baxter's European Licensing Deal

Recently, Baxter International (BAX - Analyst Report) inked a European licensing agreement with Oncova Therapeutics, Inc for the anti-cancer compound rigosertib. Per the agreement, Baxter has the right to commercialize rigosertib in the European Union as well as in other European nations.

Rigosertib is presently in a Phase III study for the diagnosis of an unusual hematologic malignancy termed Myelodysplastic Syndromes (MDS). Elementary results for the MDS study are expected in the second half of 2013. It is also under a Phase II/III study for pancreatic cancer.

According to statistics, MDS affects three out of 100,000 in the European population annually while pancreatic cancer is highly aggressive with low survival rates. With increasing mortality rates in Europe due to pancreatic cancer, rigosertib offers a significant commercial opportunity to Baxter.

Baxter’s innovative and extensive portfolio underpins its growth performance. Management believes that rigosertib complements the company’s existing portfolio. Baxter generates roughly 60% of its total revenues from the overseas market, with Eurpean operations contributing approximately 32% in 2011. The European licensing agreement underlines the company’s core strategy to expand its international operations.

Baxter has an extant $50 million equity investment with Oncova and it can engage in the development and commercialization of rigosertib at its discretion. The company will record its upfront payment of $50 million to Oncova as a special pre-tax in process research and development expenditure in the third quarter of 2012. Apart from sales milestones and royalties, Oncova could receive up to $515 million as pre-commercial development and regulatory milestones for the MDS and pancreatic cancer indications.

We derive comfort from the solid performance of most of Baxter’s operating platforms. Despite resilience in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about a slightly somber outlook for hospital spending and tightening of reimbursement. We also account for the unfavorable impact of foreign exchange translation and possible dilution associated with the company’s acquisitions of Baxa and Synovis.

Improved execution has lifted sentiment somewhat toward Baxter. It is a good bet for value investors willing to wait as fundamentals improve further. Among others, the company competes with Becton, Dickinson and Company(BDX - Analyst Report) in certain niches.

Baxter currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.