Abbott Laboratories This Company Report

Abbott Laboratories

This company report is designed to analyze the performance and financial prospects of Abbott Laboratories through examination of the company's history and current market presence, top management and exceptional activity in 2011. The examination involved a review of current business journals, books, articles and press releases focusing on business models, biomedical research and development, pharmaceutical companies, and Abbott Laboratories in particular. After extensive examination and thought, Abbott Laboratories' reputation as a potent international force seems well-deserved and investment in Abbott's future is highly desirable.

History and Current Market Presence:

Humble Beginnings vs. Currently Powerful Presence:

Established 123 years ago by physician and kitchen-pharmacist, Dr. Wallace C. Abbott (Abbott Laboratories n.pag), Abbott Laboratories expanded to a 21st Century global behemoth with 2010 sales of $35.2 billion in pediatric and adult nutritional products, diagnostic systems and tests, proprietary drugs such as Humira, TriCor and AndroGel, and vascular products and devices (Zacks Investment Research 2). Though Abbott remains a North Chicago-based company (Balde and Kaplan n.pag), 57% of its 2010 net sales were international revenues (Zacks Investment Research 2), and Abbott aggressively competes with worldwide business giants such as Pfizer, Inc., Johnson & Johnson, Bristol-Myers Squibb Company, Merck & Co., Inc., Schering-Plough Corporation and Eli Lilly and Company (Funding Universe n.pag).

Dr. Abbott headed the company from 1888 until his death in 1921, overseeing the exclusively-pharmaceutical company's incorporation in 1900 as "Abbott Alkaloidal Company," then the name-change to "Abbott Laboratories" in 1915, then through World War I, as Abbott developed such vital drugs as procaine and barbital (Funding Universe n.pag). After Dr. Abbott's death in 1921, Abbott continued to concentrate on product development and marketing, going public on the Chicago Stock Exchange in 1929 and going international in 1931 (Funding Universe n.pag). Since that time, Abbott developed and/or discovered and/or acquired pharmaceuticals, some of whose names are commonly known: the antibiotic erythromycin; the artificial sweetener, cyclamate; the baby formula, Similac; an anticonvulsant called Depakene; a tranquilizer called Tranxene; a treatment for blood clots called Abbokinase; an antibiotic called clarithromycin for the treatment of upper respiratory ailments, etc. (Funding Universe n.pag).

Abbott's diversification into non-pharmaceutical fields began under the leadership of Edward J. Ledder, who was named Abbott's president in 1967. Ledder strongly advocated diversification to shield Abbott from the potentially devastating effects of relying solely on pharmaceuticals for its livelihood. Receiving income from several industries, including but not limited to pharmaceuticals, Abbott was able to "cross-subsidize failing operations until they could be rehabilitated" (Funding Universe n.pag). That flexibility and adaptability has expanded and become a hallmark of Abbott's operations to this day (Funding Universe n.pag).

ii. International Business:

Entering the international business community in 1931 through an affiliate office established in Montreal, Canada (Funding Universe n.pag), Abbott assertively engaged in the international market and now operates in 130 countries worldwide (Abbott Laboratories n.pag). Continuing that policy, Abbott is developing relatively new international markets such as Brazil, Singapore, Shanghai and South Korea. "Brazil is the favored manufacturing and sales destination for many global life sciences companies. Some of the early players in the country include many famous international companies, including Abbott Laboratories…" (Mroczkowski 104). Singapore and Shanghai have also proven to be attractive overseas markets for Abbott: "Tuas Biomedical Parks I and II are located in Western Singapore and are also easily accessible from Malaysia. The second major biomedical park to be formed was Biopolis…These new facilities have attracted…several of the leading big pharma companies, including…Abbott" (Mroczkowski 220). Abbott is also involved in drug-discovery projects in South Korea: "Domestic companies are seeking foreign partnerships in the form of joint research collaboration and licensing agreements. Several multinational corporations (MNCs) have also set up various R&D activities in South Korea; these include Pfizer, Novartis, and Astra Zeneca, which has a virtual drug-development project in the country. Other players include Abbott Labs, Merck, and Bayer, who have drug-discovery projects in Korea" (Mroczkowski 99).

iii. Industry Rise and Erosion:

Since World War II, the industry dominated by Abbott and other pharmaceutical titans has reportedly been the most profitable segment of our national economy, largely due to four bases which Gary Pisano calls "…four structural pillars: (1) latitude to charge relatively high prices, (2) long product life cycles, (3) 'blockbuster' drugs, and (4) relatively high R&D productivity" (Pisano 173). Though Pisano believes these "pillars" have markedly disintegrated for the past ten years and will continue to crumble in the future (Pisano 173), Abbott has surmounted that difficult financial climate and financially outperformed many of its larger competitors due to its exceptionally large array of products (Associated Press n.pag).

b. Top Management:

i. Miles D. White, CEO:

Much of the credit for Abbott's notable growth and adaptability in the past 12 years is attributed to its CEO, Miles D. White. White, 56, earned degrees in Mechanical Engineering and Business Administration from Stanford University. He joined Abbott in 1984, is a former chairman of the Federal Reserve Bank of Chicago and a current director of Caterpillar Inc. And McDonald's Corporation (Yerak n.pag). While Abbott's dividend has risen for 39 consecutive years (with and without White), his unusually long 12-year tenure as a pharmaceutical company CEO has seen Abbott's sales rise from $13.2 billion to $35.2 billion (Yerak n.pag). White is a prominent example of dramatically effective top managers "with a high tolerance of risk, those who favor innovative activities and those who display a high degree of proactiveness" (Davis, Bell and Payne 41). The highly successful corporate structure touted in "The American Journal of Business" and evidently used by Abbott positions White as "the decisive force guiding organizational strategic decisions and direction, with the board of directors typically playing more of a supporting role" (Davis, Bell and Payne n.pag).

ii. Richard Gonzalez, Executive Vice President:

Richard Gonzalez, 57, is widely known as the second person in command at Abbott and White has described him as a "close friend" (Yerak n.pag). Gonzalez, 57, majored in Biochemistry at the University of Houston, and then worked as a research biochemist at Miami University's medical school. Gonzalez worked at Abbott for approximately 30 years, retired in 2007, and was enticed back to Abbott in 2009 to lead its medical investments. In 2010, Gonzalez was appointed head of Abbott's worldwide pharmaceuticals (Yerak n.pag).

c. 2011 -- An Exceptional Year:

Though Abbott's 123-year development is a model of assertiveness, 2011 is apparently a banner year in its history due to divisional reorganization (Zacks Investment Research 2), earnings consistently higher than analytical predictions (The Motley Fool), Abbott's announced division into two companies (Loftus, Abbott to Split Into Two Companies n.pag), and the anticipated settlement of a prominent whistle-blower suit against Abbott (Loftus, Abbott Books $1.5 Billion Charge for Potential Settlement n.pag).

i. Divisional Reorganization:

As of January 1, 2011, Abbott reorganized to adequately control its dramatically expanding product line. Creating a new corporate segment called "Established Pharmaceutical Products" encompassing its "international branded generic pharmaceutical products" (Zacks Investment Research 2), Abbott also united its national and worldwide proprietary pharmaceutical segments under one global umbrella (Zacks Investment Research 2). As a result, Abbott began 2011 reorganized into five divisions: "Proprietary Pharmaceutical Products," "Established Pharmaceutical Products," "Nutritional Products," "Diagnostic Products" and "Vascular Products" (Zacks Investment Research 2).

ii. Earnings Consistently Higher Than Predictions:

The year 2011 also saw Abbott outstrip analysts' earnings expectations for the year's first two consecutive quarters, leading investors to excitedly anticipate Abbott's 3rd Quarter earnings announcement scheduled for October 19, 2011 (The Motley Fool n.pag). True to form, Abbott announced the following 3rd Quarter earnings on October 19, 2011: global sales rose 13.2% to $9.8 billion; "Proprietary Pharmaceutical Products" sales rose 13.5%; durable growth sales, accounting for "Nutritional Products," "Established Pharmaceutical Products," "Diagnostic Products" and diabetes care, rose 15.3%; innovation-driven device business sales rose 6.0%; emerging markets sales rose 21.0% from the prior year; the gross margin ratio was 60.4%, which is higher than Abbott's prior guidance; Abbott expects double-digit earnings per-share of 11.5% (Abbott Laboratories n.pag). Clearly, Abbott is a consistently lucrative company and 2011 is proving to be yet another financially successful year.

iii. Anticipated Split into Two Companies:

Perhaps the most exciting news about Abbott in 2011 is its October 19, 2011 announcement that it will split into two companies. According to "The Wall Street Journal," Abbott opted to split the company for several reasons: first, Abbott has become "a victim of the success of its own top product" because investors' worries over competition, particularly regarding the drug Humira, is overshadowing the emerging market success of other Abbott segments, such as its nutritional products line (Loftus, Abbott to Split Into Two Companies n.pag); secondly, according to CEO White, "The pharma piece got so big and is so different, that these two investments make sense separately, and both are of a critical mass and size that they have great sustainability going forward as independent companies" (Loftus, Abbott to Split Into Two Companies n.pag); finally, White claims that a management split is logical because there are pronounced differences between Abbott's pharmaceutical segment, which requires risky and costly R & D, versus its diversified businesses, which have rising and lucrative markets in India and China (Loftus, Abbott to Split Into Two Companies n.pag). Some business will continue as usual, of course: Abbott's nutrition division, based in Columbus, Ohio and employing approximately 2,000 people, announced that the nutrition unit will "fall under the umbrella of a new medical products company that will retain the Abbott name in a split announced Wednesday" (Rouan n.pag). In addition, the announcement has apparently met with international investor approval: "At the news, Abbott's shares went up 7.3% in premarket trading on Wednesday" (M2 Pharma n.pag).

The split is expected to occur in 2012 and will result in the currently-unnamed pharmaceutical company and the diversified medical products company, retaining the name "Abbott" (Abbott Laboratories n.pag).

(a). Pharmaceutical Company:

The pharmaceutical company is projected to have annual sales of approximately $18 Billion, a portfolio including Abbott's high-profile drugs such as Humira and Lupron, and a pipeline of "promising new specialty medicines and formulations" (Abbott Laboratories n.pag). According to Abbott's press release, this currently-unnamed company will concentrate on innovatively-developed products in certain critical areas of medicine "…such as immunology, Multiple Sclerosis, chronic kidney disease, Hepatitis C, women's health and oncology" (Abbott Laboratories n.pag). Revenue for the pharmaceutical company will come from "developed markets" (Abbott Laboratories n.pag).

(b). Diversified Medical Products Company:

The diversified medical products company, which will retain the name of "Abbott," is projected to have annual sales of approximately $22 Billion, a portfolio consisting of "established pharmaceuticals (branded generics outside the U.S.), adult and pediatric nutritionals, core laboratory diagnostics, point of care and molecular diagnostics, and medical devices, including vascular devices, diabetes care and vision care" (Abbott Laboratories n.pag) and a pipeline of unspecified "new technologies and products" (Abbott Laboratories n.pag).

Abbott expects the diversified medical products company to be "…one of the largest and fastest growing investment opportunities in medical products" (Abbott Laboratories n.pag) due, in part, to an exceptional range of essential healthcare products (Abbott Laboratories n.pag).

An exceptionally bright developmental decision for the split was CEO White's designation of Richard Gonzalez, Abbott's current executive vice president, as CEO for the new research company (M2 Pharma n.pag). "Gonzalez retired in 2007 after 30 years with Abbott but was lured back in 2009 to head its medical investment arm. Last year the throat cancer survivor was named head of Abbott's global pharmaceuticals business" (Yerak n.pag). Some industry insiders are already weighing in on the selection of Gonzalez: Harry Kraemer, former chairman and CEO of Baxter International and now a professor at Northwestern University's management school believes the longstanding working relationship between White and Gonzalez is a good sign: "If people are compatible then the process can go incredibly smooth for shareholders, who often end up owning stock in both companies," Kraemer said (Yerak n.pag).

(c). Possible Problems Executing Company Split:

While the anticipated division of Abbott into two companies sounds straightforward and simple, it could be highly complex and problematic. "Executing a business transformation is always difficult. The problem is sheer scale...Many transformation efforts fail, and even those that succeed often achieve only some of the original goals" (Bridgeland and Zahavi 278-9). In fact, while Abbott contends that the division should be accomplished by the end of 2012, Abbott also acknowledges that the split is contingent on approval by the board of directors, the Internal Revenue Service's decision regarding Abbott's intended tax-free distribution of stock for the new pharmaceutical company, and Abbott's intended "Form 10" registration with the Securities and Exchange Commission (Abbott Laboratories n.pag). Nevertheless, Pisano's book, written 5 years before Abbott's announcement, seems to preemptively agree with Abbott's new course of action: "Some industry observers, and even executives within the industry, have expressed the view that established pharmaceutical companies should focus on sales and marketing, allowing smaller, more innovative biotechnology firms to develop products" (Pisano 176). Abbott's anticipated split would allow exactly that division of resources.