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Baxter International Hiding in Plain Sight

Baxter gets less Wall Street coverage than most big names in health care. Baxter's market cap is dwarfed by Abbott's and J&J's, and it is smaller than all Big Pharma companies -- foreign and domestic -- except Schering-Plough (SGP).

Baxter also gets less sell-side analyst attention than assorted biotech companies who have few or no products, little or virtually no revenue and modest or miniscule market caps. Examples, according to Thomson Reuters data, include Neurocrine BioSciences (NBIX), Vertex Pharmaceuticals (VRTX), Medarex (MEDX) and ZymoGenetics (ZGEN).

By most accounts, analysts ignoring Baxter are missing an interesting story.

The credit for Baxter's revival goes to Robert Parkinson Jr., a former Abbott executive who had been dean of the Loyola University of Chicago's School of Business Administration before joining Baxter in April 2004. He replaced Harry Kraemer Jr., who became CEO in 1999 and added the role of chairman in 2000.

"Parkinson has done a nice job of making this a more efficient business," Stralow says.

During Kraemer's tenure, Baxter emphasized aggressive growth, which was fine with Wall Street until it couldn't make good on hefty financial projections, says James B. Shein, a professor of management and strategy at Northwestern University's Kellogg School of Management.

"Considering this industry, it wasn't realistic," says Shein, Baxter "delivered pretty good results during most of Kraemer's tenure," Shein says, adding that Kraemer "took some unfair hits for things that happened."

Baxter revised financial forecasts in late 2002 and 2003, caused primarily by greater competition. By mid-2003, Baxter was closing some plasma-collection centers, firing 5% of its work force and further cutting its estimates. By late 2003, Baxter issued another reduced earnings forecast. In January 2004, Kraemer said he would resign.

When Parkinson assumed control, "he pushed for more focused results," Shein says. "He held people more accountable for results. He said Baxter had to make sure everything works well before we emphasize growth."

Parkinson put more home-office control over foreign subsidiaries "which were almost totally independent," and he instituted procedures to secure more timely payments from customers, Shein adds. "He focused more on cash and less on growth for the sake of growth."

Future growth should come, in part, from what William Blair & Co. cites as significant increases in R&D spending over the last two years. Biosciences holds the most promise, says Stralow. "They focus on what they do best," she adds. "Growth will be an internal story rather than through acquisitions."

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