Baxter International Inc. / Letter to Shareholders / www.baxter.com

Dear Shareholders: Baxter International Inc. delivered successfully on a wide range of strategic objectives in 2014. We launched innovative healthcare technologies, advanced our new product development pipeline and expanded the global reach of our core portfolio. We made significant investments in R&D and manufacturing capacity to support future growth, and made substantial progress delivering on the synergies of our 2013 acquisition of Gambro AB. Amid these milestones, we announced a transformational decision: our plan to separate Baxter into two leading healthcare companies based on our BioScience and Medical Products businesses. This significant action reflects Baxter’s ongoing commitment to accelerating value for patients, investors, employees and other stakeholders in line with our mission to save and sustain lives.

ADVANCING AND EMBRACING HIGH-VALUE INNOVATION

While some corners of the global economy spending. The cost of innovative healthcare a full monthly dose of immune globulin to showed signs of improvement in 2014, the technologies is often cited as an obstacle in be self-administered with only one injection pressures to control healthcare spending this context; yet meaningful, cost-effective site and one infusion each month while worldwide remain profound. Healthcare healthcare innovation can actually help maintaining efficacy, safety and tolerability. spending as a percentage of gross domestic payers deliver enhanced value. The potential advances in cost effectiveness product continues to rise in well-established and benefits to patients are considerable. For example, consider HYQVIA [Immune markets. In emerging markets, growing Globulin Infusion 10% (Human) with Innovation also encompasses increasing wealth correlates with growing healthcare Recombinant Human Hyaluronidase], access to existing therapies in new demand and expense. a new Baxter treatment option for adult geographies. Peritoneal dialysis, for Governments and other payers are primary immunodeficiency patients. Most instance, is being embraced across challenged by the need to expand conventional subcutaneous treatments Asia Pacific as a cost-effective option for access to high-quality care and improve require weekly dosing and multiple injection improving treatment access and outcomes outcomes while simultaneously controlling sites per dose. In contrast, HYQVIA allows for end-stage renal disease patients.

Top Left: Lim Swee Cheng of Singapore uses Baxter peritoneal dialysis products to treat her end-stage renal disease. Top Right: Jonathan Chua advances the processing of RIXUBIS at Baxter’s Woodlands, Singapore, facility. “ This drive for high‑value innovation was one of several factors guiding Baxter’s decision, announced March 2014, to separate into two premier global healthcare companies.”

Robert L. Parkinson, Jr. / Chairman and Chief Executive Officer

Baxter, the world’s leading provider of peritoneal dialysis products, immune deficiencies, alpha-1 antitrypsin deficiency, burns and is supporting this growth on a range of fronts, including enhanced shock, and other chronic and acute medical conditions. The manufacturing capacity and creative public-private partnerships. other company, retaining the Baxter International name, will offer market-leading intravenous (IV) solutions and nutritional therapies, Cost will inevitably and rightfully remain a filter as payers assess drug delivery and administration systems, premixed and other new technologies; but the most thorough evaluations will also injectable drugs, inhalation anesthetics, biosurgery products, and a center on how these technologies can serve healthcare policy to comprehensive portfolio of products to treat patients with end-stage save and improve lives, increase efficiency and achieve other key renal disease. I will continue to serve as Baxter’s chairman and goals. The healthcare industry, for its part, must direct research and chief executive officer. development (R&D) resources toward innovations that deliver the greatest added value for stakeholders across a compelling range Both companies will realize many advantages upon separation, of clear and measurable therapeutic and economic benefits. including: • Greater management focus on the two distinct businesses INNOVATING AS TWO COMPANIES and markets. This drive for high-value innovation was one of several factors • The ability to commercialize new and existing products more guiding Baxter’s decision, announced March 2014, to separate effectively worldwide. into two premier global healthcare companies. • The ability to accelerate innovation and allocate necessary Baxter’s BioScience and Medical Products businesses have resources to areas presenting the highest growth potential. evolved in line with the unique markets they serve. Given their • The flexibility to pursue growth and investment strategies resulting scale and distinct dynamics, we have reached the moment in revenue acceleration, improved profitability and enhanced returns. where they can achieve their greatest potential by operating as independent enterprises. Baxter and Baxalta will both be well positioned to thrive in a dynamic marketplace, delivering enhanced performance for customers and One of the resulting companies, the newly named Baxalta investors. The separation is planned to take place by mid-2015. Incorporated, will offer market-leading biopharmaceuticals for the treatment of hemophilia and other bleeding disorders, 2014 FINANCIAL PERFORMANCE $3.2 $3.2 $3.1 $16.7 $3.0 $2.8

$15.0 Baxter’s 2014 worldwide sales were $16.7 billion, an increase of $13.9

$13.6 11 percent over 2013 (or 13 percent excluding the impact of foreign $12.6 currency). The company’s net income was $2.5 billion, or $4.56 per diluted share. After adjusting for Baxter’s September 2013 acquisition of Gambro AB, Baxter’s worldwide sales rose 4 percent (or 5 percent excluding the impact of foreign currency). Excluding special items, earnings per diluted share from continuing 1

2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 operations of $4.90 advanced 4 percent in 2014. Cash flow from operations was approximately $3.2 billion. The company invested Revenues Cash Flow more than $1.4 billion in R&D in 2014, an increase of 22 percent. (dollars in billions)2 from Operations (dollars in billions) 1Adjusted earnings per diluted share, excluding special items, is a non-GAAP measure. The company believes that this non-GAAP measure, when used in conjunction with results presented in accordance with GAAP, may provide a more complete understanding of the company’s operations and may facilitate a fuller analysis of the company’s results of operations, particularly in evaluating

$1,421 performance from one period to another. Effective January 1, 2014, Baxter has $2.050

$1.920 updated its non-GAAP measure of adjusted earnings per diluted share to exclude intangible asset amortization expense. Prior period non-GAAP measures have $1,165 $1.570 $1,081 been revised to reflect the updated measures. Please see the company’s website at

$890 www.baxter.com for reconciliations of the non-GAAP measures to their respective $857

$1.265 GAAP measures. $1.180

2014 Sales by Business (dollars in millions) 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Cash Dividends R&D Investment $1,004 (per common share) (dollars in millions)2 BioScience Hemophilia BioTherapeutics $1,574 BioSurgery $3,728

Medical Products $3,222 $4.90

$4.69 $2,224 142.3%

$4.59 Renal $4.38

$4.09 Fluid Systems $4,172 105.0%

94.3% Specialty Pharmaceuticals 42.1% BioPharma Solutions $747

2014 Global Sales (dollars in millions) 2010 2011 2012 2013 2014 Dow Jones 500 S&P HC S&P Baxter

Earnings per Diluted Share 5-Year Total from Continuing Operations Shareholder Return (adjusted)2,3 (including dividends) United States $9,656 $7,015 International

2Operating results from the company’s franchise are classified as discontinued operations for all periods presented. 3Represents earnings per diluted share after adjusting earnings to exclude special items. Effective January 1, 2014, Baxter has updated its non-GAAP measure of adjusted earnings per diluted share to exclude intangible asset amortization expense. Prior period non-GAAP measures have been revised to reflect the updated measures. Please see the company’s website at www. baxter.com for a reconciliation to earnings per diluted share. FOUR STRATEGIC GROWTH VECTORS • Received approvals for prophylaxis treatment with FEIBA in Canada, Australia and Japan. As Baxter International prepares for separation, our employees remain keenly focused on growing the combined business. Our four • Initiated the U.S. launch of ADVATE with the new BAXJECT III strategic growth vectors have been the foundation of our success, reconstitution system, which reduces the number of steps in the channeling our efforts to increase product access and innovation. They reconstitution process. are fueling our momentum as we set the stage for our coming separation. • Received U.S. and Canada regulatory clearance for the next- generation SIGMA Spectrum Infusion System, which incorporates VECTOR 1: Core Portfolio increased capacity for its Master Drug Library safety software and Baxter’s core portfolio is focused on a broad range of non-discretionary new asset tracking capabilities. medical needs. This continues to ensure ongoing demand for our • Obtained U.S. FDA approval for FLEXBUMIN [Albumin (Human)], products in well-established global markets as well as increasing USP, 5% Solution, broadening Baxter’s FLEXBUMIN product demand in emerging markets. Our portfolio also serves as a key portfolio to include both 5% in a 250 mL solution and 25% in platform for R&D, as we pursue new avenues to enhance the value 50 and 100 mL solutions. of our products for patients and healthcare providers. • Initiated the European launch of the ARTIS Physio system, the Among our 2014 highlights, Baxter: latest version of the ARTIS in-center system, which • Continued expanding access to its market-leading hemophilia delivers a broad range of treatment modalities, allowing therapy to therapies with new global approvals. Today ADVATE be tailored to the unique needs of each patient. [Antihemophilic Factor (Recombinant)] for the treatment of • Introduced FLOSEAL Hemostatic Matrix in Japan and hemophilia A is approved in 66 countries; and FEIBA [Anti-Inhibitor HEMOPATCH Sealing Hemostat in the European Union, widening Coagulant Complex] for the treatment of hemophilia A and B the reach of key Baxter surgical hemostats. patients with inhibitors is approved in 70 countries. • Increased access to our triple chamber systems for total parenteral • Received U.S. Food and Drug Administration (FDA) approval nutrition with the launch of OLIMEL (Amino Acids, Dextrose and of a pediatric indication for RIXUBIS [Coagulation Factor IX Lipids, with/without Electrolytes) in Brazil and Australia, and (Recombinant)] for the treatment of hemophilia B. CLINOMEL (emulsion for infusion) in China.

Top Left: Matt Perkins of Michigan uses RIXUBIS to help him manage his hemophilia B. Top Right: Jarvis Reeves checks fiber parameters at Baxter’s dialyzer manufacturing plant in Opelika, Alabama. HYQVIA [Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase]

SIGMA Spectrum Infusion System

ADVATE [Antihemophilic Factor (Recombinant)] with ARTIS Physio System BAXJECT III System

• Expanded the presence of the EXACTAMIX Automated As a matter of course, Baxter continually evaluates its many Compounding System in key markets in Latin America and distinct product lines, sharpening focus in light of evolving strategies Asia Pacific, including initial placements in China. and goals. Over the past year Baxter sold its two commercially marketed vaccines and related production facilities to Inc., and • Commenced pilot programs with multiple hospitals globally announced the sale of its proprietary Vero cell production advancing best practices on pharmacy admixing, reflecting technology and related assets to Nanotherapeutics, Inc. Baxter’s leadership in compounding and workflow technologies as well as our expansive array of IV pharmaceuticals. VECTOR 2: Research and Development We are also investing in manufacturing and processing capacity to improve our competitive position amid escalating product demand. New product innovation is the lifeblood of Baxter’s success, and our In 2014 Baxter formally opened an advanced recombinant biologic commitment is reflected in an annual R&D investment exceeding facility in Singapore that is approved to supply ADVATE in Europe. $1.4 billion. Baxter advanced R&D in 2014 through a broad range of The facility is already being expanded to process additional new product approvals, launches and other significant milestones recombinant protein therapies, including RIXUBIS and BAX 855 across our BioScience and Medical Products businesses. upon approval. In 2014 Baxter began the phased opening of a new global In addition, construction continues on Baxter’s new state-of-the-art biopharmaceutical innovation center in Cambridge, Massachusetts. plasma fractionation facility in Covington, Georgia. This facility will This will serve as the heart of Baxalta’s robust R&D program, add up to 3 million liters of additional capacity when commercial which is focused on bleeding disorders, immunology, oncology, processing begins, scheduled for 2018. and technology platforms including gene therapy. The center will bring together approximately 400 R&D employees, relocating many Major investments announced in 2014 include the expansion of positions now in Europe and California to a geography that has our state-of-the-art hemodialysis dialyzer manufacturing facility in emerged as a hub of leading-edge biopharma research. Opelika, Alabama, and a peritoneal dialysis capacity expansion across facilities in Guangzhou, Tianjin and Suzhou, China. Baxter In addition, Baxter’s Medical Products business built out its global is also investing in increased peritoneal dialysis and IV solution R&D network with the establishment of a new center of excellence in manufacturing capacity in the United States. In aggregate, Baxter Suzhou, China, focused on formulation, analytical chemistry, process has invested more than $2 billion in capacity expansion over the development and container development. The site will address past three years. global needs while also pursuing opportunities specific to emerging Asia Pacific markets. Among key 2014 product pipeline highlights, the company: • Acquired Chatham Therapeutics, LLC. Chatham’s Biological Nano Particle gene therapy platform has been integral to the • Received U.S. FDA approval for HYQVIA, the first subcutaneous development of BAX 335, now in Phase 1/2 for the treatment immune globulin treatment for adult primary immunodeficiency of hemophilia B, which potentially represents a new treatment patients that has a dosing regimen allowing for only one needle, paradigm for hemophilia patients. Baxter is also researching the one infusion site, once per month to deliver a full therapeutic gene therapy technology as a possible treatment for hemophilia A. dose of immune globulin. HYQVIA launched in the United States in the fourth quarter. It was approved for use in the European • Acquired AesRx, LLC, including its development program for Union in 2013. Aes-103 (now BAX 555), a first-in-class, oral small molecule compound for the prophylactic treatment of sickle cell disease. • Launched OBIZUR [Antihemophilic Factor (Recombinant), Porcine Sequence] following U.S. FDA approval for the treatment • Acquired ICNet, a global leader in clinical surveillance software of bleeding episodes in adults with acquired hemophilia A. used in hospitals for infection prevention, outbreak management, OBIZUR is the first recombinant porcine factor VIII approved for surgical infection surveillance, antimicrobial stewardship and acquired hemophilia A that allows physicians to manage treatment clinical pharmacy support. The acquisition extends our ability by actively measuring factor VIII activity levels. to offer integrated software, services and product solutions to address the comprehensive needs of our hospital customers. • Obtained European Union CE marking (marketing approval) for the myPKFiT program, a web-based pharmacokinetic and dosing • Signed an exclusive agreement with Rockwell Medical, Inc. to sell, calculator to help physicians develop personalized prophylaxis market and distribute Rockwell’s hemodialysis concentrates in the treatment regimens for patients prescribed ADVATE. United States and certain other countries. • Submitted a biologics license application (BLA) to the U.S. FDA • Announced an exclusive license and collaboration agreement for the approval of BAX 855, an investigational, extended half- with Merrimack Pharmaceuticals, Inc. for the development and life recombinant factor VIII treatment for hemophilia A. BAX 855 commercialization of MM-398. The investigational therapy has is based on the same native factor VIII protein as ADVATE successfully met its Phase 3 endpoints for the treatment of patients and employs proprietary PEGylation technology from Nektar with metastatic pancreatic cancer who had been previously Therapeutics designed to extend its duration in the body. treated with gemcitabine, and the data is being used as a basis for multiple regulatory submissions. MM-398 is also in Phase 1 for • Submitted a BLA to the U.S. FDA for the approval of BAX 111, the treatment of brain cancer, and in Phase 1 for the treatment of the first highly purified recombinant von Willebrand factor in Ewing’s sarcoma. clinical development as a treatment for patients with von Willebrand disease, the most common type of inherited bleeding disorder. VECTOR 4: Public-Private Partnerships • Presented the European results of a Phase 2/3 study of Among the challenges and constraints of today’s global healthcare an investigational 20 percent concentration subcutaneous marketplace, there are opportunities for Baxter to collaborate with immunoglobulin treatment for primary immunodeficiency. The local governments in new ways to achieve common goals. These study, which met its efficacy and tolerability endpoints, will be business models are helping expand access to leading technologies, used as the basis for upcoming regulatory submissions. scientific knowledge and economic opportunity while enabling governments to control costs. Baxter’s proven expertise across a VECTOR 3: Business Development range of essential healthcare therapies puts us in position to make a significant impact through these creative collaborations. In late 2013 Baxter completed its acquisition of Gambro AB, a major Among the highlights in 2014, Baxter: presence in in-center hemodialysis and acute renal care products. This acquisition, combined with Baxter’s own global leadership • Commenced a collaboration with Singapore’s Changi General in home-based peritoneal dialysis therapy, has given Baxter a Hospital to establish a new Centre of Excellence in Compounding comprehensive renal portfolio and global array of cross-therapeutic Sciences. It will be the first center of its kind in Asia Pacific to drive marketing opportunities unique in the industry. process and clinical innovations to meet the growing demand for compounded sterile products. Gambro represents the largest acquisition in Baxter’s history, and has provided our Medical Products business with an added • Continued our successful partnership with Brazil’s Hemobrás dimension that has helped pave the way for the planned separation. (Empresa Brasileira de Hemoderivados e Biotechnologia), which Much time and effort in 2014 was focused on successfully integrating is increasing local access to Baxter’s market-leading recombinant Gambro into Baxter, realizing the opportunities and synergies of our factor VIII therapy. Nearly 40 percent of Brazil’s 10,000 hemophilia expanding Renal business. This will continue to be a central focus A patients have converted to recombinant therapy since the in 2015. partnership began in late 2012. Strategic acquisitions and alliances remain essential as we continue • Advanced construction on a new peritoneal dialysis manufacturing to enhance our portfolio and pipeline. In 2014 Baxter: facility in Amata City, Rayong province, Thailand. The new plant addresses growing demand in response to the government’s “PD First” policy, which makes peritoneal dialysis the first-line treatment option for new patients, when appropriate. The facility is expected to be operational in 2016. “ One thing will remain constant for both Baxter and Baxalta: an absolute dedication to saving and sustaining lives. This mission has defined Baxter’s identity for more than 80 years.”

RETURNING VALUE TO SHAREHOLDERS in the make him well suited to lead this new company. Baxalta is also fortunate to be joined by Wayne T. Hockmeyer, Based on Baxter’s strong cash flow and disciplined capital allocation Ph.D., as non-executive chairman of its board of directors. Wayne’s strategy, the company announced a six percent dividend increase wealth of experience as a scientist and corporate leader, including in May 2014. This marked Baxter’s eighth dividend increase in as his tenure as a Baxter board member since 2007, will provide sound many years. perspective as Baxalta emerges as an independent entity. Baxter returned more than $1.6 billion to shareholders in 2014 The separation will usher in a period of transition, yet one thing will through dividends totaling more than $1.1 billion and share repurchases remain constant for both Baxter and Baxalta: an absolute dedication of approximately $550 million (or approximately 8 million shares). to saving and sustaining lives. This mission has defined Baxter’s The company has returned more than $10 billion to shareholders identity for more than 80 years, and it will live on in new ways as each cumulatively through dividends and share repurchases over the company takes distinct form. past five years. Since our founding as the first commercial manufacturer of IV solutions MOVING FORWARD to our status today as a $16.7 billion healthcare enterprise, Baxter has focused on executing strategies that make the greatest positive We are nearing a corporate milestone that will transform Baxter like impact on behalf of patients, investors, healthcare providers, no other event in the company’s history. Our separation will create employees and other key stakeholders. That same commitment remarkable opportunities for growth and success, extending our will remain Baxter’s strategic compass in the years to come. legacy of pioneering science and enhancing shareholder value. I look forward to leading Baxter as we begin the next phase of this This moment is a credit to Baxter’s 66,000 employees worldwide. Their rewarding journey. hard work and customer focus have strengthened our BioScience and Medical Products businesses to the point where they can thrive and accomplish even more for their stakeholders as independent entities. Ludwig N. Hantson, Ph.D., president of Baxter’s BioScience business since 2010, will serve as Baxalta’s chief executive officer. / Chairman and Chief Executive Officer Ludwig’s accomplishments and leadership over more than 25 years Robert L. Parkinson, Jr. February 26, 2015

Top Right: Marie-Sophie Landemaine (foreground) of Baxter’s Lessines, Belgium, facility oversees mixing and filling for an R&D pilot program. Baxter’s annual Sustainability Report details the company’s progress toward its key sustainability priorities and goals. The report is available online at: www.sustainability.baxter.com

Right: A shipment of Baxter-donated products for Ebola relief is unloaded in Monrovia, Liberia. (Photo credit: AmeriCares)

MAKING A DIFFERENCE AROUND THE WORLD

Baxter’s wide-ranging sustainability efforts The Baxter International Foundation plays Mexico, facility is now using lower carbon extend from employee wellness and diversity an important role in the company’s efforts to natural gas rather than fuel oil in its boilers. to the greening of our supply chain to expand healthcare access. This year’s grants Since 2012 all electricity purchased by healthcare access and beyond. The common helped support the work of organizations Baxter for its Deerfield, Illinois, headquarters thread is our dedication to creating lasting addressing diverse physical and mental and other Illinois facilities has been 100 social, environmental and economic value for healthcare needs of underserved adults and percent wind-generated, Green-e certified the communities we serve worldwide. children in communities across the United renewable energy. States as well as in India, China and Spain. One of the most urgent public health issues Thousands of employees worldwide annually This is in addition to the millions of dollars of 2014 was the outbreak of Ebola in West participate in Baxter’s robust volunteerism provided each year directly from Baxter’s Africa. Baxter responded with multiple airlifts efforts in areas such as healthcare, the businesses and facilities in support of critical of donated medical supplies to Liberia, environment, and math and science local needs. Sierra Leone and Guinea, managed through education. Among our many 2014 volunteer our humanitarian aid partners AmeriCares Baxter priorities also include reducing the initiatives, employees in more than 29 and Direct Relief, in addition to direct company’s carbon footprint, emphasizing countries contributed their skills to their monetary support. Overall, Baxter products the use of lower-carbon fuels and renewable local communities through the sixth annual reached more than 65 countries in 2014 energy wherever feasible. For example, in Baxter World Environment Week, held in as part of our ongoing product donation 2014 Baxter’s Grosotto, Italy, facility switched June to correspond with the United Nations’ program. We work closely with our aid from using heavy fuel oil to renewable World Environment Day. These events partners to ensure crucial therapies and biomass from local wood sawdust and focused on local environmental stewardship supplies are deployed rapidly in response scrap wood chips to generate steam for the opportunities in the areas of water, energy to needs such as pandemics and natural manufacturing process; and the Cuernavaca, and food. disasters as they occur.

Baxter is proud to be recognized or affiliated with these and other sustainability-related organizations and programs:

Baxter, Advate, Artis, Artis Physio, Baxalta, Baxject III, Clinomel, Exactamix, Feiba, Flexbumin, Floseal, Gambro, Hemopatch, © Baxter International Inc., 2015. All rights reserved. References Hyqvia, Icnet, Kiovig, Mypkfit, Obizur, Olimel, Rixubis, Sharesource and SIGMA Spectrum are trademarks of Baxter International Inc., in this report to Baxter are intended to refer collectively to Baxter or its subsidiaries. All other products or trademarks appearing herein are the property of their respective owners. International Inc. and its U.S. and international subsidiaries.