Caremark, Baxter Agree to $528-Million Merger : Pharmaceutical Giant’s Takeover of Newport Firm Would Create One of Largest Home Care Providers

Moving to create a major presence in the nation’s exploding home health-care market, Caremark of Newport Beach and Baxter Travenol Laboratories Inc. said Monday that they have agreed to merge operations in an all-stock deal valued at $528 million.

Caremark, already a leader in the in-home intravenous therapy industry, will be responsible for the companies’ combined efforts in that rapidly growing market. That service involves preparation and home delivery of medications and nutritional supplements for intravenous use.

Baxter Travenol, a major manufacturer of pharmaceuticals and medical supplies, recently entered the intravenous, in-home therapy market.

While industry analysts praised the deal as beneficial for both companies, nervous investors drove Baxter Travenol’s shares down 5.5% in price Monday while boosting the value of Caremark’s common stock by almost 16%. More than 2 million shares of each stock were traded.

The agreement, still subject to federal antitrust review, calls for Caremark, which will retain its Newport Beach offices and staff, to become a wholly owned subsidiary of the Deerfield, Ill., health care giant, which has annual revenue of $5.5 billion.

Analysts said the new subsidiary, which will have annual sales of $400 million to $500 million, would be among the nation’s largest in-home health-care operations.

Terms of the merger call for Caremark shareholders to receive Baxter Travenol stock worth $21.33 for each Caremark common share.

Caremark is not obliged to complete the transaction if the average trading price of Baxter Travenol common stock falls below $20 per share during a 10-day period just before the scheduled close of the deal on Sept. 1.

Although admitting surprise at the move, Wall Street analysts uniformly praised it, noting that it represents a combination of two strong companies looking to strengthen their positions in what is expected to be a $3-billion-a-year home health-care market by the beginning of the 1990s.

“It makes a lot of sense,” said Kenneth Abramowitz, an analyst with the New York securities firm of Sanford C. Bernstein. “It’s better to have one very strong company than two reasonably strong ones.”

According to Abramowitz’s estimates, Baxter Travenol’s home health operations will generate about $675 million this year, and Caremark will post sales of about $200 million.

Wall Street investors were enthusiastic about Caremark’s chances under the merger but were far less favorable than the analysts toward Baxter Travenol.

In active trading of 2.5 million shares Monday on the New York Stock Exchange, Baxter Travenol lost $1.375 a share to close at $23.50, while Caremark gained $2.75 a share to close at $20 and led trading in the over-the-counter market with 2 million shares changing hands.

Analysts attributed the decline of Baxter Travenol stock to initial jitters over the dilutive effect of the merger on its per-share earnings and to investor fears that the deal could require the company to increase its already sizable debt to cover forthcoming expansions of the home health operations.

The at-home health-care market is one of the fastest growing in the otherwise beleaguered health-care industry, with annual expansion rates of 20%, according to analysts who attribute the growth rate to continuing pressure from insurance companies, government agencies and corporations to hold down spiraling health-care costs.

At-home care, which can range from round-the-clock care by minimum-skilled aides to such complex tasks as kidney dialysis, is considerably less expensive than hospitalization and is increasingly being used as a substitute.

In its eight-year history, Caremark has established itself as a leader in the intravenous nutrition and drug therapy segment of the market, a niche that analysts estimate generates annual sales of about $750 million.

The company, which posted profits of $10.2 million on sales of $133.2 million in the fiscal year ended June 30, also operates the highly respected Health Data Institute, a subsidiary that supplies management and cost-accounting systems to health insurance companies and corporate benefit programs.

Analysts said the merger is sure to draw careful scrutiny from federal antitrust regulators because the new subsidiary will dominate almost half of the at-home intravenous treatment market. However, most analysts predicted that regulators will allow the merger because the intravenous market is a small piece of the total at-home market.

Caremark chairman and founder James Sweeney said merger and acquisition discussions between the two companies began in earnest recently following prolonged talks about a possible joint marketing venture of the two companies’ at-home services.

He said that when the companies realized that the joint venture would produce tax and accounting problems, they decided to merge. Sweeney and many other Caremark officers are former Baxter Travenol employees.

Caremark, Inc.

Headquarters: Newport Beach.

Annual revenues, $135 million.*

Net Income, $10 million.*

Facilities and Employees: 1,300 employees in 70 facilities throughout the country.

Baxter-Travenol Inc.

Headquarters: Deerfield, Ill.

Annual revenues: $5.5 billion.**

Net Income: $444 million.**

Facilities and Employees: 61,000 employees in more than 500 locations worldwide, including 200 facilities involced in at-home health care services.

*Fiscal year ended July 18, 1986.

** Fiscal year ended Dec. 13, 1986.