Executive Summary / Key Takeaways

• Baxter International is undergoing a significant strategic transformation, streamlining its portfolio through major divestitures and implementing a new verticalized operating model to enhance agility and focus.
• The company faces near-term operational challenges, particularly with the Novum IQ Large Volume Pump (LVP) recall and ongoing IV fluid conservation, impacting sales and profitability guidance for late 2025.
• A core strategic priority is strengthening the balance sheet, evidenced by substantial debt repayments post-divestitures and a planned reduction in the quarterly dividend to $0.01 per share starting January 2026, aimed at accelerating deleveraging to a 3x net debt-to-EBITDA target by the end of 2026.
• New CEO Andrew Hider is driving a culture of continuous improvement and enterprise-wide efficiency through the "Baxter GPS" (Growth and Performance System), alongside continued investment in customer-inspired innovation across its Medical Products & Therapies, Healthcare Systems & Technologies, and Pharmaceuticals segments.
• Despite headwinds, Baxter's medically essential product portfolio, strong market positioning in areas like Advanced Surgery and Care & Connectivity Solutions, and commitment to technological differentiation provide a foundation for long-term value creation.

A Transformed Enterprise: Setting the Stage for Growth

Baxter International Inc. ($BAX), a global medtech leader incorporated in 1931, stands at a pivotal juncture, having undergone a profound strategic transformation to sharpen its focus and unlock long-term value. The company's core business revolves around providing essential healthcare products across three primary segments: Medical Products & Therapies (MPT), Healthcare Systems & Technologies (HST), and Pharmaceuticals. This portfolio, spanning sterile IV solutions, infusion systems, surgical products, patient monitoring, and specialty injectables, underpins Baxter's critical role in healthcare delivery, touching millions of patients annually.

The strategic narrative for Baxter is one of deliberate portfolio optimization and operational streamlining. Following the implementation of a new verticalized operating model in the third quarter of 2023, the company executed two significant divestitures: the BioPharma Solutions (BPS) business in September 2023 for $3.96 billion, and the Kidney Care business (now Vantive Health LLC) in January 2025 for $3.80 billion. These actions were designed to create a more agile and focused enterprise, better positioned to accelerate innovation and drive profitable growth.

Baxter's competitive landscape is dynamic, with key rivals including Fresenius Medical Care AG & Co. KGaA (FMS) in renal care, Becton, Dickinson and Company (BDX) in medical devices and injection systems, Medtronic plc (MDT) in medical technology, and Abbott Laboratories (ABT) across diagnostics, nutrition, and devices. Baxter differentiates itself through its diversified offerings and integrated solutions, particularly in hospital environments. For instance, its infusion pumps and drug reconstitution devices offer integrated solutions for hospital settings, potentially leading to greater efficiency in patient monitoring compared to BDX's more device-focused approach. In renal therapies, Baxter's continuous renal replacement systems provide tailored solutions for intensive care, offering qualitatively better performance and efficiency in patient outcomes compared to MDT's implant-focused strategies. While Baxter demonstrates solid operational execution and stable profitability, it may lag some competitors in innovation speed for certain diagnostic tools or chronic condition technologies. The company's extensive global distribution network is a significant competitive advantage, enhancing customer access and generating recurring revenue, which helps counter the specialized dominance of players like FMS.

Technological Edge and Innovation Roadmap

Technological differentiation is a cornerstone of Baxter's strategy, particularly evident in its infusion systems and connected care solutions. The company's Novum IQ infusion pump platform, launched in 2024, represents a significant leap in infusion therapy. This platform, developed internally, integrates advanced hardware, software, and a digital platform, offering smarter and more sophisticated capabilities, including enhanced EMR interoperability. The tangible benefits for customers include improved workflow efficiency and more personalized patient care, addressing a market where many existing pumps are over a decade old. The Novum IQ platform has already demonstrated strong market acceptance, capturing multiple points of market share in 2024, with expectations for continued competitive gains in 2025. This success is crucial as it not only generates revenue from hardware and software but also drives consistent, high-margin consumable revenue over the pump's lifespan.

Complementing its infusion technology, Baxter also launched the Welch Allyn Connex 360 Vital Signs Monitor in September 2025. This next-generation patient monitoring device offers an advanced connectivity and security platform, customizable configurations, and upgrade capabilities for future functionality. This innovation, part of the Healthcare Systems & Technologies segment, underscores Baxter's commitment to connected care and digital enhancements to improve workflow efficiency in hospitals.

Baxter's R&D initiatives extend to its Pharmaceuticals segment, where the company is focused on accelerating new product launches, particularly in specialty injectables and drug compounding. In the past year, Baxter launched nearly 10 new pharmaceutical products and anticipates another double-digit year for launches in 2025. While not tied to a single large molecule, this consistent cadence of new product introductions, including more complex molecules, is designed to buoy the segment's margins and contribute to overall growth. The company is also making investments in alternate site care in the U.S., leveraging small tuck-in licensing and distribution deals to expand its nutrition portfolio.

For investors, these technological advancements and R&D efforts are critical. The Novum IQ platform, despite its recent recall challenges, represents a significant competitive moat, driving market share gains and long-term recurring revenue. The continuous innovation in connected care and pharmaceuticals positions Baxter to address evolving healthcare needs, enhance clinical outcomes, and secure its market position against rivals. The strategic intent is clear: to leverage technology to drive profitable growth, improve margins, and ultimately deliver long-term shareholder value.

Financial Performance and Strategic Realignment

Baxter's recent financial performance reflects both the ongoing strategic transformation and immediate operational challenges. For the nine months ended September 30, 2025, the company reported net sales of $8.27 billion, a 5% increase on a reported basis compared to the prior year. However, operational sales growth, which excludes the impact of foreign exchange, MSA revenues from Vantive, and the exit of IV solutions in China, was 2%. The third quarter of 2025 saw net sales of $2.84 billion, up 5% reported but only 2% operationally, falling below prior guidance. This top-line softness was primarily attributed to challenges in the Infusion Therapies & Technologies (ITT) division and Injectables & Anesthesia within Pharmaceuticals.

Profitability metrics highlight the impact of these dynamics. The adjusted gross margin from continuing operations for the nine months ended September 30, 2025, was 33.9%, a decrease from 38.4% in the prior year. Excluding special items, the gross margin ratio decreased by 4.30 percentage points in Q3 2025 and 2.60 percentage points for the nine months, driven by the Kidney Care MSA impact, unfavorable product mix, and manufacturing variances. Adjusted operating margin from continuing operations for the nine months was 14.9%, improving 40 basis points compared to the prior year, reflecting disciplined expense management and the benefit of TSA income, partially offset by softer volumes and mix.

Segment-wise, Medical Products & Therapies (MPT) reported net sales of $1.33 billion in Q3 2025, a 1% decline on both reported and operational bases. This was largely due to lower Novum LVP sales following the distribution hold and reduced U.S. demand for IV solutions due to fluid conservation. Conversely, Advanced Surgery within MPT showed strong performance, with sales increasing 13% in Q3 2025. Healthcare Systems & Technologies (HST) demonstrated improved performance, with Q3 2025 sales of $773 million, up 3% reported and 2% operationally, driven by increased U.S. capital spending and strong order growth (30% increase in U.S. capital orders for CCS in Q3 2025). Pharmaceuticals sales totaled $632 million in Q3 2025, increasing 7% on both reported and operational bases, primarily from strong growth in Drug Compounding and inhaled anesthesia in international markets, despite softness in certain premix injectables.

Liquidity and capital allocation are central to Baxter's strategy. Operating cash flows from continuing operations for the nine months ended September 30, 2025, were $355 million, unfavorably impacted by increased inventory levels.

However, the company has made significant strides in deleveraging, repaying $3.81 billion of short- and long-term indebtedness in the first nine months of 2025, primarily using proceeds from the Kidney Care sale. As of September 30, 2025, Baxter held $1.73 billion in cash and cash equivalents.

Outlook, Guidance, and Risk Assessment

Baxter's updated outlook for 2025 reflects a more cautious stance, primarily due to the Novum LVP situation and persistent IV fluid conservation. For the full year 2025, the company now expects total sales growth of 4% to 5% on a reported basis, with operational sales growth projected at 1% to 2%. This is a reduction from prior expectations of 3% to 4% operational growth, reflecting evolving business dynamics. Adjusted EPS from continuing operations is now anticipated to be between $2.35 and $2.40 per diluted share, adjusted from previous guidance of $2.42 to $2.52. For the fourth quarter of 2025, Baxter projects continuing operations sales growth of approximately 2% reported and a decline of approximately 2% operationally, with adjusted EPS of $0.52 to $0.57.

Key assumptions underpinning this guidance include the expectation that the Novum LVP distribution and installation hold will remain in place beyond 2025, with no additional sales from the platform during this period. The company is actively working on corrections and offering its Spectrum IQ LVP as an alternative. Furthermore, management anticipates that some level of IV fluid conservation practices by hospital customers will continue through the remainder of 2025 and potentially into 2026.

Several risks could impact Baxter's ability to achieve its targets. The Novum LVP recalls (Class I recalls in May and August 2025) and the temporary distribution halt pose significant operational and reputational risks. While remediation costs have not been material to date, future costs, returns, or exchanges could have a material impact. The ongoing IV fluid conservation practices, a lingering effect of Hurricane Helene, continue to depress demand in the IV solutions business. Tariffs and global economic conditions remain a concern, with an estimated net impact of approximately $40 million in 2025. Baxter is implementing mitigation strategies, but sole-source supplier relationships could limit its flexibility. Legal proceedings, including an IRS examination for transfer pricing matters with recorded reserves of approximately $300 million, and a class action lawsuit related to the Novum LVP, present additional uncertainties. Furthermore, Moody's revised Baxter's senior debt credit rating outlook from stable to negative in Q3 2025 and placed ratings on review for downgrade in November 2025, which could adversely affect funding costs and liquidity.

Conclusion

Baxter International is in the midst of a profound strategic transformation, shedding non-core assets and streamlining operations to emerge as a more focused and agile medtech leader. The appointment of Andrew Hider as CEO and the launch of the Growth and Performance System (GPS) signal a renewed commitment to operational excellence and continuous improvement, which are critical for unlocking the company's full potential. While near-term headwinds from the Novum LVP recall and persistent IV fluid conservation are impacting current financial performance and outlook, the company's decisive actions to strengthen its balance sheet through aggressive debt repayment and a planned dividend reduction underscore a clear path toward financial stability and future investment capacity.

The core investment thesis for Baxter hinges on its ability to leverage its medically essential product portfolio, technological differentiation in infusion systems and connected care, and a revitalized operational focus to drive sustainable, profitable growth. Despite competitive pressures and macroeconomic uncertainties, Baxter's strong market positioning in key segments like Advanced Surgery and Care & Connectivity Solutions, coupled with a robust innovation pipeline in pharmaceuticals, provides a solid foundation. Investors should closely monitor the resolution of the Novum LVP issues, the recovery of IV fluid demand, and the effectiveness of the new operational initiatives as key indicators of Baxter's progress toward redefining healthcare delivery and delivering enhanced long-term shareholder value.