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Pros

- The spinoff will enable both companies to


commercialize new and existing products more
effectively, as well as accelerate revenue and
enhance profitability.
- Small to mid-size bio and pharma companies
outperform large pharmas in market indices over
past decade
- Increase in scale and revenue base for growth
has become one of the major challenges for large
pharmas to create shareholder value in an
environment increasingly constrained by static or
declining performance on drivers such as the
productivity of organic R&D
- The mid-tier biotech group, defined as companies
with a market cap of $2 billion to $20 billion, has
been depleted through mergers and acquisitions.
These companies have traditionally offered solid
growth foundations for large pharmas as most
bring either top-line revenue from a marketed
product or equity appreciation from a late-stage
asset.
- Without its BioScience division, I believe Baxter's
outlook strictly as a medical device company is
promising nonetheless. In its most recent earnings
report, Baxter achieved a 22% rise in global sales
for its medical products, compared to a 5% rise in
biopharmaceutical products developed by its
BioScience division over the same period
- By 2017, Baxter estimates that the market for its
medical products will have grown to $50 billion,
affording the company numerous opportunities in
industries like biosurgery, anesthetics, nutritional
therapies, and fluid systems.
- Both the medical devices and BioScience
divisions have strong pipelines that bring positive
outlook for both.

Cons
- The change to a negative
outlook reflects Moody's
belief that Baxter's
separation of its bioscience
division would be a material
event, especially in light of
the degree to which
bioscience currently
contributes to Baxter's sales
and profitability.
- Although Baxter's medical
division's growth will benefit
from the recent Gambro
acquisition, many of Baxter's
key pipeline products are in
its bioscience area.
- The separation will cause
Baxter to lose scale, a higher
margin business, as well as
segment diversity, all of
which are currently key
credit strengths
- Baxters current structure
and success is supported by
its relatively large size as
well as its broad product
offerings focused on critical
care medical needs, which
help to insulate it from the
effects of economic
downturns
- The company could lose
some synergy. By having
units together, they wouldn't
have to endure some of the
costs they will when the
companies are separate. For
example, certain functions
that will be duplicative such
as IT, executive boards,
investor relations, legal

teams, to some extent, and


physically speaking, some
geographies where the
company might have to split
up a building.
- You lose some strategic synergy,
as well. A big trend right now is to
develop drugs in tandem with
diagnostics.
- Possible drawbacks are a
reduction in economies of scale,
including borrowing capacity
(Abbott's debt has been
downgraded by some rating
agencies); increased risk due to
lessened diversification; loss of
strategic synergies; and costs to
other stakeholders (for example,
employees). Of course, the main
risk of a spinoff is that
management will have
miscalculated, and one or both of
the resulting companies will not
perform as well as expected.

General Info
- Baxter's continued pipeline development will hopefully help bolster earnings to
achieve modest overall performance through 2015.
- Australia's National Blood Authority (NBA) issued a four-year award for ADVATE
as Australia's preferred recombinant FVIII product. Once it becomes effective in
early July, 2,300 people diagnosed with hemophilia A will receive access to
ADVATE
- Other noteworthy achievements for ADVATE include the continued success in
expanding commercialization in the UK, which now treats 5,600 people;
regulatory approval in Russia and Turkey; and the impressive 30% uptake in
Brazil. As ADVATE is now available in 62 countries and product uptake increases,
revenue should put the new company in a favorable position in 2015.

- The split makes strategic sense as the two business segments generally service
different end markets. The Medical Products business primarily serves acute and
non-acute care provider settings, while the BioScience business mostly works with
individual physicians or physician practices, with a particular focus on
hematologists.
- Baxter acquired Gambro AB on Sept. 6, 2013 for approximately $3.9 billion from
private owners. Fitch believes the transaction is strategically sound, given
Baxter's operating focus on the hemodialysis and peritoneal dialysis segments.
The Gambro acquisition will enable Baxter to expand both its renal portfolio
(particularly in hemodialysis) offering and its geographic reach. While Baxter's
$300 million synergies target appears reasonable, in Fitch's view there is
integration risk with a transaction of this size.
- The medical devices business tends to be somewhat defensive and slow growing
in nature, while the biopharmaceuticals division carries more risk in growth and
while both are medical, the two sides of the business have become so distinct
that splitting them up made sense, company officials explained.
- Separating these businesses will enhance value for all our constituents including
shareholders, patients, healthcare professionals and providers and employees.
These businesses operate in distinct markets with evolving underlying
fundamentals
- Generally, analysts believe that the split into two companies makes sense as the
company's two units have different profiles: 1) the medical devices division is
more defensive and slow growing in nature; and 2) the biopharmaceuticals
division is more growth oriented but carries more risk.
- There may be other financial or legal reasons for a spinoff, such as stripping
underperforming or at-risk assets from an otherwise successful company, but this
is not likely the case with Abbott. In the case of Kraft for example, it divided its
grocery and snack businesses; the former was seen as impeding growth of the
latter. An example of a spinoff for legal reasons was when Monsanto transferred
liability related to PCB contamination by spinning off its industrial chemical
division in '97.