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Baxter International Inc. Business Information, Profile, and History

One Baxter Parkway
Deerfield, Illinois 60015-4633

History of Baxter International Inc.

Baxter International Inc. is the world's largest manufacturer and distributor of hospital supplies and a leading provider of medical specialty products. Serving over 5,000 hospitals, Baxter operates in two primary industry segments: medical specialties and medical/laboratory products and distribution. The company's major products and services include dialysis systems, cardiovascular devices, laboratory and surgical equipment, and intravenous and diagnostic systems. Over the course of its history, Baxter has introduced several medical innovations, including: blood banks; the first commercial kidney dialysis system; and continuous ambulatory peritoneal dialysis (CAPD), a self-administered alternative to hemodialysis in a hospital. In the early 1990s, Baxter held an overwhelming 75 percent of the worldwide market for CAPD.

In 1931, two Iowa physicians, Dr. Ralph Falk and Dr. Donald Baxter, launched the Don Baxter Intravenous Products Company to distribute intravenous solutions commercially to hospitals in the Midwest. During this time, only large research centers and university hospitals had the facilities to produce intravenous solutions, which were of variable quality and limited in quantity. Falk and Baxter planned to overcome these problems by manufacturing large, closely controlled supplies of solutions and packing them in evacuated containers. In 1933, the company opened a plant in Glenview, a Chicago suburb. The staff of six employees produced Baxter's complete line of five solutions and packaged them in glass containers; the American Hospital Supply Corporation, also based in Chicago, distributed the Baxter products.

In 1935, Falk bought his partner's interest in the company; soon thereafter, he established a research and development division and built a second manufacturing facility, in Canada. In 1939, the company introduced the Transfuso-Vac blood collection system, a sterile vacuum-type collection and storage unit for blood. Prior methods allowed blood to be stored for only a few hours, but the Transfuso-Vac provided storage of up to 21 days, giving rise to the practice of blood banking. In 1941, Baxter introduced the Plasma-Vac container, which enabled the medical community to separate plasma from whole blood and store the plasma for later use.

During World War II, Baxter provided blood collection products and intravenous solutions to the U.S. armed forces. The company opened several temporary facilities in order to meet the military's increasing demand, and after the war these operations were consolidated in the Glenview plant. Late in the 1940s, the company moved into a new office and production facility in the Chicago suburb of Morton Grove; that facility would continue to house research and materials management operations into the 1990s.

During the 1940s, Willem Kolff, a Dutch physician, was applying dialysis procedures to treatment of kidney failure, and Baxter began making commercial use of his methods in the United States. In 1948, Baxter's product line was expanded to include Fenwal Laboratories' new unbreakable plastic container for blood storage, the precursor to the Viaflex plastic IV bag, a product that would serve as a basis for the development of a plastic delivery system for dialysis solutions. Baxter formed a pharmaceutical specialties division under the name Travenol Laboratories in 1949. This division was responsible for developing and marketing chemical compounds and medical equipment.

The company expanded considerably during the 1950s, opening a facility in Cleveland, Mississippi, which would later produce intravenous and irrigating solutions, needles, dialysis solutions, respiratory therapy products, and many disposable devices used in medical treatment. In addition, Baxter made several important acquisitions during the decade, including Hyland Laboratories of Los Angeles in 1952, as well as Flint, Eaton and Company and Fenwal Laboratories of Boston in 1959. That year, the company also established its international division, which later was divided into two separate divisions, Travenol Europe and the Americas-Pacific Division, both of which established manufacturing facilities in 17 countries and distributed products in more than 100 countries.

One of the most important company developments of the 1950s was the appointment of William B. Graham as Baxter's president and chief executive officer. Named to these posts in 1953, Graham was responsible for the decision to support Dr. Kolff's research effort on the production of artificial kidneys. In 1956, Baxter introduced the first commercially-built kidney dialysis system, representing the company's first move into a field in which it would become known as an innovator.

Baxter shares began trading on the New York Stock Exchange in 1961. The company's steady growth during subsequent years prompted shareholders to vote in favor of several two-for-one stock splits. In 1963, Baxter ended its 30-year-old distribution contract with American Hospital Supply and thereafter developed its own sales force. The company also built two Arkansas facilities during this time and acquired Disposable Hospital Products as well as Dayton Flexible Products Company and Cyclo Chemical Corporation. Moreover, Baxter's international operations were making extensive inroads into European markets, especially through the development of its wholly owned subsidiaries.

Several important technological innovations occurred at Baxter during the 1960s and 1970s. The first disposable total bypass oxygenator for open-heart surgery was introduced in 1962, and, in 1968, Baxter marketed the Hemofil antihemophilic factor, which was six times as powerful as any similar product offered at that time. The company also developed the Autoplex anti-inhibitor coagulant, another important innovation in the treatment of hemophilia. In 1979, Baxter offered continuous ambulatory peritoneal dialysis as an alternative to hemodialysis for kidney failure. CAPD proved popular as it could be performed at home by the patient, was less costly than hospital treatment, provided more uniform results, and allowed increased patient mobility.

Baxter's sales totaled $242 million in 1972, securing the company a spot on the Fortune 500 list. By 1978, sales had quadrupled to $1 billion, and the company could boast an earnings growth rate of 21 percent for the preceding 24 continuous years. During this time, Baxter built a new plant in North Carolina and a new corporate headquarters in Deerfield, Illinois. In a series of acquisitions, the company bought American Instrument Company and Surgitool in 1970, Vicra Sterile Products in 1974, and Clinical Assays in 1976. That year, Baxter shareholders voted to adopt the name Baxter Travenol for the parent company, with Travenol Laboratories as the major domestic operating subsidiary. In 1980, Vernon R. Loucks, Jr. replaced William Graham as president and chief executive officer; he would become chairperson seven years later.

During the 1980s, industry analysts predicted a continued strong demand for intravenous solutions and equipment, kidney dialysis equipment, and various blood-derived products, all market areas that Baxter dominated. The company's earnings per share rose steadily, from $1.86 in 1980 to $2.64 in 1982, and further rises were expected. Expansion into foreign markets, development of 'mini-bags' of pre-mixed drugs, and domination of the CAPD market were all factors favoring the company's continued growth.

Nevertheless, Loucks and other leaders at Baxter believed that the company's continued growth depended on its exploitation of new markets for health care products and services. Under Loucks' guidance, Baxter acquired Medcom Inc., a medical education and information company, in 1982 and subsequently purchased two computer software firms specializing in health management applications. In late 1983, the company formed a partnership with Genentech Inc. to develop, manufacture, and market products in the human diagnostics field.

Loucks also initiated a comprehensive cost-cutting program intended to make Baxter the lowest-cost supplier of medical products and services. Toward that end, Baxter's research and development focused on such cost-cutting products as pre-mixed drugs, rather than the sophisticated, expensive items it had emphasized. Moreover, the new research and development programs, many of which were joint ventures, sought to adapt traditionally expensive products for less costly use in the home.

In 1982, when the federal government announced reductions in the fees it would pay Medicare and Medicaid patients undergoing kidney dialysis treatment, industry observers predicted that Baxter would take the lead in home dialysis methods. Baxter's sales of home dialysis products had risen 40 percent since 1978, when the company introduced CAPD, and the company had also developed a device called an ultraviolet germicidal chamber to reduce the risk of infection from tactile contamination. Although the company seemed well-positioned to gain market share, several factors instead contributed to a poor performance.

At the end of 1983, due to a special charge of $116.1 million after taxes, consolidations involving the closing of three manufacturing facilities, and asset revaluations, Baxter announced that its earnings for the following year were likely to be below the average of previous years; in fact, net sales for 1984 decreased 2.3 percent, net income dropped a precipitous 86.7 percent, and the average price for Baxter common stock declined 29 percent. Moreover, several market trends worked against Baxter. In response to pressure from government and private insurance companies, hospitals sought to control their costs, and demand for Baxter's traditional hospital-oriented products declined sharply. Although the company had anticipated these events and had shifted its research into growth areas, it was unable to offset the slackened demand from hospitals and the resulting competitive pricing in the industry. The high investment in research and development of products for Baxter's new non-hospital products and services had not yet begun to pay off.

One of Baxter's most significant adjustments to changes in the medical industry was its development of a 'package deal' of products and services for hospitals. The plan combined the company's traditional products--intravenous supplies, blood therapy products, and hemodialysis and urological goods--with consulting services to help its hospitals reduce costs. Through the plan, Baxter hoped to establish contacts with hospitals engaged in setting up home health care systems. However, to make a profit in home health care, a company had to be able to rely on a large patient pool, particularly because many patients were short-term, and Baxter did not have access to such a pool.

Moreover, Baxter had to bear the expense of maintaining extensive production facilities for the manufacture of its products, particularly intravenous solutions and equipment, while domestic demand for such products decreased. Although demand remained strong in international markets, conducting business in foreign territory proved problematic at times. For example, in 1985, when labor strikes in the Philippines caused turmoil at Baxter's intravenous operation, the company was forced to close its operations there, a withdrawal that cost Baxter its $10 million investment in the facility. Furthermore, in the late 1980s, perceived and real risks of contracting Acquired Immune Deficiency Syndrome (AIDS) from blood transfusions depressed the demand for blood therapy products. Although a reliable blood screening test was developed relatively quickly, analysts predicted that a return to earlier levels of use of blood therapy products was unlikely in the near future.

In 1985, Baxter acquired its early partner, American Hospital Supply Company, for $51 per share in cash and securities, through a hostile takeover. Although earnings were diluted by the merger, investors remained confident in the future of the company. Stock rose 35 percent as assimilation of American progressed. With its new name, Baxter International, and new emphasis on high profit products, including diagnostic equipment and computer software for hospitals, the Baxter-American merger promised increased competition in a crowded market.

Two years later, Baxter acquired Caremark Inc., an alternative site health care business that provided products and services for use outside of hospitals. The purchase doubled Baxter's holdings in that segment, which soon became its fastest-growing business. However, Baxter's traditional hospital customers soon began to resent the threat Caremark posed to their own home health care programs. Moreover, in 1991 a criminal investigation of Caremark for alleged Medicare kickbacks was initiated. Baxter decided to spin Caremark off to shareholders in 1992.

Rumors that the Baxter-American merger had resulted in difficulties between the divergent corporate cultures seemed to be confirmed in ensuing years, as the firm entered a state of frequent restructuring. Early in 1990, the company announced the largest restructuring in its history, involving the closing of 21 plants, divesting marginal businesses, and laying off about ten percent of the work force. The 1990 retrenchment focused largely on Baxter's hospital supply businesses, and the revamp two years later eliminated its alternative site health care business.

During this time, Baxter lost several lucrative contracts, having gained a reputation as a high-cost, high-priced distributor whose practices tended to anger and frustrate hospital purchasing managers. According to an October 1993 Health Industry Today article, Baxter's contract with Premier Health Alliance Inc., which represented $32 million in 1992 sales, was not renewed in 1993. Furthermore, the Veterans Administration proposed to exclude Baxter from bidding on and being awarded contracts for the next year, following allegations by the VA that Baxter knowingly misled and provided false information to the government agency's officials. In a conciliatory measure, Baxter accelerated programs to revamp its sales structure and lines of authority as well as slash executive pay.

In spite of the firm's efforts to improve its reputation, damaging information continued to emerge. In March 1993, Loucks admitted that Baxter had violated laws against aiding the Arab League's boycott of Israel when it sold its Travenol Laboratories Ltd. operations in Israel and entered into a joint venture with the Syrian army. Asserting that such illegal actions were inadvertent, the corporation nevertheless plead guilty to federal charges and agreed to pay $6.5 million in fines. Also that year, Baxter was implicated in a lawsuit brought by hemophiliacs infected by HIV-tainted clotting agents, and took a $700 million charge for divesting some divisions and reorganizing its diagnostics subsidiary. At year's end, President James Tobin quit, and Baxter's stock plunged to a four-year low. Moreover, Baxter's proposed merger with third-ranking Stuart Medical Inc. was terminated, and Stuart quickly engaged another suitor, Owens & Minor Inc. Their combined operations promised to threaten Baxter's top position in medical/surgical supply, as the new company would follow Baxter by only about $300 million in annual revenues.

Loucks's 1993 letter to shareholders acknowledged that the company's 'earnings and stock price [had] not performed well,' and announced 1993 losses of $268 million. Nevertheless, sales at Baxter had increased every year from 1988 through 1993, with net sales increasing over $400 million from 1992 to 1993. Loucks vowed to 'achieve the potential that exists for Baxter International' by emphasizing service, international growth, and technological innovation through its new 'Network 2000,' a $400 million plan to expand, consolidate, and modernize facilities and operations.

Principal Subsidiaries: Baxter Diagnostics Inc.; Baxter Export Corporation; Baxter Vascular Systems; Bentley; Biotech Group; Clinical Alternate Site; Clintec Nutrition Company; Dietary Products; Edwards Critical Care; Edwards CVS; Hospital Supply; Hospitex; Interventional Cardiology; I.V. Systems; Novacor; Renal; Scientific Products; Scientific Products Industrial and Life Sciences; Surgical Group; Valuelink Business Center.

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