Baxter breakup marks a re-focus on strongest businesses

Baxter breakup marks a re-focus on strongest businesses – Baxter International Corp

The breakup of Baxter International announced in late November was foreshadowed by its presentation at the Oppenheimer & Co. and First Boston health care conferences in New York three weeks earlier. The financial statistics of the medical specialties and med/lab (distribution) portions of the Baxter business indicate a clear differentiation: While medical specialties accounts for just 40% of total sales of $10 billion, it generates just under 50% of cash flow and almost two-thirds of pretax income.

Baxter’s (Deerfield, Illinois) breakup, announced on Nov. 28, will see creation of two entities, each initially with annual revenues of about $5 billion. One company, with an international medical technology focus, will retain the Baxter International Inc. name. The other company, as yet unnamed, will consist of Baxter’s cost management, U.S. distribution and surgical products operations. Vernon Loucks Jr., who will continue as chairman and CEO of Baxter International when the split occurs in 1996, said the company “will place greater emphasis on international expansion and technological innovation.” For its part, the cost-management company “will expand its portfolio of products and services to help customers reduce health care costs,” Loucks said.

The lion’s share of Baxter’s $350 million a year in R&D spending (a whopping 85%) is being spent on technical innovation in four key areas: renal dialysis, left ventricular assistance, heart valves, and a bioengineered blood substitute. As outlined at the Oppenheimer conference, the company’s overall strategies fall into three categories: global expansion, technical innovation, and the incorporation of healthcare cost management into its distribution program. The first two are an obvious fit with the “new” Baxter International, the latter with the cost-management company.

Baxter’s plans for global expansion include revenue growth in all parts of the world (Table 4). China and India, how ever, are the two major regions the company has targeted as having the highest revenue growth potential. The high-margin peritoneal dialysis business provides an effective entry point for Baxter into developing countries. The peritoneal dialysis product is lifesaving and, unlike hemodialysis, requires only minimal health care infrastructure and a limited number of health care professionals for deployment. Following entry into the peritoneal dialysis market, Baxter leverages its manufacturing, marketing, and distribution capabilities to expand its product offering to include intravenous solutions (another high-margin business) and manual blood processing equipment. Thus, Baxter is positioned as a provider of products needed by a country with only limited health care expenditures, a position Baxter continues to leverage as those countries develop and increase their health care spending.

Table 4

Also as a part of its biotechnology program, Baxter is developing systems that remove tumor cells from the bone marrow of cancer patients and systems which harvest stem cells from the bone marrow for subsequent infusion following high-dose chemotherapy. The stem cell harvesting system entered advanced clinical trials this year. Baxter also is involved in developing a gene therapy approach to fighting inherited diseases such as cancer, diabetes, and hemophilia.

Cost management is another focus

The third portion of Baxter’s strategy is to implement health care cost management in its distribution system. Baxter is uniquely positioned to do that, as it says it can supply 75% of most hospital needs with its products. The company has evolved several programs within the context of that strategy. Its procedure-based delivery system delivers customer supply modules containing virtually all of the disposables needed to perform various surgical procedures directly to the hospital operating rooms, streamlining product utilization and reducing related labor and inventory costs. The ValueLink program provides “stockless” inventory management service through just-in-time delivery of supplies, allowing a hospital to reduce or eliminate its own internal storage and inventory expenses. Baxter management says the market for ValueLink is only 25% penetrated.

The newest elements of Baxter’s distribution strategy involve the use of account teams that call directly on the CEO of the hospital and the signing of risk-sharing supply contracts with its customers. In 1994, Baxter signed its (and the industry’s) first risk-sharing supply agreement with its first “supply chain” customer, Duke University Medical Center (Durham, North Carolina). There is an equal incentive for Baxter and Duke to cut costs: If Duke’s costs fall below the budgeted cost per procedure, Baxter gets half the savings; if Duke’s costs exceed the budgeted cost per procedure, Duke is paid half the overage. Through such an arrangement, Baxter says it can reduce costs by about 25%, versus the 5% to 10% cost reduction it achieves through its more traditional ValueLink program.

Mallinckrodt focuses on diverse products

In another presentation at the Oppenheimer gathering, the Mallinckrodt Group (St. Louis, Missouri) consists of three divisions with total annual sales exceeding $2 billion. The Mallinckrodt Medical division is responsible for products such as contrast media, interventional products, airway management systems, point-of-care blood analysis systems, and temperature measurement devices. During fiscal 1995, anesthesiology and critical care products made up 32% of the division’s sales, with the remainder derived from imaging products. The U.S. accounted for 58% of that division’s sales, and Europe for 26%. The division has had growth of 20% in net sales and 35% in operating earnings over the past five years.

Mallinckrodt sells contrast agents for all types of medical imaging: X-ray, MRI, nuclear and ultrasound (see Table 6, page 230, for market sizes), and plans to launch several new types of X-ray contrast media before the end of the decade. These are primarily “me-too” products, with the introduction of the first generic X-ray contrast media scheduled for introduction during fiscal 1998. The advent of generic iopanidol poses a manageable threat to the company, as the company maintains a strong advantage over its potential competition based upon end-user familiarity, customer relationships, and low raw material costs. The company plans to grow its X-ray contrast media business by focusing on contrast media delivery systems, reducing manufacturing costs, and continuing geographic expansion.

Table 6

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