Backed Against The Wall At Baxter

At Baxter International Inc.'s annual meeting in April, Vernon R. Loucks Jr. drew a pointed response when he introduced himself as the company's chairman and chief executive officer. "Not for long," shouted a shareholder.

Indeed, investor anger was palpable at the meeting, largely because Baxter had just paid $6.5 million in fines and pleaded guilty to cooperating with the Arab boycott of Israel. But Loucks ignored the outburst and plowed ahead with the meeting--extolling Baxter's strategy and his fitness to lead the company in a time of wrenching change. By the end of the session, the tone had changed dramatically: Shareholders gave him a standing ovation.

Nobody's clapping now. In the wake of the Arab boycott settlement, the Defense Dept. Personnel Support Center announced it was banning Baxter from new business. Similarly, the 183-hospital Premier Health Alliance on Sept. 10 awarded a $32 million Baxter contract to rival Curtin Matheson; it says Baxter also stands to lose a $14 million contract for medical gowns and a $40 million one for surgical trays. And Baxter is contesting charges by the Veterans Administration, which has accused the company of providing products that weren't part of its contract. The VA has banned Baxter from doing new business for most products with federal agencies--the source of $130 million in revenues last year--for up to three years.

"NO MAGIC BULLET." Meanwhile, Baxter's hospital supply business, beset by price-cutting and lower volumes, has hit a wall. This year, analysts expect the company to report $559 million in income from continuing operations, down slightly from 1992, on a 6% increase in sales. What's more, BUSINESS WEEK has learned that Baxter may be liable for more than $350 million to compensate hemophiliacs infected by HIV-tainted clotting agents marketed by Baxter and other suppliers (box).

With trouble all around, attention is focusing on the man in the middle: CEO Loucks. On Sept. 7, Loucks announced he would run Baxter's hospital supply business himself, dispatching Chief Operating Officer James R. Tobin to focus on strategic issues. At the same time, Loucks axed his own salary by 25%. But Baxter's stock fell even further, to $21 on Sept. 15 from $35 before the boycott settlement. "The investment community is saying: `Horrors, don't step in, step out,"' says one disgruntled shareholder.

Loucks says he'll stay put. He recently stepped down from the board of Yale University after student protests about his involvement in the Arab boycott. But at Baxter, "I will be here doing the best I can, the best way I know how," he says. "The [Baxter] board has been extremely supportive." Board members did not return telephone calls for comment.How long will the support last? Loucks says he needs time: "There is no magic bullet. You can't turn this thing around overnight." His strategy revolves around cost-cutting and, possibly, restructuring. Loucks is scrapping Baxter's traditional reliance on a product-specific sales force, switching salespeople to cover geographic regions and building large, regional distribution centers. He is focusing on foreign sales and admits that future moves could include the sale of one or more of Baxter's nonhospital businesses. Likely candidates? Baxter's diagnostics or cardiology units, say former executives and analysts.

Critics say Loucks is following the wrong strategy at the wrong time. Baxter is focusing on product distribution at a time when margins are under attack. It recently resumed distributing products made by Johnson & Johnson, 3M, and U.S. Surgical Corp. But analysts say Baxter earns only about a 12% return on distributed products, compared with around 40% for products it makes. Baxter's second-quarter sales growth of 6.5% was nearly twice the industry average, but analysts note that little of that growth will add to the bottom line.

STONE WALL. Another problem: Baxter's ValueLink program, in which Baxter essentially manages a hospital's inventory by supplying products on a just-in-time basis, may be topping out. ValueLink is a high-end service, and customers increasingly are focusing strictly on the bottom line. What's more, hospital buyers see ValueLink as a wedge Baxter uses to supplant competitors products, undermining the purchasing department's clout.

Loucks might be in better shape if he enjoyed a wealth of goodwill among investors and customers. He doesn't. One major investor, the California Public Employees Retirement System, says it has received no response several weeks after writing Loucks a letter seeking an explanation for Baxter's conduct in the Arab boycott and VA matters. "It's been a one-sided communication," says DeWitt Bowman, the fund's investment officer. Loucks says he hasn't seen the letter, but intends to respond.

Big investors don't like to be ignored, though, and they're starting to bare their teeth. "He has presided over a few big disappointments, not just the boycott thing," says the manager of a $5 billion pension fund who recently sold some of the fund's Baxter shares. "I would think his goodwill with investors is pretty much in jeopardy." Loucks has plenty of work to do if he wants investors to start clapping again.

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