Baxter profit falls 26% amid turnaround, quality issues

By Bruce Japsen
Posted Jan. 27 at 1:53 p.m.

Baxter International Inc.’s stock lost nearly 4 percent of its value today after the company said fourth-quarter profits fell 26 percent as the company works its way through a turnaround plan and escalating product quality issues.

The Deerfield-based medical product giant’s earnings were negatively impacted by $227 million in charges. The biggest cost was a $164 million charge for what it called a “business optimization” initiative, which included paying severances, shutting down certain product lines and executing an undisclosed number of job cuts.

Baxter shook up its management team in the fourth quarter and decided to focus on two divisions: medical products and bioscience treatments.

Also part of the charges was $25 million stemming from research costs related to acquisitions and nearly $40 million of the $227 million is related to a reserve being set aside to pay litigation costs related to its blood thinner heparin imbroglio.

In 2008, Baxter’s heparin was linked to several deaths of patients in the U.S. that had been infused with the blood thinner, which the U.S. Food and Drug Administration has said was contaminated by a Chinese supplier.

Baxter’s fourth quarter net income was $423 million, or 72 cents a share, compared to $572 million, or 94 cents a share in the fourth quarter of 2009.

“2010 was an unusually challenging year for our company,” Baxter chairman and chief executive officer Robert Parkinson said in a statement prior to an early morning conference call with analysts.

“However, we continue to benefit from the diversified and medically-necessary nature of our portfolio, broad geographic reach and strong financial position. We also executed on our key commercial, operational and organizational strategies intended to enhance our effectiveness, competitive position, and growth profile.”

Baxter has struggled in the last year amid global pricing pressure and quality control issues in various operations of the company. The latest disclosure came Thursday morning when Parkinson said the FDA sent two Baxter facilities in Puerto Rico a warning letter related in part to how the company has been reporting information to the agency in regard to how drugs are sold after they are on the market.

“Clearly our aspiration is to have none of these,” Parkinson said in reference to an analyst question about quality issues.

Baxter’s most high-profile product quality issue came last year when the FDA forced the company to removed its once popular Colleague medication delivery pump. Parkinson said the company introduced a replacement product and it is gaining market share.

“We have made great progress,” Parkinson told analysts in a conference call that lasted more than an hour. “Our aspiration is zero defect here. We are better than we were but clearly we have to get better.”

Parkinson said the company faces pricing issues around the world amid global economic issues.

Revenue was largely flat, rising one percent to $3.5 billion. Baxter said bioscience sales were up just 1 percent to $1.5 billion, driven by sales of its immune system boosting drug Gammagard. Medication sales, which include various intravenous therapies used in hospitals, rose 1 percent to $1.3 billion.

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