McGaw Stock Falls 21%; VA Job in Jeopardy : Manufacturing: Irvine intravenous products maker’s proposal for contract with veterans agency has been protested and may be lost.

McGaw Inc.’s stock fell 21% Monday after the U.S. Department of Veterans Affairs--the company’s largest customer--ruled that its proposal for a renewed $129 million contract was incomplete.

The preliminary rejection of McGaw’s bid on the five-year contract with the federal agency came after competitor Baxter International protested that McGaw’s proposal to supply intravenous products to all VA hospitals did not follow proper guidelines, the company said.

Baxter and the VA’s National Acquisition Center in Chicago, which manages purchasing contracts for the agency, would not comment Monday. McGaw representatives met Monday with VA officials, but it was unclear if the company would be able to hang on to the lucrative contract, company officials said.

If McGaw loses the contract that it has held since 1988, the Irvine-based company could face an immediate revenue loss of $7 million a quarter--$28 million a year--McGaw spokesman Lawrence A. Watts said.

Though the company, which makes and supplies intravenous solutions and devices, could eventually make up the difference by finding new customers, analysts said that the immediate effect on the bottom line could be a shock.

“This is a big deal,” said Vivian Wohl, an analyst with the brokerage Robertson Stephens & Co in San Francisco. “I think there is a fair amount of uncertainty over this.”

McGaw has been doing well on Wall Street since its stock began trading publicly in late March at $8 a share. The stock, traded on the NASDAQ market, was as high as $11.75 a share in late June.

On Monday morning, the company, expecting a panic, requested permission to halt trading until it could put out a press release, Watts said. On the news that the contract was in jeopardy, investors began a heavy sell-off as soon as trading resumed. About 524,000 shares--more than five times typical trading volume--changed hands during the day. The stock closed at $9.25 a share, down $2 from Friday.

Watts said that McGaw was awarded a contract in 1988 to be the primary supplier of intravenous products to the VA’s health care network. That contract, worth almost $128 million, expires in September.

In May, Baxter and Abbott Laboratories, both based in Illinois, challenged McGaw for the new contract, Watts said. McGaw, which offered the renewal for $129.4 million, appeared to have won.

“We came out the low bidder,” Watts said. “Everyone was excited.”

Baxter’s bid was $132 million, while Abbott’s bid was $154 million.

In protest, however, Baxter reportedly pointed out that McGaw’s proposal would cost the VA more initially than Baxter’s would. For instance, the Baxter contract would charge the VA $26.4 million for each year of the contract. McGaw’s plan, by contract, would bill the agency on a decreasing scale, charging $29.9 million in the first year, $28.5 million the second year, $26.5 million the third year, $23.8 million the fourth year and $20.7 million the fifth year--a total of $129.4 million.

After Baxter’s protest, the VA has ruled that McGaw’s proposal was incomplete because it was “mathematically and materially unbalanced.”

Watts said that the contract was scaled into five steps because of the costs the company incurs in making its environmentally safe Excel intravenous bag, which is more expensive to manufacture.

The bag made national news when vice presidential candidate Al Gore visited the plant during a Southern California campaign swing. He praised McGaw for considering the environment by manufacturing the bag, even though doing so has cut into the company’s profits.

Within five years, the bag will be less expensive to make because of economies of scale, Watts said. Considering that, the company decided to charge the VA more in the first few years to cover the added costs, then give the agency breaks at the end of the contract.

“We think we were doing the right thing,” Watts said. “We were passing the savings along as we achieve them.”

Watts said that the company will continue to pursue the contract and will challenge the government agency in court, if necessary.

“We have a good track record with the VA,” Watts said. “It is just a matter of resolving these issues.”