Baxter International
Annual Report 1997

Plain-text annual report

Baxter International 1997 Annual Report THE BUSINESSES OF BAXTER INTERNATIONAL Blood Therapies 1997 Sales: $1.8 billion I.V.Systems/Medical Products 1997 Sales: $2.1 billion Core Business: Baxter’s Blood Therapies businesses are global leaders in Core Business: Baxter’s I.V. Systems/Medical Products business is a leading products and therapies used in transfusion medicine. The company is a provider of medication-delivery products and systems that deliver fluids and drugs leading developer and processor of therapeutic proteins used to treat hemophilia, to patients. It is the world’s leading manufacturer and marketer of intravenous (IV) immune deficiencies and other blood-related disorders. It also is a leading products for use in hospitals and other health-care settings. Baxter manufactures manufacturer of plastic blood-collection containers and automated blood- about 800 different IV products, from IV fluids in plastic containers, to electronic separation and collection systems, used by blood and plasma centers to collect infusion pumps, to ambulatory IV delivery systems. Additionally, the company blood and its components for use in a variety of applications. sells select products of other companies in countries outside the United States. Key Products: Recombinate™ Anti-hemophilic factor (Recombinant) was the first genetically engineered clotting factor for the treatment of hemophilia A. Gammagard® S/D IGIV is a viral-inactivated plasma-based derivative that boosts weakened immune systems. The 1997 acquisition of Immuno International AG adds Key Products: Baxter’s Viaflex ® container was the first flexible, plastic IV container and remains the standard for IV therapy world- wide. The company’s Mini-Bag™ IV containers carry the industry’s broadest line of premixed drugs for IV delivery. In 1997, Baxter intro- duced the Colleague™ volumetric infusion to the company’s breadth of biopharmaceutical products, including vaccines pump, which provides accurate, cost-effective electronic infusion for a broad and specialized blood-coagulation therapies. The Fenwal Blood-Pack® unit is range of therapeutic applications. The InterLink® IV access system was the the world’s most widely used manual blood-collection container system. The first “needleless” system for IV therapy and is used by nearly 2,000 health-care company’s Amicus ™ separator is the most advanced automated instrument for facilities worldwide. Other products include compounding equipment for mixing the collection of platelets, a blood component essential for blood clotting. IV nutrition solutions, ambulatory IV pumps, anesthesia products and automated dispensing systems for solid pharmaceuticals. Product Development: The company is conducting clinical trials of its hemoglobin therapeutic, or “blood substitute,” which is an oxygen-carrying Product Development: Baxter continues to expand its industry-leading line intravenous solution derived from human hemoglobin. Unlike a unit of blood, of premixed drugs. The company also is advancing its compounding technology the product can be given to patients of any blood type, so it can be administered to meet pharmacists’ needs for safety, efficiency and accuracy in preparing IV rapidly, potentially improving oxygen delivery to patients’ vital organs. This may nutrition solutions. The acquisition of Bieffe Medital S.p.A. adds new low-cost save lives and reduce complications for trauma patients and others with acute technology for manufacturing IV solutions containers without plasticized medical conditions. Baxter expects to launch the product in 2000. Meanwhile, polyvinyl chloride (PVC). This non-PVC container technology, which some the company continues to expand its capabilities in recombinant technologies customers prefer, complements Baxter’s IV and renal product lines. to produce therapeutic proteins. Baxter also is developing pathogen-inactivation technologies for blood components to enhance the safety of transfusion products. Global Strategy: The strategy of Baxter’s I.V. Systems/Medical Products unit is twofold: in established markets, Baxter is using its position in basic IVs Global Strategy: To optimize its growth opportunities in transfusion medicine, to introduce new, technologically advanced products and services that help in 1997 Baxter realigned its Blood Therapies businesses around three markets: customers increase productivity and reduce costs. In new markets, Baxter enters biopharmaceuticals; products and systems for collecting, storing and separating with products that meet its customers’ current requirements, then broadens its blood and its components; and hemoglobin therapeutics. The company will product offerings as health-care spending increases. The company’s acquisition grow its established businesses by introducing new products, by investing of Bieffe will allow Baxter to provide IV solutions more cost-effectively in in recombinant and other technologies to enhance the safety and purity of its emerging markets, and to participate in markets in which non-PVC containers products, and by expanding globally. Today, more than half of these businesses’ are required. The company also continues to form alliances or joint ventures sales come from Europe. Growth there, as well as in North America and Japan, to market or manufacture IV products in developing countries, such as Argentina, will come from new products. Growth in faster-growing, developing markets Chile, China, Hungary and Turkey. such as Asia and Latin America is fueled by established products such as blood-pack units and plasma-derived factor concentrates. In hemoglobin therapeutics, Baxter will continue to invest aggressively. Renal 1997 Sales: $1.4 billion CardioVascular 1997 Sales: $0.9 billion Core Business: Baxter’s Renal business is one of the world’s leading providers Core Business: Baxter’s CardioVascular Group is a global leader in the develop- of products and services for kidney dialysis, a treatment for end-stage renal ment and manufacture of products used to treat advanced heart disease and vascular disease, a life-threatening condition in which the kidneys fail. The company is disorders through conventional or minimally invasive surgical procedures. These a global leader in the manufacture of products for peritoneal dialysis (PD), a include a complete line of heart-valve replacement and repair products; disposable home-based therapy that Baxter pioneered in the late 1970s. Baxter also manu- medical devices, used to provide oxygen to the blood while the heart and lungs are factures products for hemodialysis, which is administered at a hospital or clinic. stopped during open-heart surgery; vascular products, used to remove clots from Baxter pioneered hemodialysis in the 1950s. peripheral blood vessels; cardiac-monitoring catheters; and contract perfusion services. Key Products: Baxter’s Dianeal ® solutions are the world’s leading brand of PD solutions, which are administered by patients through a surgically implanted catheter in their peri- toneum, or lining of the abdominal cavity. The peritoneum serves as the membrane through which waste products are filtered and Key Products: The company’s Carpentier- Edwards® pericardial heart valve, made from the tissue that surrounds a cow’s heart, is the world’s leading tissue heart valve due to its durability and performance. Baxter’s SpiralGold® oxygenator, used in cardiopul- monary bypass, is one of a series of products later drained from the body. The company’s Dianeal product line includes specially coated with the company’s patented Duraflo ® heparin treatment, which reduces formulated solutions for specific patient needs. Baxter’s Twin-Bag ™ container blood clotting and resulting complications. The company’s Swan-Ganz ® catheter, system (also called the UltraBag™ system) combines infusion and drainage pro- used to measure cardiac output and pressures inside the heart, and the Fogarty® cedures in one system, simplifying solution exchanges and reducing the chance embolectomy catheter, used in vascular surgery, have been industry standards of infection. One of Baxter’s most successful new products is the HomeChoice® for more than 25 years. automated PD machine. The lightweight, compact device cleanses the blood overnight while the patient sleeps. Hemodialysis products include hemodialysis Product Development: Baxter is continuing to work with leading cardiovas- machines, water-purification systems and dialyzers. cular surgeons to develop new and enhanced heart-valve therapy products, both tissue and mechanical, for valve replacement and repair. The company also is Product Development: Baxter continues to develop new PD solutions to investing in products and technologies for minimally invasive cardiac and manage specific patient conditions, new hardware systems to improve the quality vascular surgery, building off of its 1997 acquisition of Research Medical, Inc., of dialysis, and other products to reduce costs and improve patient convenience and its continued work in endovascular grafts for treating abdominal aortic and quality of life. Baxter’s Nextran unit is a leader in research on xenotransplan- aneurysms. The company’s Novacor® left-ventricular assist system is an tation, or animal-to-human transplants. Our researchers are developing genetically implantable, electronic pump that aids circulation in patients awaiting heart trans- modified pig organs that someday could be transplanted safely into humans. plantation. It has been approved in Europe as both a bridge and an alternative to This research extends beyond kidneys to livers, hearts and lungs. transplant, and currently is under regulatory review in the United States in the bridge-to-transplant application. Global Strategy: There are more than 800,000 dialysis patients worldwide. In many developing countries, thousands more go untreated. As the economies Global Strategy: Heart disease claims more lives and health-care dollars than of these countries grow, so will dialysis treatment rates. Baxter’s strategy is to any other medical ailment. Baxter’s strategy is to be a leader in providing products increase PD penetration in developed countries and expand rapidly into less- and services to treat advanced heart disease, aiding patients with the most life- developed nations, where PD is the preferred treatment due to its lower start-up threatening and cost-intensive conditions. Significant opportunities for Baxter costs. Baxter also is aggressively expanding its two renal-service businesses. are in such established markets as North America, Europe and Japan, where In international markets, Baxter’s Renal Therapy Services unit operates dialysis growth is driven by technological advancement. An aging worldwide population clinics in partnership with leading local physicians and hospitals to increase and the progressive nature of heart disease also will contribute to market demand access to treatment, improve patient outcomes and reduce clinics’ operating for Baxter’s products. And, as the economies of developing countries such as costs. In the United States, Baxter’s Renal Management Strategies unit is Brazil, China and India grow and more money is spent treating chronic health partnering with nephrologists to use advanced disease-management techniques conditions, they too, will represent significant growth markets for the company. to improve the quality and reduce the cost of long-term renal care. FINANCIAL HIGHLIGHTS OPERATING RESULTS Net sales (Dollars in millions, except per share data) Income from continuing operations before acquired research-and-development (R&D) expense1 Income from continuing operations Basic earnings per share from continuing operations before acquired R&D expense1 Basic earnings per share from continuing operations Operational cash flow from continuing operations before net litigation payments INVESTMENTS Capital expenditures RETURNS OTHER Research-and-development expenses Total shareholder return Dividends per common share Total assets Net-debt-to-capital ratio Stockholders’ equity Common stockholders of record at year-end 1997 $6,138 $ $ 652 300 $ 2.35 $ 1.08 $ $ $ 432 496 392 1996 $ 5,438 $ $ 575 575 $ 2.11 $ 2.11 $ $ $ 587 398 340 25.9% 14.1% $ 1.139 $8,707 $ 1.17 $ 7,596 46.9% 33.8% $2,619 62,900 $ 2,504 65,400 See financial section for more information. 1.In 1997, the company recorded a $352 million charge for purchased R&D relating to the acquisitions of Immuno International AG and Research Medical, Inc. 2.Bar chart reflects basic earnings per share before R&D charge referenced above. 6.0 4.0 2.0 0 600 400 200 0 2.50 1.50 .50 0 95 96 97 95 96 97 95 96 97 Net Sales (in billions of dollars) Operational Cash Flow (in millions of dollars) Basic Earnings Per Share from Continuing Operations (in dollars) 2 Table of Contents Letter to Shareholders Core Capabilities Blood Therapies I.V. Systems/ Medical Products 1 4 6 8 Renal CardioVascular Corporate Citizenship Financial Information Index 10 12 14 16 A Message from Chairman and Chief Executive Officer Vernon R. Loucks Jr. LETTER TO SHAREHOLDERS A A t Baxter International, we serve some of the world’s most chronic and critical health-care needs. It is important work. Important to the patients and health-care professionals who use our products in 112 countries. Important to our employees, who know they are in the business of saving lives. And important to our shareholders, who invest in the opportunity to advance the frontiers of medicine worldwide. Baxter today is executing its strategies of global expansion and technological innovation in four businesses: blood therapies, intravenous (IV) therapy, renal therapy and cardiovascular medicine. These strategies enabled us to deliver attractive returns to our shareholders in 1997, and we are committed to doing so in 1998 and beyond. Key Accomplishments We made significant progress in 1997. We enhanced our technological superiority by introducing new products like our Amicus™ separator, an automated device that collects blood components, and the Colleague™ infusion pump, which is setting new standards for ease of use and accuracy in IV therapy. We expanded all of our businesses geographically, particularly in Asia and Latin America. And, our research-and-development initiatives made substantial progress in clinical testing. Additionally, several key acquisitions improved both our technology base and our global reach. They included: l Immuno International AG, a leading global manufacturer of therapeutic proteins. Baxter’s and Immuno’s strengths—both in terms of product lines and geographic markets—are extremely complementary, and we believe this will lead to greater gains for our customers and shareholders. l Research Medical, Inc. (RMI), a leader in products used for minimally invasive heart and vascular surgery. The combination expands our product offerings in one of the fastest-growing segments of cardiovascular care. l Bieffe Medital S.p.A., a leading dialysis, IV therapy and irrigation solutions business. Bieffe’s flexible non-PVC container technology and cost-effective 1 manufacturing processes enable our Renal and I.V. Systems businesses to enter emerging markets more quickly. Global expansion and technological innovation are the keys to our competitive edge. It’s great to be first, best or biggest in any business. In medical specialties and markets where we operate, Baxter is often all three. That leadership drives growth and enables us to consistently meet our financial commitments to you. 1997 Financial Commitments l Increase sales 20 percent, including acquisitions; or approximately 10 percent excluding acquisitions. Sales grew 16 percent, including acquisitions and before the impact of foreign exchange. Sales rose 6 percent, excluding acquisitions. l Grow earnings in the low double digits. Income from continuing operations increased 13 percent, excluding a charge for acquired research and development related to the Immuno and RMI acquisitions. l Generate $300 million to $400 million in operational cash flow before litigation payments, after investing approximately $1 billion for capital improvements and research and development. Baxter generated $432 million in operational cash flow before litigation payments, after spending $392 million in research and development and $496 million in capital expenditures. Overall, total return to shareholders (including reinvested dividends) for 1997 increased 26 percent. This was greater than the Dow Jones Industrial Average and the S&P Medical Products and Supplies Index. We also increased the dividend for the 41st consecutive year. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T LETTER TO SHAREHOLDERS Contributing to this performance is our practice of directly aligning management’s financial incentives with your interest as shareholders, through stock- purchase programs, stock options and bonus plans based both on the achievement of our financial commitments and on stock-price appreciation. Your board of directors also is compensated primarily in Baxter stock. Our financial goals for 1998 are equally specific and ambitious. We expect to: l Increase sales approximately 10 percent, before acquisitions and the impact of foreign exchange. l Grow earnings in the mid-teens, before the impact of foreign exchange, and in the low double digits after absorbing the impact of foreign exchange. l Generate at least $500 million in operational cash flow. This will be after investing approximately $1 billion in capital improvements and research and development. We intend to achieve our goals in 1998 and beyond by building on our strengths and sticking to our strategies. Strategies and Strengths Our strategy of technological innovation stretches back through a long line of firsts: first flexible, plastic container for IV fluids; first artificial kidney machine; first implantable heart valve; first Factor VIII clotting concentrate to treat hemophilia, and many more. Today, Baxter’s businesses are all based on expertise related to the blood and circulatory system. What’s more, they share basic technologies. Our Blood Therapies, I.V. Systems and Renal businesses all use disposable 2 plastic containers to deliver solutions. All four businesses rely on sophisticated instrumentation to control everything from IV pumps to heart-lung machines. To make the most of the strengths we share, and to encourage ongoing innovation, Baxter’s Technical Council brings together top scientists from throughout the company. We operate three corporate research centers in the United States, Belgium and Japan. We also maintain vast scientific databases that are available to all our businesses worldwide. Despite this expertise, we have aggressively built on our internal strengths by accessing technology developed elsewhere. We have expanded our product port- folio in recent years by licensing and buying technology, acquiring companies and entering into joint ventures. This is one way we keep a new stream of ideas flowing into the company to complement our existing base of knowledge. During 1997, we continued to advance our clinical trials, several of which are testing products that represent breakthroughs in medicine. We became the first company to begin Phase III clinical trials in trauma patients with a hemoglobin therapeutic, or “blood substitute.” Called HemAssist™ (Hemoglobin Crosfumaril), this hemoglobin-derived solution is being tested for its ability to deliver oxygen to patients’ vital organs, potentially reducing complications or saving the lives of patients with significant blood loss. We expect to bring this product to market in late 1999 or early 2000. We also are pursuing potential breakthroughs in xenotransplantation, or animal-to-human transplants. Baxter added several sites to its clinical trial that uses transgenic pig livers as an extracorporeal (outside the body) perfusion device as a bridge to transplant for patients suffering from acute liver failure. We hope to complete this trial within the next year. Other trials, such as those for our Novacor® left-ventricular assist device, used to support patients with failing hearts; and for a pulmonary medication-delivery device, which potentially will deliver medication to patients’ lungs more efficiently, are progressing well. Besides being technologically adept, we also are committed to a strategy of global expansion. Our approach is market-by-market, developing and adapting products and services for the specific state of each market’s medical system and economic infrastructure. We listen intently to our customers around the world, then design and deliver products and services that meet their requirements. That’s what it means to be a truly global company. These twin strategies of technological innovation and global expansion have proven very successful. Today, products that hold No. 1 market positions — many of which we were the first to introduce — account for about 70 percent of sales. Thirty-six percent of our sales are from products introduced within the last five years. At the same time, more than 50 percent of sales, and 75 percent of earnings, come from outside the United States. Elsewhere in this report, sections on our core capabilities and individual businesses explain how we will pursue these strategies in 1998 and beyond. l Our Blood Therapies businesses will build on the Immuno acquisition to expand in Europe and elsewhere. They also will continue clinical trials for our hemoglobin therapeutic in the United States and Europe, and for our pathogen-inactivation technologies. l Our I.V. Systems/Medical Products business will aggressively market its new Colleague™ pump worldwide, while using technology acquired from Bieffe to complement and expand its geographic base. l Our Renal business will expand peritoneal dialysis and hemodialysis therapies into developed and emerging markets. It also will continue to expand its two service businesses: Renal Therapy Services, which operates dialysis clinics overseas, and Renal Management Strategies Inc., a disease-management organization focused on the U.S. market. l Our CardioVascular business will build on its leadership in heart-valve therapy, as well as pursue opportunities in minimally invasive surgery and 3 other developing treatments for late-stage cardiovascular disease. Employees and Community Behind all these plans and strategies stand the people of Baxter. Our employees are exceptionally dedicated. They work here not just to make a living, but also to make a difference. To them, we pledge continued opportunity, support and respect. In 1997, we also reinforced our commitment to communities around the globe where we live and work. Through direct donations, including disaster relief, and through our support of The Baxter Allegiance Foundation, we worked to improve the availability and affordability of health care from Düsseldorf, Germany, to Cali, Colombia. It is a commitment that draws on our business skills as well as the caring and dedication of Baxter people everywhere. At Baxter, we are driven and inspired by our strategies of technological innovation and global expansion; by the chance to save lives and alleviate suffering worldwide; by the opportunity to provide a challenging and rewarding work environment for our employees; and by the responsibility to generate outstanding returns for our shareholders. During 1998, we have the opportunity, and the obligation, to achieve those goals once again. We will meet the challenge. On behalf of the entire Baxter team, Vernon R. Loucks Jr., Chairman and Chief Executive Officer February 13, 1998 B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T CORE CAPABILITIES F F or more than 60 years, Baxter has achieved many medical breakthroughs we all take for granted today. Intravenous therapy. today share three core elements: expertise in technologies related to the blood and circulatory system, global leverage and Kidney dialysis. Heart-valve replacement. Blood-component therapy. Building on this legacy of innovation, Baxter’s businesses superior manufacturing capabilities. Baxter is a global leader in technologies related to Baxter built on its expertise in basic IV solutions In 1997, the Smithsonian Institution recognized the blood and circulatory system. The company’s to develop IV nutrition, premixed and frozen drugs, two Baxter products for their contribution to medical blood therapies businesses make products that dialysis solutions to cleanse the blood of kidney science. Baxter’s Renal Link™ clinical software collect, separate and store blood, as well as thera- patients, plasma-based solutions to treat hemophilia system, which helps physicians evaluate patients peutic proteins derived from blood. Its renal and other diseases, and genetically manufactured to achieve the best treatment, became part of the products cleanse the blood. Cardiovascular products therapeutic proteins. The company’s hemoglobin- Smithsonian’s collection of products depicting keep blood pumping through the body. Intravenous based “blood substitute”—now in clinical trials innovation in information technology. The Isolex® (IV) products infuse drugs and other solutions into the blood. Throughout its history, Baxter has capitalized on expertise in select core technologies to develop a steady stream of product innovations across busi- nesses. Because many of these products are based 4 on related technologies, they are produced in the same manufacturing plants. The company further leverages its expertise geographically, extending the reach of its life-saving products to patients around the world. History of Innovation An estimated 3,000 patients die each year in the United States awaiting an organ transplant, and another 100,000 patients die never having qualified for a place on the donor-organ waiting list. Nextran’s efforts to make porcine organs more acceptable for the human immune system magnetic cell separator, currently used in clinical studies, was included in an exhibit commemorating the 25th anniversary of the National Cancer Act. The Isolex system collects stem cells, the “parents” of all other blood cells, for infusion into cancer patients to rebuild their immune systems following high-dose chemotherapy. Extending Expertise Across Borders Baxter’s operating experience extends to nearly every type of political and health-care system in the world. This experience translates into tremendous global penetration—more than 50 percent of the company’s sales come from outside the United When the company was founded in 1931, Baxter’s may help to alleviate this critical shortage. States, and represent the company’s fastest-growing first products were a line of five IV solutions supplied markets. Many of Baxter’s leading product lines— in glass containers. These products were the first and targeted for release in the year 2000 pending Recombinate™ Anti-hemophilic factor (Recombinant), commercially manufactured IV solutions, making regulatory approval—is the latest example of how Fenwal blood-collection systems, Swan-Ganz® life-saving IV therapy a reality. This technology Baxter uses its expertise in both blood derivatives catheters, Carpentier-Edwards® heart valves, led to the introduction of the first sterile, vacuum and IV infusion technology to create potential Dianeal® PD solutions, and others—are leaders blood-collection containers, which made blood breakthrough products. in the markets in which they are sold. banks practical for the first time. When the company’s Fenwal business developed the first flexible, plastic Xenotransplantation also has potential application A key factor in the company’s success in global blood-collection system in the 1950s, it led directly across Baxter’s businesses—particularly for the markets is its practice of recruiting employees who to the creation of Baxter’s Viaflex® product line company’s Renal and CardioVascular units. This understand the business culture, customs, of plastic IV bags, containers for peritoneal-dialysis involves the genetic modification of animal organs (PD) solutions, and other Baxter products. for transplant into humans. The technology is being developed by Baxter’s Nextran unit, which is conducting research with hearts, kidneys, livers and potentially other organs. health-care system and practices, and government Leveraging Manufacturing Excellence sets plant in Sherbrooke, Canada, was chosen by policies of the markets in which they work. This Every Baxter manufacturing plant around the world the Province of Quebec as the first recipient of its enables Baxter to more effectively tailor its leadership takes advantage of the expertise the company has Le Qualimètre Award, recognizing the facility’s in key areas of technology to grow local markets. developed over the years as a leading producer dedication to total quality. In Belgium, Baxter’s For example, Baxter is a global leader in PD products of critical health-care products. When Baxter Lessines plant was named factory of the year by and services. Two years ago, the company decided establishes a PD solutions plant in a country, it is a panel comprised of industrial representatives to begin operating dialysis centers outside the well along the road to being able to produce IV who assessed the manufacturing excellence of United States, frequently partnering with local solutions, blood-collection containers and other more than 200 companies. physicians. Baxter’s Renal Therapy Services (RTS) products that use similar manufacturing technolo- unit now has nearly 70 centers in Asia, Latin America gies. Baxter plants share expertise in plastics Baxter’s core capabilities will continue to drive the and Europe, and has more than doubled its patient extrusion, heat-sealing and filling, sterilization growth of the company. As new technologies come base since 1996. Baxter expects RTS to continue its and many other processes. on board, the company will remain true to its mis- significant growth in 1998, particularly in Europe. sion of leveraging its technological expertise, its The company’s electron-beam sterilization system is one example. It was developed to sterilize a particular part on the disposable blood-collection kits used with Baxter’s CS-3000® blood-cell separator. These kits are manufactured at Baxter’s facility in Mountain Home, Arkansas, which also produces most of the plastic sheeting used in Baxter’s IV, PD and blood-collection containers around the world. This “E-beam” technology, which provides a pinpoint stream of energy to sterilize specific plastic components, has several applications across the company. Baxter manufacturing worldwide adheres to the 5 In 1997, Baxter’s manufacturing facility in Singapore earned the Singapore Quality Award, the country’s highest recognition of quality excellence. The facility manufactures intravenous tubing and electronic infusion systems. highest standards of quality. In 1997, the company’s global presence and its manufacturing excellence operation in Singapore, which manufactures IV to bring quality products and services to more and Baxter’s Renal Therapy Services (RTS) unit partners with nephrologists outside the United States to operate dialysis clinics dedicated to advancing the treatment of kidney disease. RTS provides clinical and administrative services that help nephrologists deliver quality care most cost- effectively, improve patient outcomes and expand patient access to a full range of therapies. To fully realize its global potential, Baxter last year administration sets and electronic infusion pumps, more patients around the world. created regional boards to direct the company’s won the Singapore Quality Award, that country’s activities on a regional basis. These boards, repre- highest award for outstanding quality management senting Europe, Japan, Asia, North America and systems. Other Baxter operations that have won Intercontinental (Latin America, Eastern Europe, national quality awards include those in the Middle East, Australia, New Zealand and other Toongabbie, Australia, in 1991; Lessines, Belgium, countries), include individuals from all four Baxter in 1992; Cali, Colombia, in 1994; and Alliston, business segments to capitalize on growth opportu- Canada, in 1996. Also in 1997, the company’s IV nities in specific markets. The boards work closely with Baxter’s operating units to ensure an efficient, cohesive strategy for global growth that leverages all of the company’s capabilities on a worldwide basis. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T HELPING PATIENTS LEAD MORE FULFILLING LIVES J J ohn Bacich’s most valuable time during his 30 years with Baxter’s Hyland division has been spent with people with hemophilia. Baxter is the world’s leading manufacturer of plasma-based and therapeutic proteins derived from human blood plasma. Hyland, in addition to producing Factor VIII, processes albumin, a blood-volume expander for burn victims and other critically ill patients, and intravenous gamma glob- recombinant Factor VIII, the clotting factor missing ulins, used to treat patients with immune deficiencies. from the blood of most people with hemophilia. Immuno processes numerous other plasma derivatives, “I remember when parents had to drive long distances including albumin and additional factor concentrates, several times per month to get their children with hemo- immunoglobulins targeted at specific diseases, and a philia transfusions of fresh-frozen plasma, before there fibrin sealant used to stop patients’ bleeding. was factor concentrate,” says Bacich, co-president, Hyland and Immuno also combine their industry- Hyland/Immuno. “I’ve seen Baxter pioneer countless leading plasma-screening and viral-inactivation technological advances to turn hemophilia from a debili- technologies for increased product safety, and their tating disease to one which, while still requiring chronic research and production capacity. Baxter can now therapy, enables more patients to live full, productive lives. process more than three million liters of plasma a year. That’s what keeps me motivated and working at Baxter.” Additionally, the company’s recombinant manufacturing Today, the biggest concern of the hemophilia popu- facility in Thousand Oaks, California, will provide lation, Bacich says, is product safety. “A close second significant potential for the future. is always having a steady supply of product.” Baxter’s Anderson says that no company has more expertise acquisition of Immuno International AG enhances the in blood therapies than Baxter. “Burn victims go home company’s capabilities in both of these areas, while adding from the hospital more quickly. Hemophilia patients 6 many products to treat a host of other conditions. lead more productive lives. Cancer patients recover from In 1997, Baxter completed its acquisition of treatment with less-serious side effects. That’s why our Immuno, a leading global manufacturer of therapeutic expertise in blood therapies is critical.” proteins. This acquisition increases Baxter’s global Elsewhere in Baxter’s Blood Therapies businesses, reach, allowing the company to serve more patients. the company’s HemAssist™ (Hemoglobin Crosfumaril) The greatest expansion is in Europe, where Immuno hemoglobin therapeutic progressed to final-stage derives more than three-quarters of its sales. “It also clinical testing. The Amicus™ separator, used for the opens up opportunities for Immuno’s products in the collection of blood components, was introduced to U.S. United States, Latin America, Japan and Asia, where customers. Finally, Baxter combined the assets of its Baxter has a stronger presence,” says Tim Anderson, Immunotherapy division with VIMRX Pharmaceuticals Baxter group vice president. Inc. to form a new company to develop cellular therapies The acquisition greatly broadens Baxter’s line of to fight cancer and other diseases. Marilène, a cancer patient and mother of two, had Tisseel® fibrin sealant applied to help heal wounds resulting from radiation therapy to her face. By promoting fast, safe and effective wound healing, the therapy enabled her to eat normally again in a relatively short period of time, further aiding her recovery. Transfusio A surgeon in France prepares to administer Tisseel® fibrin sealant, which is used to control intraoperative bleeding in surgical procedures. It consists of fibrinogen and thrombin, two blood proteins that, when mixed, form a natural clotting substance called fibrin to stop bleeding and seal internal wounds. Developed by Immuno International AG, Tisseel is one of a number of wound-management products Baxter plans to introduce in the coming years. n Medicine Market Demand for Amicus™ Kits (number of kits in thousands) Market demand continues to grow for Baxter's Amicus separator, the industry's most efficient platelet-collection device. 60 50 40 30 20 10 0 Total North America Europe Japan mid-1995 1996 1997 One kit is used for each platelet-collection procedure. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T A LIFELINE FOR LIFE’S SMALLEST PATIENTS T T he neonatal intensive-care unit (ICU) of the about 700 high-risk and premature infants a Children’s Hospital of Illinois in Peoria, treats year—from babies born with complex heart problems "It satisfies the one need that hadn't previously been met for patients, and that is a very accurate pump that can be used in a wide range of applications throughout the hospital," says Jack McGinley, group to premature infants weighing as little as 10 ounces. vice president, I.V. Systems/Medical Products. As one of the nation’s leading neonatal ICUs, the Customers played a key role in the product's hospital served as a test site for Baxter’s Colleague™ development, according to Dave Drohan, president, volumetric infusion pump. I.V. Systems, who led the crusade to acquire the core Introduced in 1997, the Colleague pump is an technology for the Colleague pump from a European electronic infusion pump that provides more precise company in 1993. "We listened to our customers and flow rates, can be used for all types of patients and is gave them the product they were asking for." easier to use than existing devices when infusing In addition to its clinical benefits, the Colleague intravenous (IV) solutions into patients. The pump can pump also can be used with standard Baxter IV sets deliver flow rates as low as 0.1 milliliters an hour and rather than more expensive IV administration cassettes. as high as 1,200 milliliters an hour. This wide range "This cost-effectiveness is a significant competitive allows it to be used in virtually any clinical setting— advantage," Drohan says. "Colleague offers the eco- from the neonatal ICU, where the smallest dosages must nomic benefits of a standard-set pump, yet it is as be delivered with the highest degree of accuracy, to the accurate as pumps that require expensive cassettes." emergency room, where trauma victims may require Drohan estimates that the Colleague pump will large volumes of fluid. represent 90 percent of Baxter’s IV pump sales by 8 “We had one baby on the Colleague who weighed year-end 1998. "This pump positions us for continued less than a pound and required seven IV lines running leadership in the electronic flow-control marketplace." simultaneously,” says Cheryl Colgan, clinical educator Elsewhere in the I.V. Systems/Medical Products for the neonatal ICU at Children’s Hospital. “For cases business, the acquisition of Bieffe Medital S.p.A. broadens this complex, we have not found any other pump that Baxter's ability to serve the global IV market. Bieffe adds meets our needs as well as the Colleague pump.” new, low-cost non-PVC container technology that gives Following the pump’s successful trial in the neonatal Baxter a strong competitive position in several inter- ICU, it was brought back in for trials in the pediatric ICU. national markets. Other acquisitions and joint ventures “They loved it as well,” Colgan says. The hospital, outside the United States also were completed in 1997 as which previously employed three different types of IV part of the company's initiative to globalize its IV business. pumps, now plans to replace all of its pumps with A main area of emphasis is Latin America, where sales the Colleague pump. of the company's IV products grew 11 percent in 1997. Nathan Denault, with his parents Steve and Crystal, was the first patient to be treated with the Colleague™ pump in clinical trials last spring. Because he was born 12 weeks prematurely and weighed only two pounds, he could receive only an extremely small amount of fluids. Nathan benefited from the Colleague pump’s ability to deliver flow rates as low as 0.1 milliliters an hour. Medicati The Colleague™ pump is manufactured in Baxter’s Singapore plant. The facility, which also manufactures solution-administration sets and components for the company’s InterLink® “needleless” intravenous (IV) access system, is the largest IV pump manufacturing plant in the world. Baxter introduced the Colleague pump in 1997. onDelivery Global IV Manufacturing Presence B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T PROVIDING SOLUTIONS FOR A DEADLY DISEASE F F ifty-year-old jewelry craftsman Antonio Romero of Mexico City was diagnosed with end-stage renal disease (ESRD), or kidney failure, in September 1994. specially formulated solutions for specific patient needs. These include low-calcium solutions for patients who have problems managing their calcium level; Extraneal™, a polyglucose solution for patients The most common treatment for ESRD in most who require a higher fluid-removal rate; and Nutrineal™, parts of the world is hemodialysis, a therapy pioneered an amino-acid-based solution that provides nutrition by Baxter in the 1950s, in which the patient’s blood for patients who suffer from malnutrition. is filtered through a machine outside the body to Baxter also has begun to introduce its Twin-Bag™ eliminate waste normally removed by healthy kidneys. PD solution container in developing markets. The product Like an increasing number of nephrologists, however, combines infusion and drainage in one system, simplify- Romero’s doctor instead prescribed peritoneal dialysis ing solution exchanges and reducing infection rates. (PD), a newer, faster-growing therapy introduced by In developed markets, automated peritoneal dialysis Baxter in 1978. (APD) is the fastest-growing form of therapy. Baxter has Unlike hemodialysis, PD is a home-based therapy. fueled much of this growth with its HomeChoice® APD It uses the body’s peritoneal membrane as a filter to machine. The lightweight, compact device cleanses cleanse the blood rather than external pumping and the blood overnight while the patient sleeps. filtering equipment, offering significant cost and lifestyle Elsewhere in Baxter’s Renal business, the company’s advantages. “Being a home therapy, with flexible acquisition of Bieffe Medital S.p.A. will broaden its scheduling of solution exchanges, PD makes it easier position in the global renal market. Baxter also continued for patients to work and lead a normal home life,” says to expand its Renal Therapy Services (RTS) business, 10 Dr. Mario Matos Martínez of the Centro Médico “La which operates dialysis centers in partnership with local Raza.” “It represents a better quality of life for patients.” physicians in a number of countries outside the United Baxter is the world’s leading provider of products States. RTS doubled the number of patients it served for PD. The therapy is growing fastest in developing in 1997 to more than 5,200, and plans to aggressively markets, where patients lack access to dialysis centers expand in Europe in 1998. In the United States, Baxter’s or kidney transplants. “Without treatment, patients Renal Management Strategies unit and Humana Inc. with ESRD will die. In some countries, PD is the signed the industry’s first national managed-care patient’s only option,” says Don Joseph, group vice agreement for kidney-disease patients, designed to president, Renal. improve patient outcomes while reducing costs. In To enhance the therapy, Baxter continues to intro- 1998, Baxter plans to introduce a new hemodialysis duce new products. The company’s Dianeal® product instrument with advanced features to improve its line of PD nutritional solutions has evolved to include position in the hemodialysis market. Mexico City student Alma Lilia Martínez is able to lead an active life thanks to peritoneal dialysis (PD), a home-based therapy introduced by Baxter in the late 1970s. The therapy is particularly popular in developing markets due to its low start-up costs compared to hemodialysis. Baxter is the world’s leading provider of products and services for PD. Kidney Each month, Baxter Renal Service Specialist Martín Ramírez delivers peritoneal-dialysis (PD) solutions to kidney-disease patient Antonio Romero of Mexico City. More than 90 percent, or 15,000, of Mexico’s dialysis patients are on PD, which is the second-largest number of PD patients in the world after the United States. Baxter introduced home delivery of PD solutions in Mexico in 1996. Dialysis 1,500 1,000 500 0 e p o r u E n a p a J a i s A a d a n a C s e t a t S d e t i n U a c i r e m A n i t a L Dialysis Patients Worldwide (patients per million population) The number of patients being treated for kidney disease varies dramatically by geography. Baxter's strategy is to increase access to dialysis worldwide. Source: Baxter estimates and national registries. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T FIGHTING THE WORLD’S NO.1 KILLER W W hen Sandra Austhof’s heart valve began and nutritionist at the Cleveland Clinic to fail, this mother of two young sons Foundation had three treatment options: replace it with over the next five years, its valves and valve-repair pro- ducts will be used in half of such procedures performed in the United States. Also contributing to growth in Baxter’s Cardio- a tissue valve, made from human or animal tissue; Vascular business is the trend toward minimally invasive replace it with a mechanical valve, made from carbon, surgery. Baxter is developing products for both “beating” titanium or other substances; or repair it with an annu- and “stopped” heart minimally invasive procedures, loplasty product. Austhof’s surgeon opted to implant drawing from the company’s well-established franchises Baxter’s Cosgrove Edwards® annuloplasty system, which in heart-valve therapy, cardiac access and support, is used to reshape and repair defective heart valves. perfusion technologies and services, and critical-care Baxter is a world leader in heart-valve therapy, monitoring systems. The 1997 acquisition of Research providing every treatment option for patients undergoing Medical, Inc. adds a number of other products for both heart-valve procedures, including replacement valves— conventional and minimally invasive cardiac surgery tissue (bovine and porcine), mechanical and human— to Baxter’s portfolio. and repair rings, like the one that Austhof received. “Our goal is to provide products to surgeons that Austhof had been hoping that her heart valve could enable them to use the therapeutic approach that best be repaired, which would permit many of the quality- suits their patients’ needs, whether this means using of-life benefits also associated with tissue valves. Had conventional or minimally invasive methods,” says a mechanical valve been implanted, Austhof would have Mike Mussallem, group vice president, CardioVascular. been required to take life-long blood-thinning medica- To broaden its heart-valve portfolio, in 1997 Baxter 12 tions, eliminating her ability to have more children. signed an agreement with the American Red Cross “I felt shocked and frightened when I first learned to market human-tissue valves that have been cryopre- about the seriousness of my condition,” Austhof said. served. Baxter also received European regulatory “Once the surgery was over, I was so relieved. I knew clearance to market its Edwards MIRA™ bileaflet I made it and was going to survive.” mechanical heart valve, and plans to initiate U.S. clinical Cardiovascular disease is among the top three trials in 1998. diseases in terms of health-care spending worldwide. The company also continued its work with leading Baxter’s CardioVascular business focuses on late-stage clinicians to fight cardiovascular disease. Baxter signed cardiovascular disease, the fastest-growing segment a multiyear agreement with the Lerner Research Institute of this marketplace. of the Cleveland Clinic Foundation to jointly develop Nearly a quarter-million heart-valve procedures will new products and processes to treat late-stage be performed worldwide in 1998. Baxter estimates that cardiovascular disease. Sandra Austhof, shown here with her husband Joel and their sons, Bradley and Jared, is one of a growing number of people who have opted to have their heart valves repaired rather than replaced. Austhof received Baxter’s Cosgrove Edwards® annuloplasty system. Baxter is a world leader in both replacement heart valves and valve-repair products. Cardiovasc U.S. Heart-Valve Procedures, 1996 Dr. Delos M. Cosgrove, chairman of the department of thoracic and cardiovascular surgery at the Cleveland Clinic Foundation, performs minimally invasive surgery to repair a patient’s defective heart valve. Baxter heart valves and valve-repair products are used in the majority of these procedures. The Cleveland Clinic is the world’s largest cardiovascular center, providing care to more cardiovascular patients than any other hospital. 54% Tissue Valves/ Repair Rings 46% Mechanical Valves ular Therapy The U.S. market continues to shift to tissue products used in heart-valve replacement and repair. Source: Baxter estimates. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T CORPORATE CITIZENSHIP B B axter and its employees play a vital role in producing life-saving products and services for patients around the world. The company also plays an important role in the communities in which it does business. From product donations and health-related grants, to environmental stewardship, volunteerism and support of women- and minority-owned businesses, Baxter is making a positive and far-reaching impact. Worldwide Philanthropy of health care. The foundation's grant supports a They helped renovate homes for the elderly, staffed The Baxter Allegiance Foundation’s grant-making mobile clinic that offers medical care to homeless homeless shelters and raised funds for medical initiatives extend across international borders, people living in the streets of Düsseldorf. The research. In Northern Illinois, hundreds of Baxter helping to improve access to health care on three German Medical Society has since registered the employees participated in the Y-ME campaign continents. In 1997, the foundation provided clinic as an official medical facility, qualifying it for against breast cancer. Baxter employees from millions of dollars in philanthropic gifts in the government funding and eliminating the need for Europe and the United States volunteered as camp United States, Europe, Latin America and Mexico. future foundation grants. counselors at the Barretstown Gang Camp in Next year, the foundation will further expand its County Kildare, Ireland, where seriously ill children geographic reach to include Japan and Asia. l Community health, Los Angeles, California. learn and play together in a nurturing environment. In 1997, the foundation continued to strengthen its concentration of medically uninsured people in the To support education, Baxter sponsored four teams community ties through several collaborative part- United States, nearly one-third of whom are under in the FIRST national robot tournament. FIRST South Central Los Angeles (L.A.) has the highest 14 Medizinische Hilfe für Wohnungslose Düsseldorf, a mobile clinic providing care to the homeless, was one of numerous organizations that received grants from The Baxter Allegiance Foundation. age 15. Additionally, it has the highest incidence of poverty in L.A. County. A foundation grant is enabling the Charles R. Drew University of Medicine and Science to reopen public health clinics in the area that had been closed due to county fiscal con- straints, and to extend its ambulatory care training program to prepare the next generation of health professionals to work in medically underserved and indigent communities. Providing a Lifeline During Crises Through the international relief organization, AmeriCares, last year Baxter and Allegiance Corporation donated nearly $5 million in medical Many Baxter employees volunteer their time to worthy causes in their local communities. Ricky Bartlett, a sterilizer operator at Baxter’s manufacturing plant in Marion, North Carolina, is a volunteer for the McDowell County Rescue Squad. nerships with local institutions and community supplies to people around the world coping with (For Inspiration and Recognition of Science and groups, and by providing grants to 190 inadequate medical care and supplies, natural Technology) is a non-profit organization that programs, including: disasters and the effects of war. Since 1987, Baxter establishes business, community and student part- l Care for the homeless, Düsseldorf, Germany. million in medical supplies through AmeriCares. youth to learn about science and technology Germany's high unemployment rate, coupled with through participative and competitive activities. and Allegiance together have donated nearly $100 nerships dedicated to inspiring and encouraging the growing number of refugees from the war in Making a Difference in Our Communities Bosnia, have created a homeless population of Reflecting Baxter's commitment to community Many of Baxter’s employee volunteer efforts led to nearly one million people, many critically in need service, Baxter employees across the globe were additional support through the company’s Dollars active in a variety of volunteer activities. for Doers program. Funded by The Baxter l Cutting hazardous and other regulated waste The company's efforts to provide a supportive Allegiance Foundation, the program provides disposal 1.2 million pounds worldwide between environment for its employees was recognized by grants to organizations in the United States where 1989 and 1996. employees volunteer. The foundation also matches BusinessWeekmagazine when it named Baxter as one of the top 30 family-friendly companies in the employee donations to qualifying health and l Reducing product packaging by 39 million United States. BusinessWeekcited a corporate educational organizations. pounds between 1990 and 1996. culture that strongly supports a balance between the demands of work and family life. During the Focusing on Safety and the Environment Baxter subscribes to a number of voluntary year, Baxter published a seminal study on work- Baxter has set aggressive health, safety and environmental, health and safety initiatives and-life conflicts that has become an industrywide environmental goals in an effort to provide a safe worldwide. These currently include the U.S. guide for work-and-life issues. Additionally, for the workplace for its employees, and to respect the Environmental Protection Agency’s WasteWi$e second consecutive year, Baxter was named to environment in the communities in which it operates. waste-reduction program and the International HISPANICmagazine’s Hispanic Corporate 75. Chamber of Commerce’s Business Charter for In health and safety, Baxter continues to make Sustainable Development. The company also is Baxter is committed to helping its employees strides. The company's Renal business received a member of the Coalition for Environmentally develop to their full potential, regardless of cultural the U.S. Occupational Safety and Health Responsible Economies (CERES), the Health background, gender or position. In 1997, the Administration's highest honor in the agency's Resources Conservation Coalition and numerous company continued to invest in programs that Voluntary Protection Program for its outstanding other organizations. recognize employee contributions and acknowledge management of health and safety. Additionally, more than half of Baxter's facilities worldwide reported no lost workdays due to work-related injuries or illness in 1997. Baxter's efforts to cut air toxic emissions, reduce energy consumption, improve packaging and reduce the amount of waste going to landfills are paying off. Over the last three years, Baxter's environmental initiatives have yielded more than $100 million in savings and cost-avoidance. Other environmental milestones for the company include: l Achieving 100 percent compliance with the com- 15 the diversity of their needs. Forty-four percent of Baxter's management and professional positions in the United States are held by women, and nearly 18 percent by minorities. Women and minorities make up 36 percent of the company’s board of directors. The annual reports of The Baxter Allegiance Foundation and Corporate Environmental, Health and Safety are available by writing either group at: Baxter employees have reduced waste, cut air emissions and implemented many other environmental initiatives in company facilities around the world. Baxter received more than 20 awards in 1997 for its environmental efforts. Baxter International Inc. One Baxter Parkway Deerfield, Illinois 60015-4633 pany's state-of-art environmental management Valuing Employees standards by all company facilities worldwide. Shared Values—Respect, Responsiveness and l Reducing air toxic and chlorofluorocarbon employees conduct themselves on a daily basis. emissions by 94 percent between 1988 and 1996. They define our responsibilities to customers, Results—are the principles by which Baxter shareholders, suppliers, the community and l Recycling 58 million pounds of materials, each other. including more than two million pounds of paper, in 1996. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T MANAGEMENT’S DISCUSSION & ANALYSIS T his discussion and analysis presents the factors that had a material effect on Baxter International Inc.’s (Baxter, or, together with its consolidated subsidiaries, the company) cash flows and results of operations during the three years ended December 31, 1997, and the company’s financial position at that date. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the company and related notes. KEY FINANCIAL OBJECTIVES AND RESULTS 1997 OBJECTIVES RESULTS • Generate $300 million in operational cash flow, • The company generated $432 million of operational cash flow in 1997, before litigation payments. before litigation payments. • Increase net sales approximately 10% before the impact of 1997 acquisitions and 20% including 1997 acquisitions. • Net sales increased 3% before the impact of acquisitions and increased 13% including acquisitions. Excluding the effect of a stronger U.S. dollar, net sales increased 6% before acquisitions and 16% including acquisitions. • Achieve growth in income from continuing operations • Income from continuing operations increased 13%, excluding the in-process research and development charge in the low double digits. relating to the acquisitions discussed below. 17 COMPANY AND INDUSTRY OVERVIEW Baxter is a global developer, manufacturer and marketer of products and technologies related to the blood and circulatory system. The company has market-leading positions in four businesses within this segment of the medical products and services industry: Blood Therapies, which develops biopharmaceutical and blood-collection and separation products and technologies; I.V. Systems/Medical Products, which develops technologies and systems to improve intravenous medication delivery, and distributes medical products; Renal, which develops products and services to treat kidney disease; and CardioVascular, which develops products and provides services to treat late-stage heart disease and vascular disorders. The company generates more than 50% of its revenues outside the United States. While health-care cost containment continues to be a focus around the world, demand for health- care products and services continues to be strong worldwide, particularly in developing markets such as Latin America and Asia. The company’s strategies emphasize global expansion and technological innovation to advance medical care worldwide. The health-care marketplace continues to be competitive. There has been consolidation in the company’s customer base and by its competitors, which has resulted in pricing and market-share pressures. These industry trends are expected to continue. The company will continue to manage these issues by capitalizing on its market-leading positions, developing new products and services, leveraging its cost structure and making acquisitions. The company has experienced increases in its labor and material costs, which are partly influenced by general inflationary trends. Competitive market conditions have minimized the impact of inflation on the selling prices of the company’s products and services. Management expects these trends to continue. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T MANAGEMENT’S DISCUSSION & ANALYSIS RESULTS OF CONTINUING OPERATIONS NET SALES TRENDS years ended December 31 (in millions) Global businesses: Blood Therapies I.V. Systems/Medical Products Renal CardioVascular Total net sales years ended December 31 (in millions) United States International Total net sales 1997 1996 1995 1997 1996 Percent increase $1,765 2,110 1,384 879 $6,138 1997 $2,887 3,251 $6,138 $ 1,284 $ 1,131 1,956 1,343 855 1,893 1.294 730 $ 5,438 $ 5,048 37% 8% 3% 3% 13% 14% 3% 4% 17% 8% 1996 $ 2,665 2,773 $ 5,438 1995 $ 2,492 2,556 $ 5,048 Percent increase 1997 1996 8% 17% 13% 7% 9% 8% 18 The U.S. dollar has strengthened relative to other currencies over the last two years. As a result, the company’s sales denominated in foreign currencies are lower when translated into U.S. dollars. Excluding the effect of a stronger U.S. dollar, international sales growth would have been 24% and 13% in 1997 and 1996, respectively. Blood Therapies Strong demand for the company’s therapeutic proteins, especially Recombinate™ Anti-hemophilic factor (Recombinant), generated worldwide growth in the Blood Therapies businesses in 1997 and 1996, particularly outside the United States. This trend is expected to continue as the company increases its manufacturing capacity for genetically engineered proteins to meet the strong demand for these blood therapies. The acquisition of Immuno International AG (Immuno), a global manufacturer of biopharmaceutical products, was a strong contributor to sales growth in 1997. The Immuno acquisition strengthens the businesses’ presence in Europe and enhances the company’s position in several emerging markets. Sales of Gammagard® S/D immunoglobulin intravenous, a viral-inactivated plasma derivative that boosts immune systems, strongly contributed to the 1996 sales growth of the Blood Therapies businesses. Sales levels in 1997 in the automated and manual blood-collection businesses decreased slightly from those in the prior year primarily due to pricing pressures and supply issues, partially offset by continued penetration of basic blood-collection products into developing markets. Sales in the automated and manual blood-collection businesses increased modestly from 1995 to 1996, as penetration into developing markets more than offset pricing pressures in the businesses. I.V. Systems/Medical Products Contributing to 1997 sales growth were increased sales due to the acquisition of the Clintec parenteral-nutrition business (Clintec) after the dissolution of the company’s joint venture with Nestlé S.A. Excluding the effect of the acquisition of Clintec, worldwide sales of intravenous and other medical products increased moderately in both 1997 and 1996. Sales in the United States and Western Europe were unfavorably affected by competitive pricing pressures and cost pressures from health-care providers. Offsetting these factors were increased penetration and new product introductions in Latin America, increased sales as a result of a multiyear agreement entered into in late 1996 with Premier, a major U.S. group of customers, and the 1997 introduction of the Colleague™ volumetric infusion pump in the United States. Also, as discussed in Note 4 to the Consolidated Financial Statements, in early 1998, the company acquired Bieffe Medital S.p.A. (Bieffe), a European manufacturer of dialysis and intravenous solutions and containers, and entered into a definitive agreement to aquire the Pharmaceutical Products Division of the Ohmeda business from the BOC Group (Ohmeda), a manufacturer of gases and drugs used for general and local anesthesia. These factors are expected to contribute to the trend of moderate and stable growth in this business. Renal Worldwide sales of renal products and services continued to grow in 1997 and 1996. Strong pricing pressures in the United States and Europe along with continued market consoli- dation in the United States affected sales growth in these two regions. These factors were more than offset by increased penetration into developing markets, especially in Latin America. Another strong contributor to 1997 sales growth was revenue from the Renal Therapy Services (RTS) unit, which operates dialysis clinics outside the United States, frequently partnering with physicians and hospitals. Also contributing to sales growth in 1997 was the new Renal Management Strategies (RMS) unit, which is a renal disease-management organization dedicated to creating partnerships with nephrologists to lead renal-care networks throughout the United States. Continued growth in the RTS and RMS units and the early 1998 acquisition of Bieffe discussed above, are expected to enhance the sales growth trend of the Renal business. More than 70% of the sales of the Renal business are generated outside the United States. Therefore, the strengthening of the U.S. dollar over the last two years has significantly affected the U.S. dollar sales growth in this business. CardioVascular Sales growth in 1997 and 1996 was led by strong growth in the tissue heart valve and valve-repair product lines. The 1997 acquisition of Research Medical, Inc. (RMI), a manufacturer of specialized cannulae and cardioplegia products, also contributed to the sales growth. The acquisition of several perfusion-services businesses and strong sales of monitoring catheters were contributors to 1996 sales growth. The acquisitions of RMI and perfusion-services businesses are part of the company’s strategy to offer a compre- hensive approach for surgeons treating patients with late-stage cardiovascular disease, including products used in minimally invasive cardiac surgery. While pricing pressures continue to impact several product lines, sales are expected to continue to grow in 1998, with strong performances expected in the heart valve, valve repair and minimally invasive product lines. GROSS MARGIN AND EXPENSE RATIOS years ended December 31 (as a percent of sales) Gross margin Marketing and administrative expenses 1997 45.6% 22.1% 1996 44.7% 21.0% 1995 45.0% 21.5% 19 The gross margin increased in 1997 primarily as a result of acquisitions and a more favorable product mix, particularly with respect to the Renal and I.V. Systems/Medical Products businesses. The decrease in the gross margin rate in 1996 reflects increased sales in the lower-margin cardiovascular-services business as a result of the 1996 perfusion-services business acquisitions, coupled with a slight change in the mix of product sales. The company expects its gross margin rate to be approximately 45% in 1998. Marketing and administrative expenses increased as a percent of sales in 1997 primarily due to the acquisition of Immuno, and expansion into developing markets and new business initiatives, partially offset by a continued focus on cost control in all business units. The ratio decreased in 1996 primarily as a result of increased sales in the cardiovascular-services business, which has a lower cost structure, coupled with a continued focus on cost control in all business units. The company expects that its expense ratio will decrease in 1998 as the company continues to focus on cost control and realizes the benefits of integrating Immuno and other recent acquisitions. The gross margin and expense ratios were affected in 1997 by favorable experience and related assumptions with respect to certain employee retirement plans. RESEARCH AND DEVELOPMENT years ended December 31 (in millions) Research and development expenses as a percent of sales Percent increase 1997 $392 1996 $ 340 1995 $ 327 1997 15% 1996 4% 6% 6% 6% B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T MANAGEMENT’S DISCUSSION & ANALYSIS Research and development (R&D) expenses above exclude in-process R&D charges of $220 million and $132 million relating to the 1997 acquisitions of Immuno and RMI, respectively, which are discussed in Note 3 to the Consolidated Financial Statements. The 1995 expense excludes the $18 million in-process R&D charge related to the acquisition of the remaining 30% of Nextran. R&D expenses are focused on initiatives such as hemoglobin therapeutics, xenotransplantation, medication-delivery systems and the Novacor® left-ventricular assist system. The company is conducting several clinical trials of its hemoglobin therapeutic, HemAssist™ (Hemoglobin Crosfumaril), or “blood substitute,” in the United States and Europe. The company currently anticipates launching the product by late 1999 or early 2000. RESTRUCTURING PROGRAMS Baxter has two restructuring programs in process. See Note 5 to the Consolidated Financial Statements for a discussion of the charges, utilization of the reserves and position reductions to date. Management believes remaining restructuring reserves are adequate to complete the actions contemplated by the programs. With respect to the 1993 program, the company realized approximately $129 million, $116 million and $90 million in pretax savings in 1997, 1996 and 1995, respectively, which were consistent with originally forecasted savings. Anticipated future savings of approximately $130 million annually are also in line with original targets. Management anticipates restructuring savings will continue to be partially invested in R&D and expansion into growing international markets. The company is in the process of implementing the 1995 program. Management expects that the plant closures and consolidations in Puerto Rico will be substantially completed in 1999, and will lower manufacturing costs and help mitigate future exposure to gross margin erosion arising from pricing pressures, primarily in the United States. Future cash expenditures related to both the 1993 and 1995 programs will be funded with cash generated from operations. 20 LITIGATION AND OTHER INCOME AND EXPENSE Included in the 1995 results are net litigation charges in the amount of $96 million relating to the company’s plasma-based therapies and mammary-implant product liabilities. Net interest expense increased in 1997 primarily due to increased debt related to the acquisition of Immuno. Net interest expense is not expected to change significantly in 1998. Goodwill amortization increased in 1997 primarily due to the acquisitions of Immuno and Clintec, and increased in 1996 primarily due to the acquisition of Clintec. Goodwill amortization is anticipated to increase in 1998 primarily due to the acquisition of Bieffe. The early 1998 acquisition of Bieffe and the pending acquisition of Ohmeda are expected to be nondilutive to earnings in 1998 and accretive in 1999. Included in the 1997 results is a pretax gain of $32 million relating to the company’s divestiture of certain assets of its Immunotherapy division. Refer to Note 3 to the Consolidated Financial Statements for further information. Also included in other income in 1997 and 1995 are pretax gains relating to the disposal of certain non-strategic investments totaling $17 million and $62 million, respectively. PRETAX INCOME FROM CONTINUING OPERATIONS years ended December 31 (in millions) Pretax income from continuing operations 1997 $523 1996 $ 793 1995 $ 524 1997 (34%) 1996 51% Percent increase (decrease) Excluding the in-process R&D charges and divestiture gains, the 1997 growth in pretax income from continuing operations would have been 4%. Excluding the restructuring, litigation and Nextran in-process R&D charges and the divestiture gain, all recorded in 1995, the 1996 growth in pretax income from continuing operations would have been 17%. The effective income tax rate for continuing operations, excluding the in-process R&D charges, was approximately 25%, 27% and 30% in 1997, 1996 and 1995, respectively. The rate has declined primarily due to a larger portion of the company’s earnings generated in lower tax jurisdictions. Management does not expect a significant change in the effective tax rate in 1998. Income from discontinued operations in 1996 and 1995 related to the company’s former health-care cost management and distribution businesses. In September 1996, Baxter stockholders received all of the outstanding stock of Allegiance Corporation (Allegiance), its health-care cost management and distribution businesses, in a tax-free spin-off. Income from discontinued operations decreased significantly from 1995 to 1996 due primarily to the net gain in 1995 resulting from the company’s divestiture of its Industrial and Life Sciences business and to lower income in 1996 resulting from the spin-off of Allegiance at the end of the third fiscal quarter. Excluding the in-process R&D charges and divestiture gains recorded in 1997, diluted earnings per share from continuing operations (EPS) in 1997 would have been $2.21, and the 1997 growth in diluted EPS would have been 7%. Excluding the 1995 restructuring, litigation and Nextran in-process R&D charges, and the divestiture gain, diluted EPS would have been $1.61 for the year ended December 31, 1995, and the 1996 growth in diluted EPS would have been 29%. FINANCIAL INSTRUMENT MARKET RISK The company’s business and financial results are affected by fluctuations in world financial markets, including currency exchange rates and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. In hedging its currency and interest rate risks, the company utilizes primarily forward contracts, purchased options and swaps. Refer to Note 7 to the Consolidated Financial Statements for further 21 information regarding these instruments. The company does not hold financial instruments for trading or speculative purposes. CURRENCY RISK The company is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in Japanese Yen, Belgian Francs, U.K. Pound Sterling, French Francs, German Marks, Austrian Schillings and Italian Lira. Business activities in various currencies expose the company to the risk that the eventual net dollar cash inflows resulting from transactions with foreign customers and suppliers denominated in foreign currencies may be adversely affected by changes in currency exchange rates. The company manages these risks utilizing various types of foreign exchange contracts. The company also enters into foreign exchange contracts to hedge anticipated, but not yet committed sales expected to be denominated in foreign currencies. In addition, the company hedges certain of its net investments in international affiliates. As part of its risk-management process, the company uses a value-at-risk model to measure the potential loss related to its foreign currency financial instruments. The value-at-risk calculation approximates a potential loss amount from adverse movements in currency exchange rates. The company utilizes a Monte Carlo simulation, with a 95% confidence level, using implied volatilities and correlations (as of the measurement date) to estimate this potential loss. The company’s calculated value-at-risk as of fiscal year-end 1997, assuming a one-year holding period, is $15 million; this amount excludes the potential effect of any changes in the value of the underlying transactions or balances. Actual future gains or losses may differ from this estimate based upon actual fluctuations in market rates, operating exposures and the timing thereof, and changes in the company’s portfolio of derivatives during the measured period. In addition, the assumption within the value-at-risk model is that changes in currency exchange rates are adverse, which may not be the case. Any loss incurred on the financial instruments is expected to be offset by the effects of currency movements on the respective underlying hedged transactions and balances. However, since the company’s risk-management program does not require the hedging of all exposures, there may be currency exchange-rate gains or losses in the future. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T MANAGEMENT’S DISCUSSION & ANALYSIS INTEREST RATE RISK As part of its risk-management program, the company performs sensitivity analyses to assess potential gains and losses in earnings and changes in fair value relating to hypothetical movements in interest rates. A 75 basis-point increase in interest rates (approximately 10% of the company’s weighted average interest rate) affecting the company’s financial instruments, including debt obligations and related derivatives, and investments, would have an immaterial effect on the company’s 1998 pretax earnings and on the fair value of the company’s fixed-rate financial instruments. As discussed in Note 7 to the Consolidated Financial Statements, the fair values of the company’s long-term litigation liabilities and related insurance receivables were computed by discounting the expected cash flows based on currently available information. A 10% movement in the assumed discount rate would have an immaterial effect on the fair values of those assets and liabilities. OTHER RISKS With respect to the company’s investments in affiliates accounted for on the cost basis, management believes any reasonably possible near-term losses in earnings, cash flows and fair values would not be material. LIQUIDITY AND CAPITAL RESOURCES Management assesses the company’s liquidity in terms of its overall ability to mobilize cash to support ongoing business levels and to fund its growth. Management uses an internal 22 performance measure called operational cash flow that evaluates each operating business and geographic region on all aspects of cash flow under its direct control. The company exceeded its annual operational cash flow goals for the last three years. Operational cash flow, as defined, reflects all litigation payments and related insurance recoveries except for those payments and recoveries relating to mammary implants, which the company never manufactured nor sold. If all the company’s litigation payments, net of insurance recoveries, were excluded from operational cash flow (including those relating to plasma-based therapies), the amount generated from continuing operations would be $432 million, $587 million and $337 million in 1997, 1996 and 1995, respectively. The company expects to generate more than $500 million in operational cash flow in 1998. Certain amounts on the Consolidated Balance Sheet have increased due to the acquisitions discussed above. In addition, the increases in accounts receivable reflect increased sales outside the United States, which have longer collection periods. The following table reconciles cash flow provided by continuing operations, as determined by generally accepted accounting principles, to operational cash flow: Brackets denote cash outflows years ended December 31 (in millions) Cash flow provided by continuing operations Capital expenditures Net interest after tax Other Operational cash flow — continuing operations Operational cash flow — discontinued operations Total operational cash flow 1997 $616 (496) 97 57 274 – $274 1996 $700 (398) 62 126 490 192 $682 1995 $ 573 (399) 56 86 316 271 $ 587 Cash flow provided by discontinued operations decreased from 1995 to 1996 primarily due to the spin-off of Allegiance, which occurred in September 1996, and the proceeds received in 1995 relating to the divestiture of the Industrial and Life Sciences business. Capital expenditures are made at a sufficient level to support the strategic and operating needs of the businesses. Significant expenditures have included continuing construction of a manufacturing facility in Switzerland for HemAssist™ (Hemoglobin Crosfumaril), the company’s hemoglobin therapeutic, construction of a new European distribution center in Belgium, and construction and continuing expansion of facilities in California for the production of genetically engineered proteins. Management expects to invest between $500 million and $600 million in capital expenditures in 1998. Approximately $498 million and $48 million of the net cash flows used for acquisitions and investments in affiliates in 1997 related to the acquisition of Immuno and the early 1998 acquisition of Bieffe, respectively. The increase in net cash flows used for acquisitions and investments in affiliates in 1996 related primarily to purchases of cardiovascular-services businesses, the largest of which was PSICOR, Inc. Also included was the previously discussed acquisition of Clintec. See Notes 3 and 4 to the Consolidated Financial Statements for additional information. The company’s net-debt-to-capital ratio was 46.9% and 33.8% at December 31, 1997 and 1996, respectively. The increase in the ratio primarily was due to increased net debt relating to the acquisition of Immuno and the impact on total capital of the in-process R&D charges discussed above. Management expects the ratio to decline to the low-40% range over time as a result of ongoing operations. Refer to Note 6 to the Consolidated Financial Statements for a discussion of the company’s credit facilities and long-term debt and lease obligations. Refer to Note 2 to the Consolidated Financial Statements regarding Allegiance’s indirect assumption of company debt in 1996. As authorized by the board of directors, the company repurchases its stock to optimize its capital structure depending upon its operational cash flows, net debt level and current 23 market conditions. In November 1995, the board of directors authorized the repurchase of up to $500 million over a period of several years, of which $267 million was repurchased as of December 31, 1996. The company repurchased $500 million of its stock in 1995 under a prior board of directors’ authorization. As discussed above, the company’s net-debt- to-capital ratio is currently 46.9% and, therefore, management does not presently intend to repurchase shares. Effective as of December 31, 1997, the company could issue up to $550 million in aggregate principal amount of additional senior unsecured debt securities under effective registration statements filed with the Securities and Exchange Commission. The company’s debt ratings on senior debt are A3 by Moody’s, A by Standard & Poor’s and A- by Duff & Phelps. The company intends to fund its short-term and long-term obligations as they mature by issuing additional debt or through cash flow from operations. The company believes it has lines of credit adequate to support ongoing operational requirements. Beyond that, the company believes it has sufficient financial flexibility to attract long-term capital on acceptable terms as may be needed to support its growth objectives. In February 1998, the board of directors declared a quarterly dividend on the company’s common stock of 29.10 cents per share (annualized rate of $1.164 per share). The company intends to continue lowering its dividend payout ratio in order to optimize its capital structure. See Note 13 to the Consolidated Financial Statements for a discussion of the company’s legal contingencies and related insurance coverage with respect to cases and claims relating to the company’s plasma-based therapies and mammary implants, as well as other matters. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established reserves. While such a future charge could have a material adverse effect on the company’s net income or cash flows in the period in which it is recorded or paid, based on the advice of counsel, management believes that any outcome of these actions, individually or in the aggregate, will not have a material adverse effect on the company’s consolidated financial position. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T MANAGEMENT’S DISCUSSION & ANALYSIS Based on the company’s assessment of the costs associated with its environmental responsibilities, including recurring administrative costs, capital expenditures and other compliance costs, such costs have not had, and in management’s opinion, will not have in the foreseeable future, a material effect on the company’s financial position, results of operations, cash flows or competitive position. The company is in the process of implementing appropriate courses of action to ensure its computer systems, selected products and other processes will be “year 2000” compliant. The costs of new software will be capitalized and amortized over the software’s estimated useful life and software modification costs will be expensed as incurred. The amounts expensed to date have been immaterial and the company does not expect the amounts required to be expensed in the future to have a material effect on its financial position or results of operations. A significant portion of the anticipated modification effort will be accomplished by a redeployment of existing internal information technology resources. Management presently believes that, with planned modifications to existing software and conversions to new software, year 2000 compliance will not pose significant operational problems. However, if such modifications and conversions are not completed on a timely basis, or if the company’s trading partners have significant unresolved systems problems, there is a risk that year 2000 compliance could have a material impact on the operations of the company. The matters discussed in this section include forward-looking statements that involve risks and uncertainties, including, but not limited to, currency exchange rates, technological advances in the medical field, economic conditions, product demand and industry acceptance of the company’s new products, competitive products and pricing, manufacturing efficiencies, new product development, ability to enforce patents, availability of raw materials and manufacturing capacity, new plant start-ups, the U.S. and global regulatory, trade and tax environment, year 2000 compliance, and other risks more completely reflected in the company’s filings with the Securities and Exchange Commission. 24 ADOPTION OF NEW ACCOUNTING STANDARDS In June 1997, the FASB issued Statement No. 130, “Reporting Comprehensive Income,” which is effective for fiscal years beginning after December 15, 1997, and requires reclassification of prior-period financial statements. Statement No. 130 requires the presentation of comprehensive income, which consists of net income and other comprehensive income, and its components in a full set of financial statements. The company’s other comprehensive income will consist of foreign currency translation adjustments, which totaled $(202) million, $(44) million and $29 million in 1997, 1996 and 1995, respectively, and which currently are reported as a component of stockholders’ equity. Additional items may be included in other comprehensive income in the future. The company plans to display comprehensive income and its components in the Consolidated Statement of Stockholders’ Equity beginning in 1998. In June 1997, the FASB issued Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which is effective for fiscal years beginning after December 15, 1997, and requires reclassification of prior-period financial statements. Statement No. 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers in annual financial statements and interim financial reports. Management currently is evaluating its reportable segments under the new Statement and anticipates disclosures for more than one segment under the new rules. MANAGEMENT’S RESPONSIBILITIES FOR FINANCIAL REPORTING he accompanying financial statements and other financial data have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include some amounts T that are based upon management’s best estimates and judgments. Management is responsible for establishing and maintaining a system of internal control over financial reporting and safeguarding of assets against unauthorized acquisition, use or disposition that is designed to provide reasonable assurance as to the integrity and reliability of financial reporting and asset safeguarding. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived from them. Management believes that the foundation of an appropriate system of internal control is a strong ethical company culture and climate. The Corporate Responsibility Office, which reports to the Public Policy Committee of the board of directors, is responsible for developing and communicating appropriate business practice, policies and initiatives; maintaining independent channels of communication for providing guidance and reporting potential business practice violations; and monitoring compliance with the company’s business practices, including annual compliance certifications by senior managers worldwide. Additionally, a professional staff of corporate auditors reviews the design of the related internal control system and the accounting policies and procedures supporting this system and compliance with them. The results of these reviews are reported at least annually to the 25 Public Policy and/or Audit Committees. Price Waterhouse LLP performs audits, in accordance with generally accepted auditing standards, which include a review of the system of internal controls and result in assurance that the financial statements are, in all material respects, fairly presented. The board of directors, through its Audit Committee comprised solely of non-employee directors, is responsible for overseeing the integrity and reliability of the company’s accounting and financial reporting practices and the effectiveness of its system of internal controls. The independent certified public accountants and corporate auditors meet regularly with, and have access to, this committee, with and without management present, to discuss the results of the audit work. Vernon R. Loucks Jr. Harry M. Jansen Kraemer Jr. Brian P. Anderson Chairman of the Board and President Chief Executive Officer Senior Vice President and Chief Financial Officer B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T REPORT OF INDEPENDENT ACCOUNTANTS BOARD OF DIRECTORS AND STOCKHOLDERS BAXTER INTERNATIONAL INC. I n our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders’ equity present fairly, in all material respects, the financial position of Baxter International Inc. (the company) and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial 26 statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Chicago, Illinois February 5, 1998 as of December 31 (in millions, except shares) CURRENT ASSETS Cash and equivalents Accounts receivable Notes and other current receivables Inventories Short-term deferred income taxes Prepaid expenses Total current assets PROPERTY, PLANT AND EQUIPMENT, NET OTHER ASSETS Goodwill and other intangibles Insurance receivables Other Total other assets Total assets CURRENT LIABILITIES Notes payable to banks Current maturities of long-term debt and lease obligations Accounts payable and accrued liabilities Income taxes payable Total current liabilities LONG-TERM DEBT AND LEASE OBLIGATIONS LONG-TERM DEFERRED INCOME TAXES LONG-TERM LITIGATION LIABILITIES OTHER LONG-TERM LIABILITIES STOCKHOLDERS’ EQUITY Common stock, $1 par value, authorized 350,000,000 shares, issued 287,701,247 shares in 1997 and 1996 Additional contributed capital Retained earnings Common stock in treasury, at cost, 7,662,187 shares in 1997 and 15,261,100 shares in 1996 Cumulative foreign currency adjustment Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS 1997 $ 465 1,372 367 1,208 253 205 3,870 2,360 1,622 409 446 2,477 $8,707 $ 102 42 1,963 450 2,557 2,635 316 210 370 288 1,876 1,006 (329) (222) 2,619 $8,707 1996 $ 761 1,219 266 883 212 139 3,480 1,843 1,386 641 246 2,273 $7,596 $ 121 225 1,704 395 2,445 1,695 255 365 332 288 1,825 1,022 (611) (20) 2,504 $7,596 27 B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T CONSOLIDATED STATEMENTS OF INCOME years ended December 31 (in millions, except per share data) OPERATIONS Net sales Costs and expenses Cost of goods sold Marketing and administrative expenses Research and development expenses Acquired research and development Special charges for litigation and restructuring Interest, net Goodwill amortization Other (income) expense 1997 $6,138 3,340 1,356 392 352 – 163 45 (33) 1996 $ 5,438 3,009 1,142 340 – – 103 36 15 1995 $ 5,048 2,777 1,084 327 18 199 96 28 (5) Total costs and expenses 5,615 4,645 4,524 Income from continuing operations before income taxes Income tax expense Income from continuing operations Discontinued operations Net income 28 PER SHARE DATA Basic earnings per common share Continuing operations Net income Diluted earnings per common share Continuing operations Net income The accompanying notes are an integral part of these consolidated financial statements. 523 223 300 – 793 218 575 94 524 153 371 278 $ 300 $ 669 $ 649 $ 1.08 $ 1.08 $ 1.06 $ 1.06 $ 2.11 $ 2.46 $ 2.07 $ 2.41 $ 1.34 $ 2.35 $ 1.32 $ 2.31 years ended December 31 (in millions) (brackets denote cash outflows) CASH FLOWS FROM CONTINUING OPERATIONS Income from continuing operations Adjustments Depreciation and amortization Deferred income taxes Gain on asset dispositions Acquired research and development Restructuring and litigation charges Other Changes in balance sheet items Accounts receivable Inventories Accounts payable and accrued liabilities Income taxes payable Net litigation payments Restructuring program payments Other Cash flows from continuing operations CASH FLOWS FROM DISCONTINUED OPERATIONS CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures Additions to the pool of equipment leased or rented to customers Acquisitions (net of cash received) and investments in affiliates CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from assets dispositions Cash flows from investing activities Issuances of debt and lease obligations Redemption of debt and lease obligations Increase (decrease) in debt with maturities of three months or less, net Common stock cash dividends Stock issued under employee benefit plans Purchase of treasury stock Cash flows from financing activities EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS (DECREASE) INCREASE IN CASH AND EQUIVALENTS CASH AND EQUIVALENTS AT BEGINNING OF YEAR CASH AND EQUIVALENTS AT END OF YEAR Supplemental information: Interest paid, net of portion capitalized Income taxes paid The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS 1997 $300 398 (1) (48) 352 – 9 (56) (102) 103 3 (215) (19) (108) 616 – (403) (93) (622) (23) (1,141) 855 (465) 81 (316) 110 – 265 (36) (296) 761 $ 465 $ 155 $ 174 1996 $ 575 348 74 (9) – – 17 (258) 59 79 6 (219) (37) 65 700 93 (318) (80) (294) (15) (707) 1,855 (1,674) 429 (320) 193 (267) 216 (17) 285 476 $ 761 $ 215 $ 114 1995 $ 371 336 (17) (65) 18 199 20 (121) (90) 104 (19) (87) (40) (36) 573 763 (309) (90) (44) 91 (352) 1,296 (891) (698) (306) 103 (500) (996) 20 8 468 $ 476 $ 176 $ 182 29 B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY years ended December 31 (in millions) COMMON STOCK Balance, beginning and end of year ADDITIONAL CONTRIBUTED CAPITAL Balance, beginning of year Stock issued under employee-benefit plans Stock issued for acquisitions Balance, end of year RETAINED EARNINGS Balance, beginning of year Net income Common stock cash dividends Distribution of Allegiance Corporation common stock to stockholders COMMON STOCK IN TREASURY CUMULATIVE FOREIGN CURRENCY ADJUSTMENT 30 Balance, end of year Balance, beginning of year Purchases Stock issued under employee-benefit plans Stock issued for acquisitions Balance, end of year Balance, beginning of year Currency fluctuations Balance, end of year Total stockholders’ equity The accompanying notes are an integral part of these consolidated financial statements. 1997 $ 288 1,825 6 45 1,876 1,022 300 (316) – 1,006 (611) – 104 178 (329) (20) (202) (222) 1996 $ 288 1,837 (12) – 1,825 2,105 669 (320) (1,432) 1,022 (550) (267) 205 1 (611) 24 (44) (20) 1995 $ 288 1,810 27 – 1,837 1,762 649 (306) – 2,105 (135) (500) 76 9 (550) (5) 29 24 $2,619 $2,504 $3,704 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Depreciation expense was $299 million, $258 million and $254 million in 1997, 1996 and 1995, respectively. Repairs and maintenance expense was $103 million, Financial statement presentation $93 million and $79 million in 1997, 1996 and 1995, respectively. The preparation of the financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and GOODWILL AND OTHER INTANGIBLE ASSETS assumptions that affect reported amounts and related disclosures. Actual results as of December 31 (in millions) could differ from those estimates. Basis of consolidation The consolidated financial statements include the accounts of Baxter International Inc. and its majority-owned, controlled subsidiaries (Baxter or the company). Operations outside the United States and its territories are included in the consolidated financial statements on the basis of fiscal years ending November 30 in order to facilitate timely consolidation. INVENTORIES as of December 31 (in millions) Raw materials Work in process Finished products Total inventories 1997 $ 279 243 686 $1,208 1996 $190 152 541 $883 Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for raw materials is based on replacement costs and for other inventory classifications on net realizable value. PROPERTY, PLANT AND EQUIPMENT as of December 31 (in millions) Land Buildings and leasehold improvements Machinery and equipment Equipment leased or rented to customers Construction in progress Total property, plant and equipment, at cost Accumulated depreciation and amortization Net property, plant and equipment 1997 $ 106 994 2,515 449 343 4,407 (2,047) $2,360 1996 $ 85 719 2,290 400 301 3,795 (1,952) $1,843 Depreciation and amortization are principally calculated on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the related facility leases or the asset, whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Goodwill Accumulated amortization Net goodwill Other intangibles Accumulated amortization Net other intangibles 1997 $1,571 (379) $ 1,192 $ 804 (374) $ 430 1996 $1,388 (334) $1,054 $ 663 (331) $ 332 Intangible assets are amortized on a straight-line basis. Goodwill is amortized over estimated useful lives ranging from 15 to 40 years; other intangible assets, consisting of purchased patents, trademarks, deferred charges and other identified rights, are amortized over their legal or estimated useful lives, whichever is shorter (generally not exceeding 17 years). Based upon management’s assessment of the future undiscounted operating cash flows of acquired businesses, the carrying value of 31 goodwill at December 31, 1997, has not been impaired. Earnings per share The numerator for both basic and diluted EPS is income from continuing operations or net income, as applicable. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The following is a recon- ciliation of the shares (denominator) of the basic and diluted per-share computations: years ended December 31 (in millions) Basic EPS Effect of dilutive securities: Employee stock options Employee stock subscriptions Diluted EPS 1997 278 4 0 282 1996 272 4 1 277 1995 277 4 1 282 Basic and diluted EPS from discontinued operations (net of costs associated with effecting the business distribution) were $0.35 and $0.34, respectively, in 1996 and $1.01 and $0.99, respectively, in 1995. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivatives 3 ACQUISITIONS AND DIVESTITURES Realized gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and ultimately are recognized in All acquisitions during the three years ended December 31, 1997, were accounted for income. Gains and option premiums relating to qualifying hedges of firm under the purchase method. The purchase price of each acquisition was allocated to commitments or anticipated transactions are deferred and recognized in income as the net assets acquired based on estimates of their fair values at the date of the offsets of gains and losses resulting from the underlying hedged transactions. Gains acquisition. The excess of the purchase price over the fair values of the net tangible and losses relating to terminations of qualifying hedges are included in the carrying assets and liabilities acquired is allocated to intangible assets. On the basis of amounts and amortized over the remaining expected lives of the underlying assets or independent appraisals in 1997, a portion of the purchase price for certain of the liabilities. In circumstances where the underlying assets or liabilities are sold or no acquisitions during 1997 and 1995 was allocated to in-process research and longer exist, any remaining carrying value adjustments are recognized in other development (R&D) which, under generally accepted accounting principles, was income or expense. Gains and losses on hedges of net investments are reported as immediately expensed. foreign currency adjustments in stockholders’ equity. The interest rate differential Results of operations of acquired companies are included in the company’s relating to interest rate swaps used to hedge debt obligations and net investments in results of operations as of the respective acquisition dates. The pro forma information foreign affiliates is reflected as an adjustment to interest expense over the lives of the presented below is not necessarily indicative of what operating results would have swaps. Cash flows from derivatives are classified in the same category as the cash been had the acquisitions occurred on the indicated dates, nor is it necessarily flows from the related investment, borrowing or foreign exchange activity. indicative of future operating results. Cash and equivalents Immuno International AG 32 Cash and equivalents include cash, certificates of deposit and marketable securities In the first fiscal quarter of 1997, the company acquired Immuno International AG with a maturity of three months or less. (Immuno), a global manufacturer of biopharmaceutical products and services for trans- Reclassifications fusion medicine. The acquisition cost was approximately $600 million plus assump- tion of $280 million of net debt. Approximately $58 million of the purchase price is Certain reclassifications have been made to conform the 1996 and 1995 financial being withheld to cover certain legal contingencies, as further discussed in Note 13. statements and footnotes to the 1997 presentation. Approximately $220 million of the purchase price was allocated to in-process R&D, 2 DISCONTINUED OPERATIONS and expensed, as discussed above. Approximately $95 million of the purchase price was allocated to existing product technology and is being amortized on a straight-line basis over 20 years. Approximately $82 million of the purchase price was allocated to On September 30, 1996, Baxter stockholders of record on September 26, 1996, goodwill and is being amortized on a straight-line basis over 40 years. received all of the outstanding stock of Allegiance Corporation (Allegiance), which was the company’s health-care cost management and distribution business, in a tax- Research Medical, Inc. free spin-off. As of that date, Allegiance began operating as an independent publicly In March 1997, Baxter acquired Research Medical, Inc. (RMI), a provider of owned company. specialized products used in open-heart surgery. The purchase price was $239 million In 1996 and 1995, the company recorded income from discontinued and was principally settled with 4,801,711 shares of Baxter International Inc. common operations of $81 million and $304 million, respectively, which was net of income tax stock, issued from treasury. Approximately $132 million of the purchase price was expense of $14 million and $88 million, respectively. In addition, the company allocated to in-process R&D, and expensed, as discussed above. Approximately $40 recorded an additional $13 million in 1996, which consisted of $36 million in benefit million of the purchase price was allocated to existing product technology and is being plan curtailment gains, net of costs of the distribution and income tax expense of amortized on a straight-line basis over 14 years. Approximately $29 million of the $11 million. Costs of the distribution totaled $26 million in 1995, which were net of purchase price was allocated to goodwill and is being amortized on a straight-line an income tax benefit of $8 million. basis over 20 years. Through an issuance of new third-party debt, $1.15 billion of Baxter’s existing debt was indirectly assumed by Allegiance upon spin-off. Approximately $1.4 billion of net assets were transferred to Allegiance upon spin-off. Clintec Nutrition Company 4 SUBSEQUENT EVENTS In October 1996, the company and Nestlé S.A. (Nestlé) dissolved Clintec Nutrition Company (Clintec), a joint venture between Baxter and Nestlé. Under the dissolution Bieffe Medital S.p.A. agreement, the company funded its share of previously guaranteed joint venture debt In July 1997, the company signed a definitive agreement to acquire Bieffe Medital totaling $66 million and received the assets and liabilities associated with Clintec’s S.p.A., a European manufacturer of dialysis and intravenous solutions and containers, parenteral-nutrition business for a total consideration of the company’s 50% share of for approximately $235 million, which includes assumption of debt. Approximately Clintec’s enteral business and a net cash payment to Nestlé of $50 million. $48 million in purchase price installments were made during 1997. The acquisition Approximately $198 million of the purchase price was allocated to goodwill and is will be recorded in early 1998, when the company became a majority shareholder. The being amortized on a straight-line basis over 40 years. purchase of the remaining shares is expected to be completed in mid-1998. PSICOR, Inc. Pharmaceutical Products Division of the BOC Group In January 1996, the company acquired PSICOR, Inc. (PSICOR), a perfusion-services In January 1998, the company signed a definitive agreement to acquire the business, for $84 million. Approximately $70 million of the purchase price was Pharmaceutical Products Division of the BOC Group’s Ohmeda health-care business allocated to goodwill and is being amortized on a straight-line basis over 15 years. (Ohmeda), a manufacturer of gases and drugs used for general and local anesthesia, for approximately $104 million. The transaction is subject to customary antitrust Pro Forma Information (Unaudited) review and is expected to close in 1998. Had the acquisitions of Immuno and RMI taken place at the beginning of the first fiscal quarter of 1997, net sales, net income and basic earnings per share would not have been materially different from the reported amounts and, therefore, pro forma 5 RESTRUCTURING PROGRAMS 33 information is not presented. Had the acquisitions of Immuno, RMI, Clintec and PSICOR taken place at the beginning of the first fiscal quarter of 1996, the company’s The company has two restructuring programs in place. In November 1993, the pro forma net sales in 1996 would have been approximately $6.2 billion. Excluding company recorded a $216 million restructuring charge for costs associated with the in-process R&D charge relating to the acquisitions of Immuno and RMI, pro strategic actions designed to accelerate growth and reduce costs in the company’s forma net income and basic earnings per share for the year ended December 31, 1996, businesses worldwide, including reorganizations and consolidations in the United would have been $701 million and $2.54 per share, respectively. States, Europe, Japan and Canada. The restructuring program is expected to be substantially completed in 1998. Employee-related costs include provisions for VIMRX Pharmaceuticals Inc. severance, outplacement assistance, relocation and retention payments. Since the In December 1997, the company and VIMRX Pharmaceuticals Inc. (VIMRX) formed a inception of the program, the company has eliminated approximately 1,950 positions, new cell-therapy company to develop innovative treatments for cancer and other life- which exceeds the 1,640 positions originally targeted. threatening diseases. The company transferred certain assets of its Immunotherapy In September 1995, the company recorded a restructuring charge of $103 division into the new company and holds a minority ownership position along with million primarily to eliminate excess plant capacity and reduce manufacturing costs, warrants to acquire an additional ownership interest in the future. VIMRX obtained a as well as to initiate certain organizational structure changes. The charge majority interest in the new company in exchange for 11 million shares of VIMRX predominantly relates to the closure of the intravenous-solutions plant and common stock and convertible preferred shares with a nominal value of warehouse in Carolina, Puerto Rico. Production and warehousing will be transferred approximately $66 million. The securities received by Baxter are reflected on the and consolidated into other facilities. Employee-related costs consist primarily of company’s balance sheet in other noncurrent assets. Baxter is restricted from selling severance. The company currently estimates that approximately 1,200 positions will the common stock or converting the convertible preferred stock for a period of time be eliminated in total. Approximately 350 positions have been eliminated to date and pursuant to government regulations and contractual agreement, respectively. The completion of the plan is anticipated in 1999. The original timetable for the 1995 company recognized a pretax gain from the transaction of $32 million. The company program has been affected by delays in required governmental regulatory reviews and VIMRX loaned $30 million and $10 million, respectively, to the new company to relating to the transfer of equipment and production processes to other facilities in provide initial operating funds. Puerto Rico and the United States. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESTRUCTURING PROGRAMS At December 31, 1997 and 1996, commercial paper and short-term notes (in millions) Reserves at Employee- related costs Divestitures and asset write-downs Other costs together totaling $1,172 million and $743 million, respectively, have been classified Total with long-term debt as they are supported by a long-term credit facility, as discussed below, which management intends to continue to refinance. The company had December 31, 1994 $94 $113 $49 $256 unamortized original issue discounts of $36 million and $47 million for the Zero 1995 utilization: Cash Noncash 1996 utilization: Cash Noncash Reallocation of reserves 1997 utilization: Cash Noncash and adjustments Reserves at 20 – 26 – 18 10 3 – 72 – 20 (6) – 10 17 – 27 – (12) 5 2 37 72 53 20 – 15 15 coupon notes due 2000 at December 31, 1997 and 1996, respectively. The company leases certain facilities and equipment under capital and operating leases expiring at various dates. Most of the operating leases contain renewal options. Rent expense under operating leases was $86 million, $81 million and $88 million in 1997, 1996 and 1995, respectively. FUTURE MINIMUM LEASE PAYMENTS AND DEBT MATURITIES December 31, 1997 $17 $ 17 $10 $ 44 as of and for the years ended December 31 (in millions) Operating leases 6 LONG-TERM DEBT, CREDIT FACILITIES AND LEASE OBLIGATIONS 34 Effective interest rate 5.7% 5.7% 8.9% 10.0% 9.7% 6.0% 7.4% 6.4% 7.5% 10.2% 6.9% 1997 1996 $ 1,053 $ 694 119 – 87 99 112 160 151 252 198 100 202 144 49 200 86 98 98 151 150 – 198 100 – 96 as of December 31 (in millions) Commercial paper Short-term notes 7.5% notes due 1997 8.875% notes redeemable by company in 1998 9.25% notes due 1999 Zero coupon notes due 2000 8.125% notes due 2001 7.625% notes due 2002 7.125% notes due 2007 7.25% notes due 2008 9.5% notes due 2008 7.65% debentures due 2027 Other Total long-term debt and lease obligations Current portion Long-term portion $ 69 $ 47 48 31 22 19 34 Aggregate debt maturities and capital leases 114 145 1,3241 350 718 2,698 (21) $2,677 1998 1999 2000 2001 2002 Thereafter Total obligations and commitments $223 Amounts representing interest, discounts, premiums and deferred financing costs Present value of long-term debt and lease obligations 1. Includes $1,172 million of commercial paper and short-term notes supported by long-term credit facilities expiring in 2001. Baxter maintains a $1.5 billion revolving credit facility, which expires in 2001 and enables the company to borrow funds on an unsecured basis at variable interest rates. The agreement contains covenants, which include a maximum debt-to-capital ratio and a minimum interest coverage ratio. At December 31, 1997, there were no borrowings outstanding under this facility. Baxter also maintains short-term credit arrangements totaling approximately 2,677 (42) 1,920 (225) $2,635 $1,695 $829 million in support of international and domestic operations. At December 31, 1997, approximately $221 million of borrowings were outstanding under these facilities, of which $119 million is classified as long-term debt as discussed above. 7 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT deferred hedge gains of $19 million and $2 million, respectively, offset by $3 million and $4 million of deferred hedge losses, respectively. Concentrations of credit risk In the normal course of business, the company provides credit to customers in Foreign exchange risk management the health-care industry, performs credit evaluations of these customers and The company enters into various types of foreign exchange contracts to protect the maintains reserves for potential credit losses which, when realized, have been within company from the risk that the eventual net dollar cash inflows resulting from the range of management’s allowance for doubtful accounts. The allowance for transactions with foreign customers and suppliers may be adversely affected by doubtful accounts was $29 million and $24 million at December 31, 1997 and 1996, changes in currency exchange rates. The company also enters into foreign exchange respectively. contracts, with terms generally less than one year, to hedge anticipated but not yet The company invests the majority of its excess cash in certificates of deposit or committed sales expected to be denominated in foreign currencies. Deferred hedging money market accounts and, where appropriate, diversifies the concentration of cash gains on hedges of anticipated but not yet committed sales totaled $15 million and among different financial institutions. With respect to financial instruments, where $3 million at December 31, 1997 and 1996, respectively. appropriate, the company has diversified its selection of counterparties, and has The company has entered into foreign exchange contracts, for up to 10 years, arranged collateralization and master-netting agreements to minimize the risk of loss. to hedge certain of its net investments in foreign affiliates. These contracts hedge the U.S. dollar value of foreign currency denominated net assets from the effects of Interest rate risk management volatility in currency exchange rates by changing the currency denomination of Baxter uses forward contracts, options and interest rate swaps generally from one to certain of Baxter’s debt repayments and interest payments from the U.S. dollar to the three years in duration to manage the company’s exposure to adverse movements in respective currencies of the underlying net assets. interest rates. The book values of debt at December 31, 1997 and 1996, reflect The company principally hedges the following currencies: Japanese Yen, 35 Belgian Francs, French Francs, Italian Lira, U.K. Pound Sterling, German Marks and Austrian Schillings. INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS as of December 31 (in millions) Interest Rate Contracts Floating to fixed rate hedges Average pay rate Average receive rate Fixed to floating rate (swapped notes) Average pay rate Average receive rate Call Option Floor Foreign Exchange Contracts Forwards and options used to hedge anticipated sales Forwards and swaps used to hedge certain receivables and payables Forwards and swaps used to hedge Notional amounts Market value gain (loss) $400 $ (1) – 25 – 397 290 – 6 – (4) 7 10 net investments in foreign affiliates 1,546 1997 Weighted- average interest rate 5.4% 5.8% N/A N/A N/A Market value gain (loss) 1996 Weighted- average interest rate $2 7 4 11 0 6 (11) 5.8% 5.5% 4.3% 5.8% N/A N/A N/A Notional amounts $850 325 25 150 68 102 144 B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUES OF FINANCIAL INSTRUMENTS asofDecember31(inmillions) Assets Long-term insurance receivables Investment in affiliates Liabilities Carrying amounts 1996 1997 Approximate fair values 1996 1997 $409 180 $641 64 $339 192 $548 74 121 741 Notes payable to banks 102 121 102 Short-term borrowings classified as long-term 2 1,172 743 1,173 Other long-term debt and lease obligations 1, 2 1,505 Foreign exchange hedges Long-term litigation liabilities 26 210 1,177 (18) 1,625 13 1,224 (5) 365 191 290 9 COMMON STOCK Baxter has several stock-based compensation plans, which are described below. The company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plans. The compensation expense recognized for continuing operations for performance-based and restricted plans was $13 million, $20 million and $17 million in 1997, 1996 and 1995, respectively. Had compensation cost for all of the company’s stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method of FASB Statement No. 123, “Accounting for Stock- Based Compensation,” the company’s income and earnings per share (EPS) would have been reduced to the pro forma amounts indicated below: 1. Based on quoted market prices. 2. Interest rate hedge carrying amounts are included in corresponding debt balances. PRO FORMA INCOME AND EPS FROM CONTINUING OPERATIONS Although the company’s litigation remains unresolved by final orders or settlement agreements in some cases, the estimated fair values of insurance receivables and long-term litigation liabilities were computed by discounting the expected cash flows 36 based on currently available information. The carrying values of all other financial instruments approximate their fair values due to the short-term maturities of these assets and liabilities. 8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES as of December 31 (in millions) Accounts payable, principally trade Employee compensation and withholdings Restructuring Litigation Pension and other deferred benefits Property, payroll and other taxes Other 1997 $ 572 1996 $ 442 225 34 400 38 74 620 222 30 465 25 63 457 Accounts payable and accrued liabilities $1,963 $1,704 years ended December 31 (in millions, except per share data) Income from continuing operations: As reported Pro forma EPS from continuing operations: Basic, as reported Pro forma 1997 1996 1995 $ 300 $ 266 $1.08 $0.96 $ 575 $ 557 $ 2.11 $ 2.05 $ 371 $ 358 $1.34 $1.29 Excluding the $352 million in-process R&D expense recorded in 1997, and further discussed in Note 3, pro forma income from continuing operations and EPS from continuing operations in 1997 was $618 million and $2.22, respectively, compared to income from continuing operations and EPS from continuing operations of $652 million and $2.35, respectively. The pro forma amounts reflected above are not likely to be representative of the pro forma amounts in future years due to the FASB Statement No. 123 transition rules that require pro forma disclosures only for awards granted after 1994. In addition, the pro forma expense in 1997 is higher than the amounts in 1996 and 1995 due principally to accelerated vesting as a result of achievement in 1997 of the specified stock price level relating to the stock options granted in 1995. Pro forma income and EPS from discontinued operations were $66 million and $0.24, respectively, for 1996 and $299 million and $1.08, respectively, for 1995. All outstanding options were modified as a result of the spin-off of Allegiance. Equitable adjustments were made to the number of shares and exercise price for each option and employee stock subscription outstanding. Pro forma compensation expense for stock options and employee-stock subscriptions was calculated using the Black-Scholes model. Fixed stock option plans Employees transferring to Allegiance generally were required to exercise any Stock options have been granted at various dates. All grants have a 10-year initial vested options within 90 days from the date of spin-off, and all unexercised options term and most have an exercise price equal to 100% of market value on the date of were canceled after that date. All unvested options held by Allegiance employees grant. Vesting terms vary, with some options vesting ratably over three years and were canceled 90 days after the date of spin-off. Under the rules of FASB Statement others vesting 100% in five years or three years. Some grants vest on an accelerated No. 123, the modified options held by employees remaining with the company were basis upon the achievement of specified stock price levels. treated as an exchange of the original award for a new award. FIXED STOCK OPTIONS OUTSTANDING Range of Exercise Prices Outstanding December 31, 1997 Options Outstanding Weighted-average remaining contractual life (years) $14 – 18 19 – 26 27 – 40 41 – 51 52 – 58 $14 – 58 110,516 2,502,332 3,701,575 7,470,124 97,800 13,882,347 .69 5.34 6.58 8.22 9.67 6.10 Weighted-average exercise price per share Exercisable December 31, 1997 Weighted-average exercise price per share Options Exercisable 16.93 24.03 34.15 47.70 57.19 39.64 110,516 2,502,332 3,701,575 – – 6,314,423 16.93 24.03 34.15 – – 29.84 37 STOCK OPTION PLAN STATUS (Exercise Price Equals Market Price) as of and for the years ended December 31 1997 Weighted- average exercise price Shares 1996 Weighted- average exercise price Shares 1995 Weighted- average exercise price Shares Outstanding at beginning of year 12,501,329 $34.89 14,651,835 $31.35 12,368,320 $27.83 Granted Exercised Forfeited Equitable adjustment Outstanding at end of year Options exercisable at end of year Weighted-average fair value of options granted during the year 4,208,302 (2,406,409) (420,875) – 13,882,347 6,314,423 47.59 29.04 38.76 – $39.64 $29.84 $15.95 3,538,300 (4,080,414) (2,404,225) 795,833 12,501,329 4,542,496 48.12 27.88 33.09 29.98 $34.89 $26.65 $12.05 5,193,650 (2,107,441) (802,694) – 14,651,835 6,258,117 37.23 25.29 30.91 – $31.35 $29.02 $11.35 B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1996, approximately 2.4 million stock options were granted with an exercise At December 31, 1997, 61,220 shares were subject to restrictions, which lapse price of $51 (120% of the market price of the stock on grant date) and a weighted- between 1998 and 2002, and 1,144,963 shares were subject to restrictions that lapse average fair value of $11.00. All of the options were outstanding at year-end 1997. upon achievement of future performance objectives and related vesting periods. Pro forma compensation expense was calculated with the following weighted- During 1997, 1996 and 1995, 24,930, 720,043 and 574,174 shares, respectively, of average assumptions for grants in 1997, 1996, and 1995, respectively: dividend yield restricted stock and performance shares were granted at weighted-average grant-date of 2.1%, 2.7% and 2.7%; expected life of seven, eight and seven years; expected fair values of $51.29, $41.89 and $30.52 per share, respectively. volatility of 28%, 25% and 26%; and risk-free interest rates of 6.2%, 6.6% and 6.5%. Stock options have also been granted to The Baxter Allegiance Foundation (a Other philanthropic organization), as follows: an option to purchase 1,124,478 shares of In connection with a voluntary Shared Investment Plan implemented during 1994, common stock at $31.45 per share was granted on April 22, 1991, and expires in members of Baxter’s senior-management team purchased shares of the company’s 2001; and an option to purchase 1,074,000 shares of common stock at $31.42 per common stock. Baxter managers used personal full-recourse loans to purchase the share was granted on December 2, 1992, and expires in 2002. stock at the June 15, 1994, closing price. Baxter has agreed to guarantee repayment to the banks in the event of default by a participant. The participant loan amount Employee stock purchase plans outstanding at December 31, 1997, is $77 million. The company has employee stock purchase plans whereby it is authorized, as of Approximately 100 million shares of no par value preferred stock are autho- December 31, 1996, to issue up to 12 million shares of common stock to its rized for issuance in series with varying terms as determined by the board of directors. employees, nearly all of whom are eligible to participate. The purchase price is the During 1989, common stockholders received a dividend of one preferred stock lower of 85% of the closing market price on the date of subscription or 85% of the purchase right (collectively, the “Rights”) for each share of common stock. Each 38 closing market price as defined by the plans. The total subscription amount for each Right, under specified circumstances, entitles the owner to purchase one one- participant cannot exceed 25% of current annual pay. Under the plans, the company hundredth of a share of Series A Junior Participating Preferred Stock at a purchase sold 760,490, 1,121,907 and 1,579,425 shares to employees in 1997, 1996 and price of $70. The Rights become exercisable at a price of $140 and at a specified time 1995, respectively. Pro forma compensation expense was estimated with the after (1) a person or group acquires 20% or more of the company’s common stock or following weighted-average assumptions for 1997, 1996 and 1995, respectively: (2) a tender or exchange offer for 20% or more of the company’s common stock. dividend yield of 2.1%, 2.7% and 2.7%; expected life of one year for all periods; The Rights expire on March 20, 1999, unless earlier redeemed by the company under expected volatility of 33%, 26% and 23%, and risk-free interest rates of 5.7%, 5.7% certain circumstances at a price of $0.01 per Right. and 5.8%. The weighted-average fair value of those purchase rights granted in 1997, 1996 and 1995 was $13.27, $10.93 and $8.51, respectively. Restricted stock and performance-share plans 10 RETIREMENT AND OTHER BENEFIT PROGRAMS Under various plans, the company has made grants of restricted stock and The company has defined benefit pension plans that cover substantially all performance shares in the form of the company’s common stock to provide incentive employees in the United States and Puerto Rico, and its funding policy is to meet or compensation to key employees and non-employee directors. Under the long-term exceed the minimum requirements of the Employee Retirement Income Security Act incentive plan, grants are generally made annually and are earned based on the of 1974. The benefits are generally based on individual participants’ years of service achievement of financial performance targets, adjusted up or down by the company’s and compensation near retirement. Assets held by the trusts of the plans consist stock performance against the change in the Standard & Poor’s Medical Products and primarily of equity and fixed income securities. The company also has various Supplies Index. The restricted shares vest one year after they are earned. retirement plans in locations outside the United States and Puerto Rico. PENSION EXPENSE years ended December 31 (in millions) Service cost Interest cost on projected benefit obligation Actual return on assets Net amortization and deferral Total pension expense 1997 $36 90 (183) 82 $25 1996 $42 76 (155) 84 $47 1995 $27 62 (159) 105 $35 FUNDED STATUS AND CONSOLIDATED BALANCE SHEET AMOUNTS Plans with accumulated benefits exceeding assets 1996 1997 Plans with assets exceeding accumulated benefits 1996 1997 $100 $110 $132 15 117 $ 74 $ 81 $100 15 85 $1,046 $1,074 $1,169 1,290 $ 955 $ 978 $1,040 1,175 (121) (135) (4) (5) 59 70 as of December 31 (in millions) Actuarial present value of benefit obligations: Vested benefits Accumulated benefits Projected benefits Less plan assets at fair value Projected benefit obligation less plan assets Unrecognized net gains and unrecognized prior service cost Unrecognized obligation at January 1, net of amortization In addition to pension benefits, the company sponsors certain unfunded contributory health-care and life insurance benefits for substantially all domestic retired employees. NET POSTRETIREMENT HEALTH-CARE AND LIFE INSURANCE EXPENSE years ended December 31 (in millions) Service cost Interest cost on projected benefit obligation Net amortization and deferral Net postretirement benefits cost 1997 $ 3 14 (6) $11 1996 $ 5 15 (2) $18 1995 $ 3 15 (2) $16 PRESENT VALUE OF APBO OBLIGATION INCLUDED IN CONSOLIDATED BALANCE SHEETS as of December 31 (in millions) 1997 1996 Accumulated postretirement benefit obligation (“APBO”) Retirees Fully eligible active participants Other active participants Unrecognized net gains $118 $138 39 25 59 70 10 65 55 Accrued postretirement benefit liability $272 $268 (7) (6) (17) (22) ASSUMPTIONS USED IN DETERMINING THE APBO Net pension liability (asset) $106 $ 74 $ (79) $ (87) ASSUMPTIONS USED IN DETERMINING FUNDED STATUS as of December 31 1997 1996 Annual rate of increase in compensation levels: U.S. and Puerto Rico plans International plans (average) Discount rate applied to benefit obligations: U.S. and Puerto Rico plans International plans (average) Return on assets: U.S. and Puerto Rico plans International plans (average) 4.5% 4.5% 7.5% 6.0% 10.5% 7.5% 4.5% 4.6% 8.0% 6.0% 9.5% 7.0% as of December 31 Discount rate applied to APBO Annual rate of increase in the per-capita cost Rate decreased to By the year ended Increase if health-care trend rates increase by 1% in each year (in millions) APBO Expense 1997 7.5% 9.0% 5.0% 2002 1996 8.0% 10.0% 5.0% 2002 $27 $ 3 $28 $ 3 Most U.S. employees are eligible to participate in a qualified defined contribution plan. Participants may contribute up to 12% of their annual compensation to the plan and the company matches participants’ contributions up to 3% of compensation (subject to legal limits). Company matching contributions were $14 million, $14 million and $13 million in 1997, 1996 and 1995, respectively. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 INTEREST AND OTHER (INCOME) EXPENSE Income tax expense (benefit) related to continuing operations by category and by income statement classification is as follows: INTEREST EXPENSE years ended December 31 (in millions) 1997 1996 1995 INCOME TAX EXPENSE Interest, net Interest costs Interest costs capitalized Interest expense Interest income $206 $219 $219 (8) 198 (35) (5) 214 (44) (5) 214 (34) Total interest, net $163 $170 $180 Less interest allocated to discontinued operations1 Interest allocated to continuing operations1 – (67) (84) $163 $103 $ 96 1. Allocation of interest to continuing and discontinued operations was based on relative net assets of these operations. years ended December 31 (in millions) 1997 1996 1995 Current U.S. Federal State and local International Current income tax expense Deferred U.S. Federal State and local International Deferred income tax expense (benefit) $ 98 $ (16) $ 21 (6) 132 224 (50) 23 26 (1) 12 148 144 40 22 12 74 26 123 170 13 (27) (3) (17) OTHER (INCOME) EXPENSE Income tax expense $223 $218 $153 1997 $ (2) (48) (22) 39 $(33) 1996 $13 (9) 1 10 $15 1995 $17 (65) 22 21 $ (5) The income tax for continuing operations was calculated as if Baxter were a stand- alone entity (without income from discontinued operations). DEFERRED TAX ASSETS AND LIABILITIES as of December 31 (in millions) 1997 1996 1995 40 years ended December 31 (in millions) Equity in (income) losses of affiliates Asset dispositions, net Foreign exchange Other Total (income) expense 12 INCOME TAXES U.S. federal income tax returns filed by Baxter International Inc. through December 31, 1990, have been examined and closed by the Internal Revenue Service. The company has ongoing audits in U.S. and international jurisdictions. In the opinion of management, the company has made adequate provisions for tax expenses for all open years. INCOME BEFORE TAX EXPENSE BY CATEGORY years ended December 31 (in millions) U.S. International Income from continuing 1997 $ 92 431 operations before income tax expense $523 1996 $188 605 $793 1995 $ 4 520 $524 Deferred tax assets Accrued expenses Accrued postretirement benefits Merger and restructuring costs Alternative minimum tax credit Tax credits and net operating losses Valuation allowances Total deferred tax assets Deferred tax liabilities Asset basis differences Subsidiaries’ unremitted earnings Other Total deferred tax liabilities $ 10 103 19 114 136 (46) 336 294 91 4 389 $ 88 $192 97 29 90 27 (36) 295 227 80 25 332 80 97 62 20 (30) 421 241 121 26 388 Net deferred tax asset (liability) $(53) $(37) $ 33 There are $63 million of loss carryforwards which expire in 2012 and $23 million of foreign tax credit carryforwards which expire in 2001, and $10 million of foreign tax credit carryforwards which expire in 2002. INCOME TAX EXPENSE have a material adverse impact on the company’s net income and net cash flows in the Income tax expense applicable to income from continuing operations differs from period in which it is recorded or paid, management believes that no such charge income tax expense calculated by using the U.S. federal income tax rate for the would have a material adverse effect on Baxter’s consolidated financial position. following reasons: years ended December 31 (in millions) Income tax expense at statutory rate Tax-exempt operations Nondeductible goodwill State and local taxes Repatriation of foreign earnings Foreign tax expense Acquired R&D expense Other factors Income tax expense 1997 $183 (130) 12 (5) – 40 123 – $223 1996 $278 (130) 10 3 17 33 – 7 1995 $183 (125) 8 7 57 14 – 9 Mammary implant litigation The company, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits brought by individuals, all seeking damages for injuries of various types allegedly caused by silicone mammary implants formerly manufactured by the Heyer-Schulte division (Heyer-Schulte) of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested its Heyer-Schulte division in 1984. It is not known how many of these claims and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed $218 $153 to other manufacturers. As of December 31, 1997, Baxter, together with certain of its subsidiaries, had The company has received a tax-exemption grant from Puerto Rico, which provides been named as a defendant or co-defendant in 7,762 lawsuits and 1,734 claims that its manufacturing operations will be partially exempt from local taxes until the relating to mammary implants, brought by approximately 16,480 plaintiffs. Of those year 2002. Appropriate taxes have been provided for these operations assuming plaintiffs, 8,963 currently are included in the Lindsey class action Revised Settlement repatriation of all available earnings. In addition, the company has other described below, which accounts for 3,902 of the pending lawsuits against the manufacturing operations outside the United States, which benefit from reductions in company. Additionally, 7,151 plaintiffs have opted out of the Revised Settlement 41 local tax rates under tax incentives that will continue at least through 1999. (representing 3,572 pending lawsuits), and the status of the remaining plaintiffs with U.S. federal income taxes, net of available foreign tax credits, on unremitted pending lawsuits is unknown. Some of the opt-out plaintiffs filed their cases naming earnings deemed permanently reinvested would be approximately $270 million as of multiple defendants and without product identification; thus, not all of the opt-out December 31, 1997. 13 LEGAL PROCEEDINGS plaintiffs will have viable claims against the company. As of December 31, 1997, 2,527 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during 1997, Baxter obtained dismissals, or agreements for dismissals, with respect to 7,383 plaintiffs. In addition to the individual suits against the company, a class action on behalf Baxter International Inc. and certain of its subsidiaries are named as defendants in a of all women with silicone mammary implants was filed on March 23, 1994, in the number of lawsuits, claims and proceedings, including product liability claims United States District Court (U.S.D.C.) for the Northern District of Alabama involving involving products now or formerly manufactured or sold by the company or by most manufacturers of such implants, including Baxter (Lindsey, et al., v. Dow companies that were acquired by Baxter. These cases and claims raise difficult and Corning, et al., U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was complex factual and legal issues and are subject to many uncertainties and certified for settlement purposes only by the court on September 1, 1994, and the complexities, including, but not limited to, the facts and circumstances of each settlement terms subsequently were revised and approved on December 22, 1995 (the particular case or claim, the jurisdiction in which each suit is brought, and Revised Settlement). The monetary provisions of the Revised Settlement provide differences in applicable law. Accordingly, in many cases, the company is not able to compensation for all present and future plaintiffs and claimants through a series of estimate the amount of its liabilities with respect to such matters. specific funds and a disease-compensation program involving certain specified Upon resolution of any of the legal matters discussed below, Baxter may incur medical conditions. Appeals have been filed challenging the Revised Settlement. charges in excess of presently established reserves. While such a future charge could B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 15, 1995, Dow Corning Corporation, one of the defendants in the amount thus far paid by insurers, committed for payment, and projected by Baxter to mammary implant cases, declared bankruptcy and filed for protection under Chapter be paid by insurers under these agreements is in excess of $550 million, based on 11 (In re: Dow Corning Corporation, U.S.D.C., E.D. Mich. 95-20512, 95CV72397- the company’s current estimate of mammary implant expenditures. The insurers with DT). The full impact of these proceedings on the Revised Settlement is unclear. which Baxter has not reached coverage agreements generally have reserved (i.e., On January 16, 1996, Baxter, Bristol-Myers Squibb Company and Minnesota neither admitted nor denied), and may attempt to reserve in the future, the right to Mining and Manufacturing Company each paid $125 million into the court- deny coverage, in whole or in part, due to differing theories regarding, among other established fund as an initial fund to pay claims under the Revised Settlement. Union things, the applicability of coverage and when coverage may attach. Baxter is Carbide Corporation and McGhan Medical Corporation also are parties to the engaged in active litigation with each of these insurers and is negotiating with certain Revised Settlement. Under the Revised Settlement, plaintiffs and claimants have a of them to resolve outstanding insurance coverage issues. second opportunity to opt out of the Revised Settlement, once they receive a “Notification of Status” letter from the claims-administration office. “Notification of Factor concentrates litigation Status” letters were delivered to virtually all domestic claimants by July 1997, and the Baxter currently is a defendant in a number of claims and lawsuits brought by opt-out period for most claimants expired on September 1, 1997. individuals who have hemophilia, all seeking damages for injuries allegedly caused In addition to the Lindsey class action, the company also has been named in by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma 11 other purported class actions in various state and provincial courts, only one of (factor concentrates) processed by the company in the early and mid-1980s. The which is certified: Harrington v. Dow Corning Corp., et al., Supreme Court, British typical case or claim alleges that the individual was infected with the HIV virus by Columbia, C954330. The class action in British Columbia has been certified solely factor concentrates, which contained the HIV virus. None of these cases involves with respect to the issue of whether silicone gel breast implants are reasonably fit for factor concentrates currently processed by the company. 42 their intended purpose. As of December 31, 1997, Baxter had been named in 486 lawsuits and 410 In the fourth quarter of 1993, Baxter accrued $556 million for its estimated claims in the United States, Canada, Ireland, Italy, Taiwan, Japan and the Netherlands. liability resulting from the settlement of the Lindsey class action and recorded a All U.S. federal court factor concentrate cases have been transferred to the U.S.D.C. receivable for estimated insurance recoveries totaling $426 million, resulting in a net for the Northern District of Illinois for case management under Multi District charge of $130 million. Based on its continuing evaluation of the remaining opt-outs, Litigation (MDL) rules (MDL Docket No. MDL-986). The company also has been the company accrued an additional $298 million for its estimated liability to litigate or named in eight purported class actions. None of these class actions has been settle cases and claims involving opt-outs and recorded an additional receivable for certified, and five have been transferred to the MDL for discovery. estimated insurance recoveries totaling $258 million, resulting in an additional net In most states, Baxter’s potential liability is limited by laws that provide that the charge of $40 million in the first quarter of 1995. sale of blood or blood derivatives, including factor concentrates, is not covered by The mammary implant litigation includes issues related to which of the Baxter’s the doctrine of strict liability. As a result, each claimant must prove that his or her insurers are responsible for covering each matter and the extent of the company’s injuries were caused by the company’s negligence. claims for contribution against third parties. Baxter believes that a substantial portion On May 6, 1997, the court approved a settlement submitted by the plaintiffs’ of its liability and defense costs for mammary implant litigation will be covered by steering committee for the MDL, Baxter, Alpha Therapeutic Corporation, Armour insurance, subject to self-insurance retentions, exclusions, conditions, coverage Pharmaceutical and Bayer Corporation. The essential terms of the settlement provide gaps, policy limits and insurer solvency. The company has entered into “coverage-in- payments of $100,000 per person to each HIV-positive person with hemophilia in the place” agreements with a number of its insurers, each of which issued or subscribed United States who can demonstrate use of factor concentrates produced by one of the to policies of insurance between 1974 and 1985. These agreements resolve the settling defendants between 1978 and 1985. Additionally, the defendants have signatory insurers’ coverage defenses and specify rules and procedures for allocation established a $40 million fund for payment of attorneys’ fees, costs and court- and payment of defense and indemnity costs pursuant to which signatory insurers administration expenses. Baxter’s agreed contribution to the proposed settlement is will reimburse Baxter for mammary implant losses. Five of the company’s claims- 20% of the total settlement proceeds. made insurers, which issued policies subsequent to 1985, have agreed to pay under The settlement requires insurance-carrier approval and the signing of releases. their policies with respect to mammary implant claims. The combined total of the Baxter and the other defendants have reached agreements to settle potential subrogation and reimbursement claims with most private insurers, the federal which the signatory insurers will reimburse the company for factor concentrate losses. government and all 50 states, the District of Columbia and Puerto Rico. Although the The insurers with which Baxter has not reached coverage agreements generally have period for claimants to decide whether or not to participate in the settlement is reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the anticipated not to expire until March 31, 1998, the approximate number of eligible right to deny coverage, in whole or in part, due to differing theories regarding, among claimants as of December 31, 1997, was 5,581, and the number of eligible opt-outs other things, the applicability of coverage and when coverage may attach. Baxter is was approximately 533. On July 29, 1997, the court dismissed two appeals that had engaged in active litigation and negotiations with certain of these insurers to resolve been filed challenging the settlement. The defendants had paid 1,737 claimants as of outstanding insurance coverage issues. December 31, 1997. Payments are expected to continue through the middle of 1998 In the fourth quarter of 1993, the company accrued $131 million for its as documents are sent to all eligible claimants. estimated worldwide liability for litigation and settlement expenses involving factor In Japan, Baxter is a defendant, along with the Japanese government and four concentrate cases and recorded a receivable for insurance coverage of $83 million, other co-defendants, in factor concentrate cases in Osaka, Tokyo, Nagoya, Tohoku, resulting in a net charge of $48 million. In the third quarter of 1995, significant Fukuoka, Sapporo and Kumamoto. As of December 31, 1997, the cases involved developments occurred, primarily in the United States, Europe and Japan relative to 1,257 plaintiffs, of whom 1,206 allegedly used factor concentrates manufactured by claims and litigation pertaining to the Baxter’s plasma-based therapies. After the company. Based upon the Osaka and Tokyo courts’ recommendations, the parties analyzing circumstances in light of recent developments and considering various have agreed to a settlement of all pending and future factor concentrate cases. In factors and issues unique to each geography, the company revised its estimated general, the settlement provides for payment of an up-front, lump-sum amount of exposure from the $131 million previously recorded for factor concentrate litigation approximately $360,000 per plaintiff to be funded 40% by the Japanese government to $378 million for all litigation relating to plasma-based therapies, including the and 60% by the corporate defendants. The share of the settlement to be paid by each factor concentrate litigation and the Gammagard ® IVIG litigation (see Other Litigation corporate defendant was determined based upon its market share, resulting in a below). Related estimated insurance recoveries were revised from $83 million for 43 contribution by the Baxter of approximately 15.36%. The portion of the settlement to factor concentrates to $274 million for all plasma-based therapies. This resulted in a be funded by the corporate defendants will include prior payments made by the net charge of $56 million in the third quarter of 1995. corporate defendants under a Japanese government-administered program, which In addition, as described in Note 3, Baxter acquired Immuno International AG pays monthly amounts to HIV-positive and AIDS-manifested people with hemophilia (Immuno) in fiscal year 1997. Immuno has unsettled claims for damages for injuries and their survivors. Additionally, monthly payments will be made to each plaintiff allegedly caused by its plasma-based therapies. The typical claim alleges that the according to a set schedule. individual with hemophilia was infected with HIV by factor concentrates containing In Spain, Baxter was notified in 1995 that approximately 1,370 HIV-positive the HIV virus. Additionally, Immuno faces multiple claims stemming from its vaccines people with hemophilia wished to explore settlement possibilities with the company and other biologically derived therapies. A portion of the liability and defense costs in lieu of filing suit in both Spain and the United States. The parties have reached related to these claims will be covered by insurance, subject to exclusions, agreement on the terms of a settlement whereby each claimant will receive $25,000 conditions, policy limits and other factors. In addition, the stock purchase agreement (including attorneys’ fees and costs) in return for a general release and protection between the company and Immuno provides that approximately 84 million Swiss against contribution claims by other defendants. As of December 31, 1997, 1,370 francs (or approximately $58 million at year end) of the purchase price will be claimants had agreed to the settlement. Baxter does not expect any additional withheld to cover these contingent liabilities. Based on management’s estimates, the claimants to come forward. amount of these contingencies, net of insurance recoveries and reserves, is not The company believes that a substantial portion of the liability and defense costs expected to exceed the negotiated contingent payment held back from the total related to factor concentrate litigation will be covered by insurance, subject to self- purchase price. insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Baxter has entered into coverage in place agreements with certain of its Other litigation insurers that issued or subscribed to policies of insurance between 1978 and 1985. Baxter is currently a defendant in a number of claims and lawsuits brought by These agreements resolve the signatory insurers’ coverage defenses and specify rules individuals who infused the company’s Gammagard® IVIG (intravenous immuno- and procedures for allocation and payment of defense and indemnity costs pursuant to globulin), all of whom are seeking damages for Hepatitis C infections allegedly B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS caused by infusing Gammagard® IVIG. As of December 31, 1997, Baxter was a pertaining to the Caremark spin-off (Isquith, et al., v. C. A. (Lance) Piccolo, et al., defendant in 134 lawsuits and 70 claims in the United States, Denmark, France, Circuit Court, Cook County, IL, Chancery Division, 96CH0013652). Baxter and the Germany, Italy, Spain, Sweden and the United Kingdom. Eleven suits currently other defendants are vigorously defending this action. pending in the United States have been filed as purported class actions but only one Baxter has been named a potentially responsible party (PRP) for environmental has been certified. All U.S. federal court Gammagard® IVIG cases have been cleanup costs at 16 hazardous-waste sites. Under the United States Superfund statute transferred to the U.S.D.C. for the Central District of California for case management and many state laws, generators of hazardous waste that is sent to a disposal or under MDL rules. On February 21, 1996, the court certified a nationwide class of recycling site are liable for cleanup of the site if contaminants from that property later persons who had infused Gammagard® IVIG (Fayne, et al., v. Baxter Healthcare leak into the environment. The laws generally provide that a PRP may be held jointly Corporation, U.S.D.C., C.D., CA, ML-95-160-R). The company sought an immediate and severally liable for the costs of investigating and remediating the site. Allegiance stay of the class notice from the 9th Circuit Court of Appeals and subsequently filed a has assumed responsibility for 10 of these sites, the largest of which is the Thermo- Writ of Mandamus seeking class decertification. The 9th Circuit Court of Appeals Chem site in Muskegan, Michigan. The estimated exposure for Baxter’s remaining six granted the stay of the class notice on March 19, 1996, and on April 12, 1996, sites is approximately $2 million, which has been accrued (and not discounted) in the granted a stay of the class certification pending final determination on the writ. On company’s financial statements. August 5, 1997, the 9th Circuit Court of Appeals denied the Writ of Mandamus. In addition to the cases discussed above, Baxter is a defendant in a number of Baxter is vigorously defending these cases. other claims, investigations and lawsuits. Based on the advice of counsel, As of September 30, 1996, Allegiance assumed the defense of litigation management does not believe that, individually or in the aggregate, these other involving claims related to Allegiance’s businesses, including certain claims of alleged claims, investigations and lawsuits will have a material adverse effect on the personal injuries as a result of exposure to natural rubber latex gloves. Allegiance has company’s results of operations, cash flows or consolidated financial position. 44 not been named in most of this litigation but will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of December 31, 1997, the company had been named as a defendant in 171 lawsuits, including the following 14 INDUSTRY AND GEOGRAPHIC INFORMATION purported class actions: Wolf v. Baxter Healthcare Corp., et al.,Circuit Court, Wayne Baxter operates in a single industry segment as a global medical products and County, MI, 96-617844NP; Murray, et al., v. Baxter Healthcare Corp., et al., U.S.D.C., services company that is a leader in technologies related to the blood and circulatory S. Dist. Ind., IP96-1889C, and Cowart, Alma M. v. Baxter International, Inc., U.S.D.C. system. It has market-leading positions in four businesses: Blood Therapies, which E. Dist., LA 97-1681. On February 26, 1997, all federal cases involving latex gloves develops biopharmaceutical and blood-collection and separation products and were ordered to be transferred to the U.S.D.C. for the Eastern District of Pennsylvania technologies; I.V. Systems/Medical Products, which develops technologies and for case management under the MDL rules (MDL Docket No. 1148). systems to improve intravenous medication delivery, and distributes medical A purported class action has been filed against Baxter, Caremark International products; Renal, which develops products and services to treat kidney disease; and Inc. (Caremark), C.A. (Lance) Piccolo, James G. Connelly and Thomas W. Hodson CardioVascular, which develops products and provides services to treat late-stage (all former officers of Caremark) alleging securities law disclosure violations in heart disease and vascular disorders. The company’s products include blood-clotting connection with the November 30, 1992, spin-off of Caremark in the Registration and therapies and machines and supplies for collecting, separating and storing blood; Information Statement (Registration Statement) and subsequent SEC filings prosthetic heart valves and cardiac catheters; dialysis equipment and supplies; and submitted by Caremark (Isquith v. Caremark International Inc., et al., U.S.D.C., N. intravenous solutions and pumps. Dist. Ill., 94C 5534). On March 26, 1997, the Court dismissed the action against the company essentially on the ground that plaintiffs lacked standing to bring this action. On April 24, 1997, plaintiffs filed a notice of appeal which is still pending. Additionally, in February 1997, the plaintiffs served a separate state court action, styled as a class action, against Mr. Piccolo, Vernon R. Loucks Jr., William H. Gantz, William B. Graham and James R. Tobin, alleging violations of various state laws FINANCIAL INFORMATION BY GEOGRAPHIC AREA years ended December 31 (in millions) United States Europe Pacific Rim1 Latin America Canada and other international Other2 Inter-area eliminations Total 1997 Trade sales Inter-area sales Total sales Pretax income (loss) Identifiable assets 1996 Trade sales Inter-area sales Total sales Pretax income (loss) Identifiable assets 1995 Trade sales Inter-area sales Total sales Pretax income (loss) Identifiable assets $ 3,054 $ 709 $ 3,763 $ 324 $ 5,480 $ 2,824 $ 761 $ 3,585 $ 215 $ 5,385 $ 2,634 $ 675 $ 3,309 $ 121 $ 4,933 1,707 249 1,956 370 2,202 1,322 182 1,504 337 1,246 1,215 158 1,373 244 1,156 888 189 1,077 248 551 890 179 1,069 268 641 860 191 1,051 284 575 342 112 454 61 427 260 129 389 45 312 204 113 317 30 209 147 1 148 35 80 142 3 145 31 85 135 2 137 37 82 – – (515) – – – – (103) – – – – (192) – – $ 6,138 (1,260) (1,260) – (33) – $ 6,138 $ 523 $ 8,707 – $ 5,438 (1,254) (1,254) – (73) – $ 5,438 $ 793 $ 7,596 – $ 5,048 45 (1,139) (1,139) – (137) – $ 5,048 $ 524 $ 6,818 1. Includes Japan, Australia, New Zealand and South Asia. 2. Consists of interest, net and in-process research and development charges (in 1997 and 1995) and litigation charges (in 1995). Inter-area transactions are accounted for using arm’s-length principles. Identifiable NET SALES AND NET ASSETS OF CONSOLIDATED FOREIGN assets are those assets associated with a specific geographic area. Goodwill and SUBSIDIARIES AND BRANCHES amortization have been allocated to geographic areas, as applicable. years ended December 31 (in millions) 1997 1996 1995 Foreign net sales1 $ 3,251 $ 2,773 $ 2,556 Foreign assets 2 net of liabilities at end of year $ 2,601 $1,876 $1,424 1. Includes U.S. export sales. 2. Includes advances from the company and its subsidiaries. B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15 QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY’S STOCK (UNAUDITED) years ended December 31 (in millions, except per share data) First quarter Second quarter Third quarter Fourth quarter 1997 Net sales Gross profit Income from continuing operations1, 2 Net income1, 2 Per common share: Income from continuing operations1: Basic Diluted Net income1: Basic Diluted Dividends Market price High Low 46 1996 Net sales Gross profit Income from continuing operations Net income 3 Per common share: Income from continuing operations: Basic Diluted Net income: Basic Diluted Dividends Market price High Low $1,443 $1,569 $1,494 $1,632 661 (203) (203) (.74) (.74) (.74) (.74) .2825 714 162 162 .58 .57 .58 .57 669 159 159 .57 .56 .57 .56 754 182 182 .65 .64 .65 .64 .2825 .2825 .2910 49.75 39.875 56.125 41.563 60.25 51.375 57.125 43.625 $1,299 $1,335 $1,310 $1,494 578 138 158 .51 .50 .58 .57 594 142 176 .52 .51 .65 .64 590 137 177 .50 .49 .65 .64 667 158 158 .58 .57 .58 .57 .2825 .3025 .3025 .2825 47.125 40.00 47.875 41.25 47.75 41.375 46.25 40.125 Total year $6,138 2,798 300 300 1.08 1.06 1.08 1.06 1.139 60.25 39.875 $5,438 2,429 575 669 2.11 2.07 2.46 2.41 1.17 47.875 40.00 1. The first quarter includes $352 million of in-process research and development charges relating to the acquisitions of Immuno and RMI. The charges decreased earnings per share by $1.28. 2. The fourth quarter includes a pretax gain of $32 million relating to the divestiture of certain assets of the company’s Immunotherapy division. 3. The third quarter includes a pretax gain of $36 million relating to the curtailment of the majority of Allegiance employees’ participation in the company’s pension and other postemployment benefit plans and a pretax charge of $12 million for costs associated with effecting the distribution of Allegiance. Baxter common stock is listed on the New York, Chicago and Pacific Stock Exchanges, on The London Stock Exchange and on the Swiss stock exchanges of Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on which the company’s common stock is traded. DIRECTORS AND OFFICERS Reed V. Tuckson, M.D. Group Vice President for Professional Standards American Medical Association Fred L. Turner BOARD OF DIRECTORS Mary Johnston Evans Arnold J. Levine, Ph.D. Former Director and Vice Chairman Professor of Biology and Walter E. Boomer President and Chief Executive Officer Rogers Corporation Pei-yuan Chia Retired Vice Chairman Citicorp and Citibank, N. A. John W. Colloton Vice President for Statewide Health Services The University of Iowa Susan Crown Vice President Henry Crown and Company EXECUTIVE OFFICERS Baxter International Inc. Vernon R. Loucks Jr. Chairman of the Board and Chief Executive Officer Harry M. Jansen Kraemer Jr. 1,2 President Brian P. Anderson 1,2 Senior Vice President and Chief Financial Officer Arthur F. Staubitz 1,2 Senior Vice President Portfolio Strategy Michael J. Tucker Senior Vice President Human Resources Fabrizio Bonanni Corporate Vice President Regulatory and Clinical Affairs Amtrak Frank R. Frame Adviser to the Board HSBC Holdings plc Chairman of the Molecular Biology Department Princeton University Vernon R. Loucks Jr. Senior Chairman of the Board and Retired Deputy Chairman Chairman of the Board and Chairman of the Executive Committee The Hongkong and Shanghai Banking Corporation Limited Chief Executive Officer Baxter International Inc. McDonald’s Corporation Martha R. Ingram Georges C. St. Laurent Jr. HONORARY DIRECTORS Chairman of the Board and Retired Chief Executive Officer Chief Executive Officer Ingram Industries Inc. Western Bank William B. Graham Monroe E. Trout, M.D. Chairman Emeritus of the Board Baxter International Inc. Harry M. Jansen Kraemer Jr. Chairman Emeritus of the Board President Baxter International Inc. American Healthcare Systems Ralph Falk II Private Investments 47 John F. Gaither Jr. 1,2 Corporate Vice President Corporate Development and Strategy David C. McKee 1,2 Corporate Vice President and Deputy General Counsel Kshitij Mohan Corporate Vice President Research and Technical Services John L. Quick Corporate Vice President Quality Management Baxter World Trade Corporation Baxter Healthcare Corporation Timothy B. Anderson 1 Group Vice President Biopharmaceuticals Donald W. Joseph 1 Group Vice President Renal Carlos del Salto Senior Vice President Latin America/Intercontinental J. Robert Hurley Jack L. McGinley Group Vice President I.V. Systems/Medical Products Michael A. Mussallem Group Vice President CardioVascular David F. Drohan Corporate Vice President and President I.V. Systems Corporate Vice President J. Michael Gatling Thomas J. Sabatino Jr.1,2 Corporate Vice President and Japan General Counsel Jan Stern Reed 1,2 Corporate Secretary Steven J. Meyer 1,2 Treasurer Roberto E. Perez 1 Corporate Vice President and President Fenwal Corporate Vice President Global Manufacturing Operations 1. Also an executive officer of Baxter Healthcare Corporation 2. Also an executive officer of Baxter World Trade Corporation As of February 28, 1998 B A X T E R I N T E R N A T I O N A L 1 9 9 7 A N N U A L R E P O R T INVESTOR INFORMATION Corporate Headquarters Transfer Agent Corporate News Stockholders who would like to receive Baxter International Inc. One Baxter Parkway Deerfield, Illinois 60015-4633 Telephone: (847) 948-2000 Internet: www.baxter.com Stock Exchange Listings First Chicago Trust Company of and Other Publications a telefax copy of Baxter’s most recent New York P.O. Box 2500 Corporate news releases, Forms 10-K corporate news or earnings releases may and 10-Q, and the company’s annual call toll free in the United States at Jersey City, New Jersey 07303-2500 report filed with the Securities and (800) 758-5804, and enter 100340 when Telephone: (201) 324-0498 Exchange Commission, are available an identification number is requested. Internet: www.fctc.com through Baxter’s home page on the Internet at: www.baxter.com. Customer Inquiries Customers who would like general Baxter common stock is listed on the Correspondence concerning Baxter New York, Chicago and Pacific Stock International stock holdings, lost or Baxter’s Form 10-K also is available on information about Baxter’s products and Exchanges, on The London Stock missing dividend checks, duplicate request from: Exchange and on the Swiss stock mailings, or changes of address should Baxter International Inc. exchanges of Zurich, Basel and Geneva. be directed to the above address. Investor Relations services may call the Center for One Baxter toll free in the United States at (800) 422-9837, or by dialing The New York Stock Exchange is the principal market on which the company’s common stock is traded. Dividend Reinvestment The company offers an automatic dividend-reinvestment program to all One Baxter Parkway (847) 948-4770. For specific information, Deerfield, Illinois 60015-4633 please contact your sales or customer- Telephone: (847) 948-4550 service representative. Annual Meeting holders of Baxter International Inc. Audio cassette copies of Baxter’s 1997 © Baxter International Inc., 1998. The 1998 Annual Meeting of common stock. A detailed brochure is Annual Report also are available on All rights reserved. References in this 48 Stockholders will be held on Tuesday, available on request from: request at the above address. report to Baxter are intended to refer May 5 at 10:30 a.m. at Baxter’s First Chicago Trust Company of North Cove manufacturing facility, New York located in Marion, North Carolina. P.O. Box 2598 Jersey City, New Jersey 07303-2598 Telephone: (201) 324-0498 collectively to Baxter International Inc. and its U.S. and international sub- sidiaries and their operating divisions. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA as of and for the years ended December 31 OPERATIONS (in millions) Net sales Income (loss) from continuing operations Depreciation and amortization Research-and-development expenses5 CAPITAL EMPLOYED (in millions) Capital expenditures Total assets Long-term debt and lease obligations Operational cash flow from continuing operations6 PER COMMON SHARE Average number of common shares 1997 1 1996 2 1995 3 $ 6,138 5,438 5,048 $ $ $ $ 300 398 392 496 $ 8,707 $ 2,635 $ 274 575 348 340 398 7,596 1,695 490 371 336 327 399 9,437 2,372 316 1994 4,479 406 302 303 380 9,039 2,341 618 19934 4,116 (193) 273 280 332 9,211 2,800 160 outstanding (in millions) 7 278 272 277 280 277 Income (loss) from continuing operations per common share: Basic Diluted Cash dividends per common share Year-end market price per common share $ 1.08 $ 1.06 $ 1.139 $ 50.44 2.11 2.07 1.17 1.34 1.32 1.11 41.00 41.88 1.45 1.44 1.025 28.25 (0.70) (0.70) 1.00 24.38 1. Income from continuing operations includes an in-process research-and-development charge of $352 million. 2. Certain balance sheet and other data are significantly affected by the spin-off of Allegiance Corporation, which occurred on September 30,1996. 3. Income from continuing operations includes a pretax restructuring charge of $103 million, a pretax litigation charge of $96 million and an in-process research-and-development charge of $18 million. 4. Loss from continuing operations includes a pretax restructuring charge of $216 million and a pretax litigation charge of $330 million. 5. Excludes in-process research-and-development charges of $352 million and $18 million in 1997 and 1995, respectively. 6. The company’s operational cash flow measurement is defined on page 22. 7. Excludes common stock equivalents. Printed on recycled paper BelliniDesign, Chicago Anderson Lithograph, Los Angeles 

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