So Baxter Does Have A Pulse

Mike Hudson has never been a betting man. The 40-year-old general manager of hospital supplier Baxter International Inc. hates financial risks: As a young boy, Hudson watched his father lose the family farm after fire destroyed a harvest and he couldn't pay his debts. But last year, Hudson borrowed $1.3 million to buy 50,000 shares of Baxter. "I never thought I'd take out a loan that big on anything," he says.

Of course, it's tough saying no to the boss--and Baxter's controversial Chairman and CEO Vernon R. Loucks Jr. did not leave Hudson much choice. One of the health-care industry's most chronic underachievers, Baxter in recent years has suffered a steep margin slide, a plunging stock, and criticism over HIV-tainted blood products and its cooperation with the Arab boycott of Israel. Things got so bad that by mid-1993, investors were calling for Loucks's ouster. To keep them at bay, he ordered a major restructuring at the Deerfield (Ill.) company--and to make sure his top managers went along, the embattled CEO urged them to borrow twice their annual compensation to buy stock. "I was looking for help," says Loucks, who doubled his own shares, to 700,000.

So far, it looks as if he got it. A year after 63 managers spent $122.2 million snapping up 4.7 million shares, Baxter's health is returning. After a loss from continuing operations of $268 million in 1993 on sales of $8.9 billion, Baxter's profits jumped to $596 million on sales of $9.3 billion in 1994. And Baxter's operating cash flow soared to $954 million, three times 1993's $292 million (charts).

Better still, Baxter's stock, which fell to 22 in late 1993, now trades at 34. Although that's still below Baxter's late 1991 high of 40, investor anger has dimmed--and Loucks's job seems safe. "The board has been supportive of Loucks, often to [Baxter's] detriment," says one big shareholder. "But their patience seems to be paying off. He's done a good job."

It hasn't been easy. A decade after acquiring American Hospital Supply Corp., Baxter still faces big challenges selling AHS's low-margin products, such as medical gowns and surgical trays, to hospitals. As cost-cutting repeatedly hit health-care companies, Baxter's sales and earnings stagnated. Meanwhile, Baxter's lucrative medical specialty business, which makes kidney dialysis machines and cardiovascular products, was booming. Unhappy shareholders wanted the company split, but Loucks resisted. His plan: shrink costs and boost cash flow in the mature supply market, then use the cash to fund specialty-unit growth.

OLD WOUNDS. Since 1993, Loucks has pared Baxter's workforce 5%, to 53,500, and slashed management. Most important, he has radically altered the medical sales force's operations. Until last year, dozens of salespeople from Baxter's divisions would separately hawk their wares to hospitals. Now sales reps work in teams. For example, 11-year veteran Jim McGorry, one of 180 account managers, oversees relations with 10 hospitals in North Carolina. When buyers need something, they deal directly with him.

Still, Baxter hasn't fully healed the wounds its old system caused with customers. Although Joan Ralph, a purchasing executive at Good Samaritan Hospital in Downers Grove, Ill., finds Baxter easier to deal with, she's not convinced it has eliminated other problems, such as constantly running out of supplies and charging her higher prices than neighboring hospitals. "It's a trust issue," Ralph says. "I still have memories of the past, and they don't go away overnight."

With cash flow now king, sales rep McGorry is pushing customers such as Duke University Medical Center to pay faster. By cutting bureaucracy from the invoice process and offering better prices if Duke pays sooner, McGorry has cut the center's "days receivable"--the outstanding goods that haven't yet been paid for--by 30 days, to 8. Controls on inventory are also being tightened. By scrapping redundant products and installing information-management systems to better coordinate shipments to its big hospital clients, Baxter has reduced inventories 12%, to 88 days. By 1998, Loucks is aiming for 50 days.

If he can achieve such gains, analysts expect Baxter to generate operating cash flow of roughly $1 billion a year. Loucks will spend much of that expanding Baxter's high-margin global medical specialty business. It's easy to see why. While Baxter's U.S. hospital-products business, with 1994 sales of $5.7 billion, is growing at a 3% rate, its medical specialty sales, which hit $3.6 billion last year, are growing around 8% annually and even faster in Latin America, the Far East, and Eastern Europe. The surging unit--specialty products grew 17% in 1995's first quarter--now accounts for 38% of Baxter's sales and 61% of earnings. "That's really our oyster," says Loucks.

Still, Loucks's strategy is not without risk. Kenneth Abramowitz, health-care analyst with Sanford C. Bernstein & Co., warns that Baxter is playing catch-up overseas. And Baxter's new-product pipeline is thin. A home-dialysis machine introduced late last year should hit sales of $100 million in 1995, but a device that pumps blood through the heart, though approved in Europe, isn't expected to be O.K.'d in the U.S. until 1998. And Baxter's new blood substitute for use in emergency rooms--potentially a $3 billion market--faces stiff competition. "In the next three to five years, they're going to need some significant additions to their product line," says CS First Boston analyst Amelia McDonald. Loucks may have won himself some breathing room, but Baxter's recovery is far from assured.

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