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BAXTER STREAMLINING OF SALES AND DISTRIBUTION WILL RESULT IN $700 MIL. CHARGE

Executive Summary

BAXTER STREAMLINING OF SALES AND DISTRIBUTION WILL RESULT IN $700 MIL. CHARGE to fourth quarter pre-tax & earnings and a reduction in force of 4,500 jobs. A restructuring and cost-cutting program announced by Baxter International on Nov. 16 provides the details of long-range cost-containment measures made public by the company in September ("The Pink Sheet" Sept. 13, T&G-7). The initial actions included a hiring freeze and executive pay cuts. In the most recent revamping, 4,500 jobs, or about 7% of total employment, will be eliminated over the next five years. Cuts will be made across the board, from support staff to executive levels, the company said. In another restructuring that started nearly four years ago, Baxter used a bigger knife on manufacturing operations by closing 21 manufacturing facilities worldwide and cutting its workforce by 10%. In addition to the $700 mil. charge to pre-tax earnings, Baxter will take an additional $225 mil. to cover future product liability costs associated with breast implants and blood clotting concentrates. Baxter acquired the implants business, and potential liability, from American Hospital Supply Corp. when the two companies merged in 1985. Based on a proposed settlement of the litigation, Baxter estimates that total breast implant liability will be between $475 mil. and $618 mil. Insurance should pay for $347 mil. to $372 mil., the company said. The blood clotting agents liability is expected to be $130 mil., of which insurance would pay for $83 mil. to $94 mil. Of the $225 mil., $50 mil. is being set aside to cover related product liability, patent and civil suits. The company expects to generate annual pre-tax savings of $100 mil. in 1994, increasing to more than $350 mil. in 1998, as a result of the reorganization. Baxter is looking to sell the manufacturing portion of its six diagnostics businesses while retaining distribution rights to its products as well as those of the acquiring company. Baxter "has held preliminary discussions with several potential buyers," the company said. Less than three months ago, Baxter consolidated the six divisions along with two diagnostics distribution divisions into one operating unit. Baxter-manufactured diagnostic products generated $675 mil. in sales in 1992. Total corporate sales were $8.5 bil. Part of Baxter's restructuring effort is geared toward reorganizing its U.S. subsidiary's sales and distribution operations: the company is merging the distribution functions of its Hospital Supply Division and Scientific Products Division. "Our focus will be on lowering total distribution costs by eliminating duplicated functions," Chairman and CEO Vernon Loucks said. In addition, the company is planning to reduce by half the number of distribution centers it operates. Baxter runs 80 centers that deliver products directly to customers. Its long-range plan calls for scaling back to 40 significantly larger centers that serve multiple states. The company operates large centers in California and Illinois and is building another in New York state. Reiterating its previously announced plan to increase the number of "teamwork accounts" it will set up to sell product lines, Baxter said it is combining the sales teams of over 20 divisions into one sales organization "that will be divided into regions and managed in account teams responsible for selling across all divisions with a single point of contact for every customer." Among other steps Baxter is taking to streamline operations, the company is folding its top three tiers of management into one Office of the Chief Executive. Comprised of Loucks, 59, President and Chief Operating Officer James Tobin, 49, and Exec VPs Lester Knight, 35, and Tony White, 47, the office will oversee the operations of 10 Baxter businesses: eight operating units -- Renal, Biotechnology, Cardiovascular, International Hospital, I.V. Systems, Operating Room, Diagnostics Manufacturing and U.S. Distribution -- and two sales organizations -- Field Sales and Account Management, and Multi-Hospital Systems and Corporate Marketing. The first of those four businesses -- Renal, Biotech, Cardiovascular and Hospital Products -- accounted for "approximately one-third of the company's overall sales and two- thirds of its operating earnings" for the first nine months of 1993, the company said. "Over the next five years, these businesses are expected to generate compound annual earnings growth of 12% to 15%." Baxter said it is planning to invest almost $2 bil., more than "75% of its total capital and research and development investments," in these "high-return" medical technology businesses during the next three years.
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