The surprise announcement last week that Harry Kraemer Jr. will be resigning as chairman and chief executive officer of Baxter International, whose financial performance has underwhelmed Wall Street in recent months, barely raised the eyebrows of hospital executives whose facilities purchase billions of dollars in supplies from the multifaceted company each year. Or, they were reluctant to talk about it lest they somehow irritate a company that supplies many of them with everything from intravenous solutions to treatments for hemophilia.
"I didn't know about it, and I don't run into it directly," said Jim Ulrich, vice president of finance and support at 44-bed Community Hospital in McCook, Neb. "It would be something that wouldn't hit high on the radar screen for me. We just have a lot of other things going on here."
Senior executives at four-hospital Continuum Health Partners in New York were not comfortable discussing the turmoil at Deerfield, Ill.-based Baxter "because it's more of an internal issue for Baxter and its shareholders," said Jim Mandler, a Continuum spokesman. "Changes in leadership happen. What most impacts buyers is when products or services change."
Those sentiments were echoed by group purchasing organizations through which most of the nation's hospitals buy those supplies.
"As a group purchasing organization, we typically don't feel the effect when a single senior executive chooses to leave a company. We see no disruption in service," said David Ricker, chief operating officer of Broadlane, a business process managing organization that specializes in supply management. Broadlane happens to be one of the few GPOs that does not do a lot of business with Baxter as it has an exclusive contract with B. Braun Melsungen for IV supplies, Ricker said.
Kraemer, 49, said in a written statement that as soon as the board named a successor, he would step down in light of "the challenges the company has faced during the last year." Reeling from sluggish sales, particularly in its biosciences division, last summer the pharmaceutical, device and biotechnology titan significantly reduced its plasma business and announced plans to cut about 3,200 jobs-nearly 6% of its workforce. Officials also revealed at about the same time that the Securities and Exchange Commission was investigating warnings on earnings the company had made.
Three days after Kraemer's exit was announced, Baxter reported 12% growth in revenue for the fourth quarter of 2003, but for the full year it suffered an 11% decline in income from the previous year. Vowing to get back on track to improve profitability, officials said the company would likely cut more positions in 2004 and try to reduce costs by as much as $300 million annually. The company also expects to take a restructuring charge in the second quarter of this year. In 2003, Baxter reported net income of $881 million on $8.9 billion in net sales or revenue.
"Given the challenges we faced during 2003 and our financial performance, we recognize the need for fundamental change going forward," Kraemer said during the earnings conference call. "Despite the efforts by Baxter team members around the world, we know we have disappointed our shareholders."
While Kraemer's departure may have had few repercussions on the day-to-day business of purchasing medications, blood-related therapeutics, and the intravenous solutions, sets and pumps that are in some ways Baxter's hallmark, it may portend big changes for the hospital supply giant. Since Kraemer ran the company's three major divisions-medication delivery, renal and bioscience-without the assistance of a COO or president, many Wall Street analysts predicted that the board would have to go outside the company to find a successor. New blood could bring new strategies, which could ultimately hit provider customers in their pocketbooks.
Bringing in an outsider to run the company is something Baxter hasn't done in recent memory. Although Kraemer had only been chairman since 2000 and CEO since 1999, he had been with Baxter for more than 20 years. As CEO, he succeeded Vernon Loucks Jr., who had been CEO since 1980.
Kraemer was unavailable for an interview, a spokeswoman said.
In 1985, as director of corporate development, Kraemer reportedly had been a key architect of the $3.8 billion purchase of American Hospital Supply Co.-a much bigger company than Baxter was at the time. In 1996, much of that deal was undone when Baxter spun off the distribution and supply businesses that had once been part of American Hospital Supply, creating Allegiance Corp. Distributor Cardinal Health bought Allegiance for $5.4 billion in 1999.
Kraemer's expertise was in finance, and people who knew him described him as personable and ethical but doomed in the end by the vagaries of the hospital supply market. Bert Patterson, president of Excel GSO, a group services organization, said after he left Premier last summer, Kraemer called him to wish him well.
"I think he got bad information from his internal people on where the volume was going, and I think most of the problem was coming from bioscience," Patterson said. He noted that the blood products market is perennially troublesome, with roller-coaster highs and lows in supply and pricing. Lately the market has been suffering from a surfeit of product, which has deflated the price, although it's something only investors would notice, not Baxter's hospital customers, he said.
"I think it put a tremendous effect on earnings and it put Harry in a bad spot," Patterson said.
By virtue of its size and its dominant market share in important hospital products, Baxter has significant contracts with nearly every GPO. Depending on the size and purchasing power of a particular GPO, senior executives either praised or scorned Baxter for its business style. Some said it is customer-oriented and reasonable in its contract negotiations while others complained that it was Baxter's "way or the highway." However, all said they thought highly of Kraemer, who in the past year or so was a guest speaker at conferences sponsored by both Premier and MedAssets.
At least one hospital system intimately familiar with Kraemer is three-hospital Evanston (Ill.) Northwestern Healthcare. Kraemer has served on the system's board since 2000 and before that spent six years on the board of its member Highland Park Hospital, said Mark Neaman, Evanston Northwestern's president and CEO. Kraemer stepped down in November 2003 and moved to the board of the Evanston Northwestern Healthcare Foundation when new system requirements demanded greater time commitments from board members. Neaman also serves with Kraemer on the board of the Healthcare Leadership Council, a coalition of healthcare executives.
"He is an excellent, first-rate board member because of his knowledge of the healthcare industry, as well as his integrity and encouraging spirit," Neaman said. "He's been a very positive force." Neaman added that he hopes Kraemer continues to serve on the foundation's board.
That said, Kraemer's exit at Baxter would not have any impact on purchasing at Evan-ston Northwestern, Neaman said. Besides, he said, the system purchases most of its IV products from Baxter's competitor, Abbott Laboratories, which, like Baxter, is headquartered in suburban Chicago. Miles White, chairman and CEO of Abbott, likewise served on Evanston Northwestern's board until last November and is also on the board of the Healthcare Leadership Council.
When he leaves Baxter, Kraemer will have to give up his seat on the leadership council to the next Baxter representative, said Mary Grealy, its president. "He has just been a tremendous leader and voice on the issue of the uninsured," Grealy said. "Here you have someone who is not with the hospital industry but is very concerned about the uninsured and the impact that was having in terms of uncompensated care."
Deborah Spak, a Baxter spokeswoman, said it was Kraemer's decision to resign, but Wall Street viewed it differently. Kraemer, who in 2002 earned a $916,346 salary according to company financial statements, had seen a cut in his annual bonus: It was $403,000 that year compared with $1.3 million in 2000.
"Baxter is a bellwether company of our healthcare industry," said Lee Perlman, president of GNYHA Ventures, a for-profit subsidiary of the Greater New York Hospital Association. "It has had its share of luck, and it will rise again because healthcare companies go in cycles, and they are due for a good cycle."
Also last week, the company announced the departure of Thomas Glanzmann, corporate vice president and president of the bioscience division. The company named John Greisch, 48, who previously served as vice president of finance and strategy for the bioscience business, to succeed him.