Biotech is still in a rut for 2015, with stocks year to date being essentially unchanged. Since January 1, the Biotechnology Index is up only 0.3%, pretty much breakeven. While the first half of 2015 was quite positive, it’s been the second half of the year that has really taken its toll on shares, with the iShares Biotechnology ETF (NASDAQ: IBB) down 17.5% since July 1. One would be hard pressed to find a company in the sector that has performed well since then. In fact, the best-performing large cap biotech since July 1 is quite unexpected, and even somewhat hidden from direct view. Surprisingly, it’s Baxter International Inc. (NYSE: BAX).

The extenuating circumstances surrounding Baxter make its envious title of best-performing biotech since July a bit elusive because it is harder to calculate. Back on July 1, Baxter split into two companies. One continued as Baxter International, and the other as Baxalta Inc. (NASDAQ: BXLT). Pre-split, the combined company had a market cap of $38 billion. Now, the combined market cap of Baxter and Baxalta is $40.9 billion. Meaning, if you had shares in Baxter before July 1, you’d be sitting on gains of 7.6%.

Baxter has outperformed what many analysts estimated post-split. 24/7 Wall St. called Baxter undervalued back in May, citing Merrill Lynch’s Bob Hopkins, who believed optimistically that the new Baxter would trade in the $30 to $33 range after the spin-off. As it turns out, Baxter has traded as high as $43.44 post-split, with the lowest price recorded at $32.18 a share. Baxalta, the spin-off, has traded in a range of $30 to $41, an outperformance however you look at it.

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Baxter’s impressive feat in the face of a falling biotech sector since July teaches an important lesson about capitalism and the division of labor. How so? Normally, it’s the mega-mergers that make the big news with huge numbers splashed across headlines. We just saw this with SanDisk and Western Digital, who together inked a $19 billion merger deal amid loud cheering. Mergers are generally responded to with enthusiasm and presented as a reason to invest. They represent a convergence of power and a sort of conquering connotation. Split-ups and spin-offs are often treated with skepticism, the danger of the conservative path fraught with risk due timidity.
The overarching message is that the free market strives toward unification and monopoly with ever bigger mergers, while spin-offs are only reluctant failures taken due to difficulties and otherwise to be avoided.

The truth is that both mergers and spin-offs are business decisions meant to increase profit, which itself is an indication of serving consumers more efficiently than otherwise. Depending on the circumstances, either move could make sense. Baxter’s top notch performance since its split is a good indication that free markets do not strive necessarily toward mergers, but rather efficiency whether by merger or spin-off, and that splits can be very successful. The added fact that splits tend to hide gains actually made, as in the case of the combined market cap of Baxter and Baxalta, is an added layer of irony in the equation.

Is the rally over though? While it is not exactly common to count two now separate companies in one rally, it is still illustrative of the efficiency point. There are still a few potentially large developments involving Baxalta specifically. The first is interest expressed by Shire Plc. (NASDAQ: SHPG) in acquiring Baxalta. Shire made an offer for Baxalta back in August that has since stalled. However, initial results for Shire’s Phase 3 lifitegrast trial for dry eye disease, expected to be blockbuster, are due by the end of the year, and positive results would restore lost momentum for the deal.

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Second, Baxalta’s largest revenues are from the hemophilia space. This accounts for 47% of its total sales. Keep in mind that Baxalta, the Baxter spin-off, is actually the larger of the two companies. Noteworthy is that Baxalta has an agreement with Xenetic Biosciences in which it has already invested $140 million prior to the split with Baxter, with the contract moving to Baxalta from Baxter post-split. The licensing agreement is for the development of a longer-acting hemophilia drug than any currently on the market, which if successful should solidify its place as the leader in the hemophilia drug market. Human trials will commence in 2016, and any positive results could have a significant effect on Baxalta shares.

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