Baxter International

One Baxter Parkway
Deerfield, Illinois 60015
U.S.A.
(312) 948-2000

Public Company
Incorporated: October 19, 1931
Employees: 32,000
Sales: $5.543 billion
Market Value: $5.490 billion
Stock Index: New York

In 1931 two Iowa doctors launched the Don Baxter Intravenous Products Company to distribute intravenous solutions commercially to hospitals in the midwestern United States. Their company survived the economic strains of the 1930’s and grew to become one of the world’s largest and most profitable manufacturers and suppliers of medical care products and services.

Dr. Ralph Falk and Dr. Donald Baxter knew that the intravenous solutions available at the time were of variable quality and limited in quantity; they planned to overcome these problems by manufacturing large, closely controlled supplies of solutions and packing them in evacuated containers. (Prior to Baxter’s founding, only large research and teaching hospitals had the facilities to produce intravenous solutions.) In 1933 the company opened a plant in Glenview, a Chicago suburb, with a staff of six employees who 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.

Falk bought his partner’s interest in 1935 and soon thereafter established a research and development division. Two years later he built a second manufacturing facility, in Canada. The company was then known as Baxter Laboratories Inc. In 1976 it became Baxter Travenol Laboratories Inc., and in 1987 it became Baxter International two years after a merger with the American Hospital Supply Corporation.

In 1939 Baxter introduced the Transfuso-Vac blood collection system, a sterile vacuum-type collection and storage unit that made 21-day blood storage possible. Previously, blood could be kept for only a few hours. The Transfuso-Vac gave rise to blood-banking. In 1941 Baxter went a step further by introducing 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 was a provider of blood collection products and intravenous solutions to the U.S. armed forces. The company opened a number of temporary facilities in order to meet the military’s increasing demand; after the war these operations were consolidated in the Glenview plant. Late in the 1940’s the company expanded into a new office and production facility in the Chicago suburb of Morton Grove. Today that facility houses research and materials management operations.

Baxter formed a pharmaceutical specialties division under the name Travenol Laboratories in 1949. The division was responsible for developing and marketing chemical compounds and medical equipment.

Willem Kolff, a Dutch physician, applied dialysis procedures to treatment of kidney failures during the 1940’s, and Baxter made commercial use of his methods in the U.S. In 1948 Fenwal Laboratories introduced an unbreakable plastic container for blood storage; the container became part of Baxter’s product line. Its successor was the Viaflex plastic IV bag. Later, the product would be a basis for the development of a plastic delivery system for dialysis solutions.

The company expanded considerably during the 1950’s. It opened a facility in Cleveland, Mississippi which today produces 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; and Flint, Eaton and Company and Fenwal Laboratories of Boston in 1959. In 1959 the company also established its international division. Today the international operations are controlled by two separate divisions, Travenol Europe and the Americas-Pacific Division. The two have manufacturing facilities in 17 countries and distribute products in more than 100.

Perhaps the most significant development of the decade for Baxter was William B. Graham’s appointment as president and chief executive officer in 1953. Graham was responsible for the decision to support Dr. Willem Kolff s research effort to produce a working artificial kidney. In 1956 Baxter introduced the first commercially-built kidney dialysis system, making the first move into a realm in which the company would continue to be an innovator.

Baxter shares began trading on the New York Stock Exchange in 1961. Because of the company’s steady growth during subsequent years, shareholders voted several two-for-one stock splits during the 1960’s. Baxter ended its 30-year-old distribution contract with American Hospital Supply in 1963 and thereafter developed its own sales force.

The company built two Arkansas facilities during the 1960’s. In 1962 Baxter acquired Disposable Hospital Products, and in 1967 it purchased Dayton Flexible Products Company and Cyclo Chemical Corporation. Meanwhile, the company’s international operations were making extensive inroads into European markets, especially through the development of its wholly-owned subsidiaries.

In the 1960’s and 1970’s Baxter introduced several important technological innovations, beginning in 1962 with the first disposable total bypass oxygenator for open-heart surgery. The contemporary version of the TMO membrane oxygenator system closely simulates the functions of the heart and lungs. In 1968 Baxter introduced the Hemofil antihemophilic factor, which was six times as powerful as any similar product on the market at that time. Later the company would develop another important innovation in the treatment of hemophilia, the Autoplex anti-inhibitor coagulant. In 1979 Baxter offered Continuous Ambulatory Peritoneal Dialysis (CAPD) as an alternative to hemodialysis for kidney failure. CAPD can be performed at home by the patient, is less costly than hospital treatment, provides more uniform results, and allows increased patient mobility.

Baxter’s sales totalled $242 million in 1972, securing the company a spot on the Fortune 500 list. By 1978 sales had grown to $1 billion, and the company could boast an earnings growth rate of 21% for the preceding 24 continuous years. During the 1970’s Baxter built a new plant in North Carolina and a new corporate headquarters in Deerfield, Illinois, and made a series of acquisitions. The company bought American Instrument Company and Surgitool in 1970, Vicra Sterile Products in 1974, and Clinical Assays in 1976. In 1976 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 replaced William Graham as president and chief executive officer; he was elected chairman of the board of directors in 1987.

Though in the early 1980’s the U.S. government and private agencies were demanding stricter cost control of medical care, Loucks and other leaders of Baxter felt the company could continue to achieve accelerated growth if health care products and therapies were shifted away from their traditional focus on hospitals and toward alternative environments such as small clinics and private homes. Loucks directed the company into the growing markets for home health care and alternate-site care.

At that time, industry analysts were predicting 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. Worldwide manufacturing facilities, development of “mini-bags” of pre-mixed drugs, and domination of the CAPD market were all factors favoring the company’s continued growth.

In 1982 Baxter acquired Medcom Inc., a medical education and information company, and in 1984 it acquired 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 to direct the company toward becoming the lowest-cost supplier of medical products and services. Loucks turned the company’s research and development away from sophisticated, expensive items toward cost-cutting products such as pre-mixed drugs. A key focus of the new research and development programs, many of them launched in cooperation with other firms, was adaptation of traditionally expensive products for less costly use in the home.

When the federal government announced reductions in the fees it would pay for kidney dialysis treatment in 1982, industry observers predicted that Baxter would take the lead in home dialysis methods. Baxter’s sales of home dialysis products had risen 40% since 1978, when the company introduced CAPD. The company had even developed a device called an ultraviolet germicidal chamber to reduce the risk of infection from tactile contamination.

Though these and other indicators seemed to point toward a bright future for Baxter in the mid-1980’s, 1984 turned out to be a disastrous year for the company. By the end of 1983 Baxter announced that its earnings in 1984 were likely to be below the average of previous years. Net sales for 1984 were in fact down 2.3% from 1983 levels, net income dropped a precipitous 86.7%, and the average price for Baxter common stock was down 29%. These results were directly attributable to a special charge of $116.1 million after taxes, the results of consolidations (three manufacturing facilities were closed) and asset revaluations.

Several market trends led to Baxter’s decline in 1984. Among them were a drop in demand from hospitals for the company’s traditional hospital-oriented products. Hospitals undertook cost containment efforts in response to pressure from government and private insurance companies; these efforts restrained day-to-day hospital activity, which in turn dampened demand. Despite having anticipated many of the changes in the market and having shifted its research into growth areas, the company was unable to offset the slackened demand from hospitals as well as the effect of increasingly 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, adding to the general financial malaise.

One of Baxter’s most significant adjustments to the new attitude in the medical industry was its development of a “package deal” of products and services for hospitals. The plan combines the company’s traditional products (intravenous supplies, blood therapy products, hemodialysis and urological goods) with consulting services to help the hospital reduce costs. It is designed to establish contacts with hospitals which are setting up home health care systems that encourage patients to recuperate at home rather than in hospital. However, to make a profit in home health care, an organization must be able to rely on a large patient pool, particularly because many patients are short-term. Baxter did not have access to such a pool.

A further problem facing Baxter is that it maintains extensive production facilities for its products, even though these products, especially intravenous solutions and equipment, are sold in domestic markets in which demand is decreasing. Demand remains strong in international markets, but conducting business in foreign territory has its drawbacks, as Baxter’s departure from the Philippines in 1985 illustrated. Labor strikes in that country caused turmoil in the company’s intravenous operation; an eventual withdrawal from the country cost Baxter its $10 million investment in the facility.

In the late 1980’s both the perceived danger and the slight real risk of Aids contamination from blood transfusions have depressed the demand for blood therapy products. Though a blood screening test was developed relatively quickly, analysts have predicted that a return to earlier levels of use of blood therapy products is unlikely in the near future. This slow down will certainly affect Baxter.

Company operations are divided into two segments: medical and non-medical care. The former accounted for 99% of Baxter’s sales in 1984. It is organized according to categories of products and services. Parenteral Therapy includes intravenous solutions, sets, catheters, and flow control devices, irrigation solutions, and enteral nutrition products. Sales of these products declined by 7% in 1984. The company attributed the decline in large part to the public’s fear of contracting Aids. Renal and Urological Therapy includes products for the treatment of kidney failure, such as hemodialysis and peritoneal dialysis, and for the treatment of urinary tract conditions, such as irrigating solutions, drainage bags and catheters. Sales of these products declined 1% in 1984. Medical Products encompasses diagnostic products, respiratory therapy products and services, physical therapy services, medical gloves, specialized pharmaceutical products in the endocrine and surgery fields, cardiopulmonary products, surgical trays and specialty needles, health and medical education and training programs, computerized health care information systems, and hospital management consulting systems. Sales of these products rose by 9% in 1984, primarily in respiratory therapy and hospital information services.

In 1985 Baxter acquired its old partner, American Hospital Supply Company, for $51 per share in cash and securities. Although earnings were diluted by the takeover, investors were confident about the future of the company. Stock rose 35% as assimilation of American progressed. There were rumors that the merger had created difficulty for the two companies in trying to coalesce their divergent “corporate cultures,” but the only visible sign of trouble was the resignation of three top-level American executives. In 1987 the company took its new name, Baxter International, and named William H. Gantz president. Formerly the executive vice-president and chief operating officer, Gantz now shares an “office of the chairman” with Loucks. The position of chief operating officer no longer exists.

The combining of assets of the two companies signals a leviathan effort on their part to meet a large portion of the world’s demand for hospital products. With new emphasis on high profit products, including diagnostic equipment and computer software for hospitals, the Baxter-American merger promises increased competition in a crowded market.

Principal Subsidiaries

Entertainment Partner, Inc.; MedTrain, Inc.; AHS Realoo, Inc.; AKL Corp.; Baxter Travenol Finance World Trade Corp.; Baxter Travenol World Trade Corp.; Travenol Laboratories Inc.