Abbott Laboratories (NYSE:ABT) recently completed a spinoff that created the company AbbVie Inc (NYSE:ABBV). Since this spinoff, both companies have seen a significant rise in the stock price. From the limited data, it is difficult to tell if one company is a better buy over the other, or if the recent trends in the stock price are merely investor excitement. According to Joel Greenblatt, in his book You Can Be A Stock Market Genius, spinoffs are one of the “special” situations in the stock market that often contain hidden opportunities. Abbott Laboratories distributes medical products, whereas AbbVie is focused on research-based pharmaceuticals.
AbbVie is much larger than Abbott Laboratories (NYSE:ABT) due to the fact that the company holds the patent for HUMIRA, a rheumatoid arthritis drug that was the largest source of revenue for the former Abbott Laboratories. This does pose some concern to AbbVie due to the fact that much of their business is focused on this drug. Any issues or patent expirations related to the drug would have a drastic impact on their bottom line. The patent associated with HUMIRA expires in 2016, posing some fairly immediate concerns with the future profitability of AbbVie. Overall, AbbVie has taken about 45% of the revenue of the original company according to the Pro Forma income statement. A little under half of those sales come from HUMIRA.
Abbott Laboratories is not necessarily doing much better as a newly focused company. The profit margins are significantly less than those of AbbVie, which most likely due to the loss in their largest source of revenue (HUMIRA). Abbott Laboratories no longer has the ability to use the significant revenues generated from HUMIRA to subsidize the costs associated with medical products such as research and development. They still do have a variety of other products that give the company opportunity to continue to thrive in the future. Abbott Laboratories does not rely on one product for their main source of revenue, which is a strength. Even though, like any company with revenue driven by patents, they still run the risk of patent expiration; their base is much more spread out to adjust for the loss of revenue of certain products. It is much easier to develop numerous small revenue generating products than to replace a massive product such as HUMIRA.