Question;Financial Analysis of AbbottDate: November 24, 2014To: XXX, Investment Director of the Megapod Funds, Inc.Prepared by: YYYYThe main objective of the memo is to analyze the business basis for spinning off AbbVieand evaluate Abbotts ability to continue to create value for its investors. Also, the overview ofAbbots financial performance is to be provided. To identify the business basis for spin off, theoverview of Abbots business model and strategic objectives will be provided. The analysis offinancial performance and comparison with competitors results will allow identifying Abbotsability to demonstrate sustainable growth. The financial data is based on the SEC Filing 10kAnnual Reports, database of Research Insight, and database of the U.S. Census Bureau.IntroductionThe business model of Abbott bases on diversification of operations. To eliminate theover-dependence on single type of business, the company aims to balance the mix of its businessoperations. The business balance is declared the key strategy of the company and all keydevelopment and investment decisions are to be made from the perspective of balanced businessprofile.To follow the strategy of balanced development and diversification, Abbot spinned off itsresearch-based proprietary pharmaceutical business in 2013 and the new company AbbVie wasformed and listed on the stock exchange. Although companies are still operating in the samebuilding, the business structure and governance of Abbot and Abbvie has been split.The financial performance of Abbot improved in 2013 and the major financials, which increasein sales and gross margin, demonstrate companys ability to develop sustainably and createshareholders value.Business model overview and basis for spin offThe major business segments of Abbot include Nutritionals, Medical Devices,Established Pharmaceuticals, and Diagnostics. The business segments are equal in terms of size,as Abbot is aimed at providing balanced diversification across the scope of healthcare withoutproviding any advantages or preferences to the segments. The company operates globally andapproximately 70% of companys sales are outside the U.S. To retain leading positions andexpand globally, Abbot significantly invests in pharmaceuticals, which is the industry rapidlygrowing in the emerging markets.As Abbot expects the pharmaceutical business to grow significantly, the company hasfocused on Humira, a highly profitable medicine. In 2011, the investors raised concerns overexcessive companys dependency on Humira sales. To eliminate dominating of other operationalsegments, Abbot considered the separation of research based segment. Humira is used to treatrheumatoid arthritis and is considered one of the worlds best-selling drugs in the autoimmunemarket. Before the separation, Humira sales comprised approximately half of the Abbots drugdivision sales. However, Abbots exclusive patent for selling Humira expires in 2016, and toseparate other segments from patent liability, the drug business was spinned off into a separatecompany. Therefore, the major two business basis for spin off is the compliance with companysstrategy of balanced diversification and elimination of possible adverse effects resulting fromexpiry of patent for Humira.Financial performanceAbbot demonstrated sustainable growth over 2003 2012 (see in the Exhibit 1).Although its sales, gross profit and operating profit dropped dramatically in 2013 due to thespinning off AbbVie, its sales, gross profit and operating profit increased significantly in 2003 2012. Thus, Abbots sales increased for 13.4% over 2010 - 2012 mainly due to increase in salesvolumes in the emerging markets. The priority emerging markets for the company are India,Russia, China and Brazil. However, the price changes were adverse due to intensifiedcompetition in the health care industry.The profit margin remained unchanged in 2013 as shown in the Exhibit 2, since thedecrease in sales was offset by price pressures and unfavorable exchange rates in EstablishedPharmaceuticals and Vascular Products segment. In addition, the gross profit margin remainedunchanged over 2013 due to successful cost reduction initiatives. As the operating expensesshown in the Exhibit 3, the company decreased its selling and administrative expenses, as part ofthe expenses was transferred to newly created AbbVie. Moreover, to enhance prudent costmanagement, Abbot approved cost reduction to improve efficiency through streamlining variouscommercial operations. As to newly established company Abbvie, it generated sales of $18.4billions in 2012 and increased to 18.8 billions in 2013. However, the gross profit margin, as wellas operating profit remained relatively unchanged.Therefore, spinning off one of the businesses, Abbot has significantly improved itsfinancial performance by demonstrating solid growth in revenues and strong operational results.As shown in the Exhibit 4, the company spent huge money for dividends and share repurchasesin 2012 and 2013. Based on the financial results and significant increase of dividends pay outs,the company is able to continue creating shareholders value.To evaluate companys ability to create shareholders wealth in the future, it is alsonecessary to assess the market trends, which drive the demand. Thus, the major market trendsinclude: the double increase of number of people over 50 years old by 2030, increased incidencesof chronic diseases, and finally increase of health care services and infrastructure in the emergingmarkets. Therefore, Abbot has potential for expansion, as the market trends indicate of increasingdemand for pharmaceuticals.Abbots versus Competitors financial resultsFrom the perspective of market capitalization, Abbots main competitors are ActavisPLC, Allergan Inc, Teva Pharmaceutical Industries Ltd. From the perspective of business profile,companys competitors also include Roche Holding Ltd. Although Abbot has strong marketcapitalization, its operating profit margin was below its competitor in 2003 2009 (see in theExhibit 5). After 2010, Abbotts operating profit margin had been increased, then it is higher thanits competitor due to emerging market and expanding market.One of the key market trends is the increased competition. However, despite thecompetition and declining price changes, the market has potential for future expansion due toincreasing aging population, improved health care infrastructure in the emerging markets, andnew technological advances. One of the adverse trends is the patent expirations in the nearestfuture and increasing research and development costs. Although research and developmentexpenses increase is required for further developments and increased market share, thepercentage of increase of sales does not exceed percentage of increase in such expenses.ConclusionIn conclusion, Abbot spin off research based pharmaceuticals business has beenprovoked by business necessity to retain balanced diversification and eliminating possibleadverse results of patents expirations. Based on the financial results, both companiesdemonstrated solid revenue growth over 2012. However, operating margin and operating incomeremained relatively unchanged due to adverse price changes and increased competition in theindustry. Abbot has increased dividends payments demonstrating sustainable increase inshareholders wealth. Despite the price pressures, the industry has potential for expansion andAbbot has managed to re-structure its business, implement cost reduction initiatives andbalanced diversification necessary for successful competition in the future.Write a report (1 page with single space) on the basis and value of the Abbvie spin-off by Abbott Laboratories. Be sure to include a financial analysis of the sustainability of the Abbvie's business model and Financial performance over 5 years. Explain how Abbvie continue to sustain its ability to create value for its investors.
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