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AMERICAN McGAW IS PROBABLE DIVESTITURE FROM BAXTER/AMERICAN MERGER: FIRMS HAVE OVERLAP OF ABOUT $500 MIL,; DISTRIBUTION NETWORK ENHANCED

Executive Summary

American McGaw's I.V. business will be a likely divestiture from the Baxter merger agreement with American Hospital Supply. Holding the third position in the U.S. large volume parenteral business behind Baxter and Abbott, American McGaw appears expendable to Baxter in order to satisfy antitrust concern about the combination of similar businesses in the deal. The I.V. business was identified by American as one of several "substantial overlap" businesses when American was fighting Baxter's initial overtures. Other logical divestiture candidates include blood expanding drugs, blood oxygenators, blood collection systems, a variety of catheters, kits and trays for medical procedures, surgical gloves and respiratory products. Baxter went into the merger attempt assuming some divestitures and has stated that it is ready to "agree to such divestitures or other actions as the Department of Justice may reasonably require before approving the transaction." Several spin-offs could also help reduce the debt that Baxter will have to carry to pay for the deal. First Boston, Baxter's advisor on the American deal, will also advise on divestitures. While McGaw has had a hard time cracking the major markets held by Baxter and Abbott, the firm has done better in several niches. In the I.V. nutritional business, for example, American McGaw held one-third of the nutritional segment as recently as 1983. The company has committed R&D funds in the drug area to developing new nutritionals: Hepatamine in 1983 and TrophAmine in 1984. McGaw Could Provide Entry Into Hospital Generic Market; Vertical Integration Opportunity For Whslrs. According to a 1983 breakdown of McGaw's chief business segments at a meeting with financial analysts, the business appeared to be divided into four relatively equal parts. LVPs accounted for 22% of the business; sets and devices accounted for another 24%. The remainder was "split fairly evenly" between irrigation/urology products and parenterals/nutritionals. McGaw is understood to have had a total of about $240 mil. in sales in 1984. While any new owner of McGaw will have to go up against a stronger Baxter/American business as well as Abbott, the business may present an unusual opportunity at this time. A number of the businesses looking at the U.S. generic drug market have been attracted to the hospital drug sector. McGaw could provide a means to expand into that business. McGaw could also be attractive to traditional drug whslrs. The hospital segment of the whsle. industry has been increasing rapidly and could reach the point at which vertical integration into an area such as solutions would make sense. Among drug companies, Lilly and Warner-Lambert already have a presence in the I.V. business through infusion pump subsidiaries. Both companies also have broad generic lines that could fit with a commodity hospital business. Lilly, however, has firm profit targets for acquisitions that McGaw probably could not meet. Arnerican's Pharmaseal subsidiary is another possible area for divestiture. The urological catheter business, for instance, is an area where American has had to divest an acquisition in the past to satisfy FTC concern over concentration. American and Baxter have recently ranked fourth and fifth in that business. Together they would have held about 17% of the market in 1983 with about $26 mil. in sales. C.R. Bard leads in that business with about 50% of the market.

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