Labs Abbott Running head: Abbott Laboratories.
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Module 1: Assignment 2 Abbott Laboratories Research Analysis Dale Laszig, Daniel Wierzbinski, and Michael Turskey Strategic and Operational Planning Argosy University Professor: Vicky Black January 15, 2010
Abbott Labs History The tradition of innovation at Abbott Laboratories can be traced back to 1888, when its founder, Dr. Wallace C. Abbott, pioneered the use of tiny granules to accurately dispense medicine. Over the next ten years, the evangelical efforts of a small but dedicated sales team paved the way to the formation of a diversified global healthcare organization, with a 700 product catalog and offices in Canada, England, India and major cities in the United States. In 1915, the Abbott Alkaloidal Company changed its name to Abbott Laboratories in a nod to its increasing focus on the research and development of synthetic compounds. One of these products, Chlorazene, was a widely used antiseptic on the battlefields of World War I. By the time that Dr. Alfred Stephen Burdick took the helm as CEO in 1921, Abbott Laboratories was operating a major manufacturing facility in Chicago, Illinois and mass
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producing multiple lines of pharmaceutical products. The company went public in 1929 with an initial public offering of 20,000 at $32 per share. Throughout the subsequent ups and downs of global financial markets, Abbott has consistently paid dividends to its shareholders. The 1930s ushered in an era of diversification for Abbott, beginning with the companys first nutritional offerings and the announcement of the first international affiliate organization in Montreal, Canada. A new, modernized research facility was opened in Chicago in 1938, leading the way for a US government contract to produce penicillin in 1941. A continuous roll out of innovative new treatments contributed to the companys favorable reputation and rising share prices. By 1965, Abbotts exponential growth made it necessary to create an all-encompassing campus to house corporate headquarters, primary manufacturing and research facilities. Major operations were relocated to a 420 acre site named Abbott Park, southwest of the companys original Chicago headquarters. The companys managed growth enabled continuous diversification, such as their foray into immunodiagnostics in 1972 and the formation of the Abbott Diagnostic Division, a move that was calculated to increase the companys leadership position as a cost-effective healthcare provider. Abbott had experimented with hospital nutritional products, designed to help patients quickly regain their strength after surgery, and diagnostic devices . . . Abbott eventually became the number one company in both of these arenas, which moved it far down the path of becoming
Abbott Labs the best company in the world of creating products that make health care more cost-effective. (Collins, J., 2001). Abbotts accelerated time-to-market was evident throughout the 1980s when many new pharmaceutical, nutrition and diagnostic products were released and the company won approval to market the worlds first diagnostic test for AIDS. (Abbott.com, 2010). Growth at Abbott has been achieved both organically and through acquisition. In 1996, the addition of MediSense, Inc. enabled Abbott to provide glucose monitoring for people with diabetes. Abbotts tradition of innovation has continued into the 21st Century, with a new array of impressive offerings, including Kaletra, a treatment for HIV AIDS, and Humira for rheumatoid arthritis. In 2009, Abbott acquired nine companies: Ibis Biosciences, a provider of leading-edge technology in diagnostic testing and surveillance; Advanced Medical Optics, an established
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global leader in vision care; Wockhardt Limited, Indias leading local manufacturer of nutritional products; Visiogen, Inc., a leader in next-generation cataract technology; Evalve, Inc., the global leader in the development of devices for minimally invasive repair of cardiac mitral valves; and Solvay Pharmaceuticals, the global pharmaceutical business of the Solvay Group. (Abbott.com, 2010). Process Control at Abbott Supply chain optimization at Abbott Laboratories is achieved through continuous efforts to improve worker safety, and implement a series of regulatory controls and compliance throughout the enterprise. The inspection data gathered in Abbott Laboratories . . . allows informed decisions leading to improved process control. The results of the program are reduced risks to the corporation and employees when operating . . . equipment. Accurate and meaningful inspection methods become the cornerstone of a program allowing proper preventative maintenance actions to occur. (Mager, L., 1998). In addition to prioritizing worker safety, Abbotts plant managers are encouraged to measure evaluation techniques and inspection methods against industry best practices to ensure that standards remain up-to-date, ISO compliant, and provide demonstrable proof of all applicable codes and regulatory procedures.
Abbott Labs The following description of Abbotts procedure of monitoring pressure vessels is a case in point of the companys proactive position on maintaining operational efficiencies: Equipment downtime is reduced because the nondestructive examination usually takes place while our vessels are in service. As the inspection takes place we are able to view a real time image of detected discontinuities on a video monitor. The B-Scan ultrasonic technique is
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allowing us to perform fast accurate examinations covering up to 95% of the surface area of each pressure vessel. Receiving data on 95% of a pressure vessel provides us with a lot of useful information. We use this data to determine the condition of each pressure vessel. Once the condition is known the vessels are classed by risk. The risk level is then managed by making decisions related to repair, operating parameters, accepting and monitoring or replacement of the equipment. Inspection schedules are set at maximum intervals and re-inspection is minimized for the vessels that are not at risk. The remaining life of each pressure vessel is determined, mechanical integrity is proven and regulatory requirements are met. Product/Service Today there are more than 72,000 employees around the world who work for Abbott. They are all committed to focusing on what matters most: life and the potential it holds when we are feeling our best (abbott.com). Abbott Labs produces hundreds of different products within multiple areas of the medical industry. They manufacture products in 5 different categories; pharmaceutical products, nutritional products, Diagnostic Instruments and Tests, Medical and Surgical Instruments, and Animal Health. They are a global, broad-based health care company devoted to discovering new medicines, new technologies and new ways to manage health (abbott.com). Their comprehensive line of products encircles their clients lives. Abbott has sales, manufacturing, research and development, and distribution facilities around the world (abbott.com). They are recognized for their global reach and their ability to serve their customers around the world. Their pharmaceutical products include treatments for people with HIV; therapies for sufferers of rheumatoid arthritis, Crohn's Disease and other autoimmune disorders; drugs for the treatment of people with migraines, epilepsy and mania associated with bipolar disorder; antibiotics; and specialized medicines for managing obesity, thyroid disease, high cholesterol, hypertension, dyslipidemia and cancer (abbott.com). Abbott is behind some of the world's most trusted names in infant, adult and healthy living nutritional products, including Similac, Ensure,
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Glucerna, AdvantEdge, Body-for-LIFE and ZonePerfect (abott.com). Abbott also offers medical nutritional products and feeding devices for patients with special dietary needs due to injury or illnesses such as cancer, respiratory conditions and food allergies. Abbotts broad range of medical diagnostic instruments and tests are used worldwide in hospitals, reference labs, blood banks, physician offices, clinics and at home to diagnose a range of serious health issues such as infectious diseases, cancer, diabetes and genetic conditions, as well as monitor other important indicators of health (abbott.com). The cornerstone of Abbotts diagnostic products is immunodiagnostics. This is the science of measuring a body's antigen/antibody reactions to detect diseases and other medical conditions. Abbot also offers a broad range of medical and surgical devices including minimally invasive treatment options for the care of people with vascular disease. Vascular offerings include vessel closure devices, carotid and coronary stents, catheters and other interventional tools and devices (abbott.com). Finally, the foundation of their veterinary products is built on their experience and expertise in the pharmaceutical and medical product businesses. Products serving the veterinary market include anesthetic and wound care products, nutritional supplements, and intravenous sets and solutions (abbott.com). Current Problems One of the current problems Abbott is facing is marketing products that address multiple diseases. For instance Abbotts Humira addresses: rheumatoid arthritis, ankylosing spondylitis (a spine condition) and Crohn's disease, and all are caused by chronic inflammation from an autoimmune condition (Edwards). Marketing these products to different consumer groups has proven difficult and an issue that many large pharmaceutical companies are facing. What Abbott has tried to do is create different television commercials and different websites for a singular product. Obviously this is an expensive tactic for marketing. Another current problem is a shortage in labor that Abbott is seeing in the clinical laboratory profession. It seems that this profession is not attracting top talent the way it used to. Abbott is attempting to stay ahead of the curve by utilizing social media websites such as Facebook and launching their own student-focused website labsciencecareers.com. These marketing attempts all fall under Abbotts initiative Labs Are Vital. Labs Are Vital is a
Abbott Labs multi-pronged, multi-year education and awareness program sponsored by Abbott that is designed to highlight the critical role laboratory professionals play in healthcare and to address the issues facing laboratories today (abbott.com). An additional concern, and one that is probably the most threatening, is the unprecedented amount of generics entering their marketplace. One of the greatest threats to Abbott's position is whether it can limit the impact of its key therapeutic franchises from genericization (Company Spotlight Abbott). Abbott has a strong record of holding up against generic competition which is a characteristic of most of the US Big Pharma players. It will be called upon more than ever over the coming years though, as generics threaten to undermine their current position of strength. Of course a concern that affects all U.S. pharmaceutical companies is the government regulations. Abbott's products are subject to rigorous regulation by the US Food and Drug Administration, and numerous international, supranational, federal and state authorities (abbott.com). The process of obtaining regulatory approvals to market a drug or medical device can be costly and time-consuming, and approvals might not be granted for future products, or additional indications or uses of existing products, on a timely basis (Company Spotlight Abbott). Delays in approvals will directly affect Abbotts bottom line. Organization and Accountability In December 2006, Abbott acquired Kos Pharmaceuticals Inc. for cash of approximately $3.8 billion, net of held cash by Kos Pharmaceuticals Inc., to expand Abbotts presence in the
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lipid management market and to provide several on-market and late-stage pipeline products. Kos Pharmaceuticals Inc. was a specialty pharmaceutical company that developed and marketed proprietary medications for the treatment of chronic cardiovascular, metabolic and respiratory diseases. This business was acquired on December 13, 2006 and the financial results of the acquired operations are included in these financial statements beginning on that date. The acquisition was financed primarily with short-term debt. The allocation of the purchase price resulted in a charge of $1.3 billion for acquired in-process research and development, intangible assets of $821 million, goodwill (primarily non-deductible) of $1.6 billion and net liabilities, primarily deferred income taxes recorded at acquisition of $331 million. Acquired intangible
Abbott Labs assets are being amortized over 4 to 15 years. Non-deductible acquired in-process research and development was charged to income in 2006. (abott.com) In order to expand Abbotts presence in the growing vascular market, Abbott acquired Guidants vascular intervention and endovascular solutions businesses on April 21, 2006 for approximately $4.1 billion, in cash, in connection with Boston Scientifics acquisition of Guidant. In addition, Abbott agreed to pay to Boston Scientific $250 million each upon government approvals to market the Xience V drug-eluting stent in the U.S. and in Japan. In 2008, the FDA approved the marketing of Xience V and Abbott paid Boston Scientific $250 million, resulting in the recording of additional goodwill. (abott.com) Government approval in Japan is anticipated in late 2009 or early 2010 which will also result in the recording of
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additional goodwill. The allocation of the purchase price resulted in a charge of $665 million for acquired in-process research and development, intangible assets of $1.2 billion, goodwill (primarily deductible) of $1.7 billion and tangible net assets of $580 million. Acquired intangible assets are being amortized over 4 to 15 years. Deductible acquired in-process research and development was charged to income in 2006. The net tangible assets acquired consist primarily of property and equipment of approximately $530 million, trade accounts receivable of approximately $250 million and inventories of approximately $120 million, net of assumed liabilities, primarily trade accounts payable, litigation reserves and other liabilities. (abott.com) Had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts. In order to facilitate Boston Scientifics acquisition of Guidant, Abbott also acquired 64.6 million shares of Boston Scientific common stock directly from Boston Scientific and loaned $900 million to a wholly-owned subsidiary of Boston Scientific. The common stock was valued at $1.3 billion and the note receivable was valued at $829 million at the acquisition date. In connection with the acquisition of the shares, Boston Scientific was entitled to certain after-tax gains upon Abbotts sale of the shares. In addition, Boston Scientific agreed to reimburse Abbott for certain borrowing costs on debt incurred to acquire the Boston Scientific shares. Abbott recorded a net derivative financial instruments liability of $59 million for the gain-sharing derivative financial instrument liability and the interest derivative financial instrument asset. The effect of recording the shares, the loan to Boston Scientific and the derivative financial instruments at fair value on the date of acquisition resulted in the recording of additional goodwill of approximately $204
Abbott Labs million. Changes in the fair value of the derivative financial instruments, net were recorded in Other (income) expense, net. Subsequent Event - Business Combination In January 2009, Abbott announced an agreement to acquire Advanced Medical Optics, Inc. (AMO), a marketer of ophthalmic surgical technology and devices, as well as eye care solutions, for approximately $2.8 billion, in cash and debt, to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts. The
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transaction is expected to close in the first quarter of 2009. AMOs sales are more than $1 billion per year. Financial Condition Cash Flow Net cash from operating activities of continuing operations amounted to $7.0 billion, $5.2 billion and $5.3 billion in 2008, 2007 and 2006, respectively. Cash from operating activities of continuing operations in 2008 compared to 2007 is higher due to higher operating earnings, decreased prepaid expenses and other assets, and increased trade accounts payable and other liabilities. Cash from operating activities of continuing operations in 2007 and 2006 compared to 2005 is higher due to higher net earnings adjusted for after-tax non-cash charges for acquired inprocess research and development in 2006 and share-based compensation and higher contributions to retirement benefit plans in 2005 compared to 2007 and 2006; partially offset by higher income tax payments in 2006, including tax payments related to the 2005 remittances of foreign earnings under the American Jobs Creation Act. Abbott funds its domestic pension plans according to IRS funding limitations. In 2008, 2007 and 2006, $200 million was funded to the main domestic pension. Abbott expects pension funding for its main domestic pension plan of $700 million in 2009 and $200 million annually, thereafter. Abbott expects annual cash flow from operating activities to continue to exceed Abbotts capital expenditures and cash dividends. Debt and Capital At December 31, 2008, Abbotts long-term debt rating was AA by Standard & Poors Corporation and A1 by Moodys Investors Service. Abbott has readily available financial resources, including unused lines of credit of $5.3 billion that support commercial paper borrowing arrangements of which a $2.3 billion facility expires in December 2009 and a $3.0
Abbott Labs billion facility expires in 2012. Abbotts access to short-term financing has not been affected by the recent credit market conditions. (abott.com) In 2006, the board of directors authorized the purchase of $2.5 billion of Abbotts
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common shares from time to time and no shares were purchased under this authorization in 2006. In 2008 and 2007, Abbott purchased approximately 19.0 million of its common shares in each period at a cost of approximately $1.1 billion and $1.0 billion, respectively under this authorization. Effective in the fourth quarter of 2008, no more purchases of common shares will be made from the 2006 authorization. In October 2008, the board of directors authorized the purchase of up to $5 billion of Abbotts common shares from time to time and 146,400 shares were purchased under this authorization in 2008 at a cost of approximately $8 million. Under a registration statement filed with the Securities and Exchange Commission in February 2006, Abbott issued $3.5 billion of long-term debt in 2007 that matures in 2012 through 2037 with interest rates ranging from 5.15 percent to 6.15 percent. Proceeds from this debt were used to pay down short-term borrowings that were incurred to partially fund the acquisition of Kos Pharmaceuticals Inc. Under the same registration statement, Abbott issued $4.0 billion of long-term debt in 2006 that matures in 2009 through 2016 with interest rates ranging from 5.375 percent to 5.875 percent. Proceeds from this debt were used to pay down domestic commercial paper borrowings that were incurred to partially fund the acquisition of Guidants vascular intervention and endovascular solutions businesses. In 2009, the acquisition of Advanced Medical Optics, Inc., the funding of Abbotts main domestic pension plan and the payment of long-term debt will be financed with operating cash flow and debt. (abott.com) Working Capital Working capital was $5.5 billion at December 31, 2008 and $4.9 billion at December 31, 2007. At December 31, 2006, current liabilities exceeded current assets by approximately $669 million as a result of increased short-term borrowings used to acquire Kos Pharmaceuticals Inc. in December 2006. (abott.com) Capital Expenditures Capital expenditures of $1.3 billion in 2008, $1.7 billion in 2007 and $1.3 billion in 2006 were principally for upgrading and expanding manufacturing, research and development,
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investments in information technology and administrative support facilities in all segments, and for laboratory instruments placed with customers. Contractual Obligations The following table summarizes Abbotts estimated contractual obligations as of December 31, 2008:
(dollars in millions) Total Long-term debt, including current maturities and future interest payments Operating lease obligations Capitalized auto lease obligations Purchase commitments (a) Other long-term liabilities reflected on the consolidated balance sheet Benefit plan obligations Other Total $13,512 416 93 4,627 2009 $1,467 74 31 4,328 2010-2011 $2,989 122 62 258 Payment Due By Period 2012-2013 $1,896 88 32
3,048 1,524 $23,220
$5,900
714 1,065 $5,210
777 198 $2,991
(a) Purchase commitments are for purchases made in the normal course of business to meet operational and capital expenditure requirements. Contingent Obligations Abbott has periodically entered into agreements in the ordinary course of business, such as assignment of product rights, with other companies which has resulted in Abbott becoming secondarily liable for obligations that Abbott was previously primarily liable. Since Abbott no longer maintains a business relationship with the other parties, Abbott is unable to develop an estimate of the maximum potential amount of future payments, if any, under these obligations. Based upon past experience, the likelihood of payments under these agreements is remote. In addition, Abbott periodically acquires a business or product rights in which Abbott agrees to pay contingent consideration based on attaining certain thresholds or based on the occurrence of certain events. In connection with the acquisition of Guidants vascular intervention and endovascular solutions businesses, Abbott will pay to Boston Scientific $250 million upon government approval to market the Xience V drug-eluting stent in Japan. Government approval is anticipated in late 2009 or early 2010. In addition, Abbott has retained liabilities for taxes on income prior to the spin-off of Hospira and certain potential liabilities, if any, related to alleged
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improper pricing practices in connection with federal, state and private reimbursement for certain drugs.
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References:
Edwards, J. (2008). 'Swiss Army Drugs' Present Challenges. Brandweek, 49(30), 5. Retrieved from Business Source Premier database. (2008). COMPANY SPOTLIGHT - Abbott Laboratories. PharmaWatch: CNS, 7(6), 19-27. Retrieved from Business Source Premier database. Abbott Products by category. Retrieved on December 2, 2008 from abbott.com http://www.abbott.com/global/url/content/en_US/20.20:20/product/Products_By_Categor y.htm Abbott.com. (2010). Abbott: A History of Innovation. Retrieved 01-14-10 http://www.abbott.com/global/url/content/en_US/10.30:30/general_content/General_Con tent_00069.htm Collins, J. (2001). Good to Great: Why Some Companies Make the Leap . . . and Others Dont. New York: HarperCollins Publishers, p. 99, 174-175. Mager, L. (1998). Nondestructive evaluation of utilities and pipelines. San Antonio: Conference No. 2, vol. 3398, pp. 154-167 ISBN 0-8194-2847-7 Retrieved 01-13-10 http://cat.inist.fr/?aModele=afficheN&cpsidt=2288997