Abbott To Split: Two Pharmas Are Better Than One?
18 CommentsBy Ed Silverman // October 19th, 2011 // 7:22 am
In a bid to unlock the perceived value in product line-up and geographic markets, Abbott Laboratories plans to separate into two publicly traded companies. The move is the latest gambit by a big drugmaker to reinvent itself on the premise that its growth potential is hampered by investors who have failed to appreciate a diverse line up of products and opportunities in so-called emerging markets.
And so, Abbott is creating what it calls a research-based pharma that will feature a portfolio of existing meds, such as Humira and Synthroid, along with a pipeline of some 20 compounds in Phase II or Phase III development to treat immunology, chronic kidney disease, Hepatitis C, oncology and neuroscience. Based on 2011 estimates, the operation would have nearly $18 billion in sales.
The other outfit would focus on ‘diversified medical products,’ including branded generics outside the US; nutritionals, lab diagnostics and medical devices, which Abbott execs believe can generate significant growth since these are sold in more than 130 countries and represent about 40 percent of sales in emerging markets. Based on 2011 estimates, this would have $22 billion in sales this year.
Basically, Abbott is taking a step that Pfizer had recently considered. You may recall that Pfizer was evaluating whether to spin off or sell its non-pharma units, including nutritionals, consumer health and animal health, and then divide the remaining pharma biz in two - an established entity consisting of older, off-patent meds, and core products, which would be home to newer drugs and R&D (see here).
In doing so, however, Abbott may prompt some of the same questions that gave Pfizer pause. For instance, the research-based pharma company, which will be renamed, will have to rely on growth from its core medications and the ensuing difficulties that come with relying on a pipeline - or deals with others - to replace big sellers. There may also be issues concerning manufacturing efficiencies.
In any event, the stock is up about 10 percent in before-hours trading, although some key details are still to be worked out. For instance, the expected stock distribution ratio will be determined at a future date. Meanwhile, Abbott ceo Miles White will remain chairman and ceo of the diversified medical products company, which will keep the Abbott name. For those who play follow the money, White’s choice may be revealing. In any event, Richard Gonzalez, who is currently executive vp of global pharmaceuticals, will become chairman and ceo of the research-based pharma company.
This is the announcement. We will update you later as more details and analyst reactions emerge.
AnnePME
Thanks Ed!
Condor
Nice anlaysis, Ed!
This is interesting, as just about six years ago, Abbott spun off what were the legacy “hospital supplies” businesses, coupled with a few higher margin ones — as a salve to shareholders (the vocal, and largest, institutional ones, at least). That company, Hospira, has seen its ups and downs — but remains a viable, independent public company, headquartered north of Chicago.
In an ironic moment, I’ll note that a fair amount of the medical technology side of the to-be-split Abbott (as of this morning’s announcement) might make a nice acquisition candidate for. . . Hospira. Wild!
You read it here first — that would be “Abbott-to-Costello-to-Abbott-to-Costello II“!
[Many called Hospira, before it took a name, "Costello". Ask yur grandparents, if the reference is lost on you.]
Namaste
original industry insider
Operationally Abbott’s Divisions have more or less functioned independently for many years. When I was there, there were three divisions:
1) PPD (Pharmaceutical Products Division, 2) ADD (Abbott Diagnostics Division, [also call the After Dark Division since those guys worked 24/7]), and 3) HPD (Hospital Products Division), recently spun off as Hospira.
By splitting into two separate publically traded companies, Abbott loses two key advantages IMO: 1) they can no longer issue a consolidated reporting statement for Abbott as a whole. This used to be a big advantages when one profitable division would offset a laggard, and 2) they lose the ABT stock bragging rights of declaring over 240 consecutive quarterly dividends.
The big advantage ABT has over Pfizer, is that by operating as essentially separate companies and separte business units within the separate companiies this reorganization was likely facilitated. On the other hand, Pfizer doesn’t know what it is or what it wants to be. One thing they do know is that in less than one month Lipitor goes off patent and that dwarfs everything else.
Pharma marketer
Ed - any update on the announcement that Abbott is also setting aside over a billion for the Depakote investigation? That “little” announcement got lost in the bigger one -
Condor
Actually, OII, the split-off will be the largest dividend in Abbott’s history.
That is, the pharma businesses will be handed to all existing Abbott shareholders, as an “in-kind” dividend of “Costello II” stock certificates — with an aggregate implied value somewhere north of $27 billion (at 1-1/2 times 2010 annual pharma sales — more like $36 billion if one can defend a 2 times annual 2010 sales valuation, even after factoring the generic incursions).
So — that’s one big ole’ honking dividend! [I do hear your general point, though.]
I think the larger institutional shareholders will love the ability to liquidate part of the Abbott stake, and still hold the other part (holding it is tax free!) — each institution choosing different sides fo the divided Abbott house to hold, or sell-off, depending on their perspectives, and current portfolio weighting targets.
Should be good news for the shareholders, and may even create some local jobs, as there will now be two public companies (where there was one), twice the reporting staff, press and investor relations, QA/RA, finance, internal audit, IT/IS, HR, patent and strategic development teams created by the spin-off.
Net, net — a good piece of news for Chicago.
Namaste
original industry insider
Actually, since Abbott Park is located in Lake County IL, about 30 miles north of Chicago, the City of Chicago may not see as much of a job bump. Most of the people working at Abbott Park live in the surrounding towns in Lake County, and some commute from southern Wisconsin, so that Lake, not Cook county (where City of Chicago is) will reap any fringe benefits.
Since there are a number of Brits inhabiting the management of Pfizer, rather than using the Abbott and Costello theme, it’s more analagous to use Laurel and Hardy or Monte Python over there on 42nd St. in NYC.
Searcing2000
Two thoughts:
1) What are the odds this goes through? Consider the boiler plate…
The transaction is expected to be completed by the end of next year, but is subject to final approval by the Abbott board of directors, receipt of a favorable ruling from the Internal Revenue Service on the tax-free nature of the transaction, and the effectiveness of a Form 10 registration statement that will be filed with the Securities and Exchange Commission …..
2)For oii - During my time there, the “after dark” was considered a reference to the earlier use ( and misuse or abuse) of radioactive materials that (as some would say) caused personnel to ‘glow’ after dark. Probably just one of those tales that get told….
original industry insider
Searching, when you speak of the odds of the deal going through I assume you also meant no antitrust issues, since ABT is such a diversified company. I think that the antitrust issues may come into play when they go for some type of M&A, which I think that the current deal is setting up to do.
BTW did they give away those nice pretty blue vitamin pills in the cafeteria when you were there? They looked like mini Viagras but didn’t have the same effect; in fact they had no effect at all.
Searching2000
oii:
I don’t remember those being available in the “off-park” dining - but ABT vitamins were on the table at home through my youth (hard to remember that I had one). A relative was an Abbott sales rep.
kerry_zaputz
As a recovering Abbott employee, I have a few thoughts: 1. There will be some huge benefit ($$) to Miles White if/when this goes through. Any financial hardship will be on the backs of the rank-and-file employees. 2. Don’t count on the Board of Directors to disagree with Miles. Look at the testimony from the lawsuit over the Humira spin-off. The B of D went along with Miles’ scheme; employees who were a year away from retirement with Abbott had to start over as a brand new Humira employee-no retirement for those folks.
Seaching2000
Any takers for this bet - a new entity will need a new HQ. How about the Pleasant Praire, WI real estate? Although for the winter months, I would vote in favor of Barceloneta PR - down at the ACP.
original industry insider
Searching, I assume you’re kidding. Abbott is the largest private employer and taxpayer in Lake Co., IL. Abbott Park is large enough to have its own zip code. Will never happen, although I’m never surprised.
cliffintokyo
Decisive and rational decision taking by big pharma now they have their ducks lined up. Expect to see more, as I (ahem) predicted.
Bob Roehr
As one who believes that the coming wave of personalized medicine increases the role and importance of diagnostics, I don’t see how separating those activities into separate companies creates any synergies. In fact, I see the opposite.
A few years back Abbott made a good bit of money (and ill will in certain sectors) by “bundling” its HCV drugs together. I see the potential for companies to do the same in bundling their drug with use of a diagnostic for personalized medicine.
CompanyFormerlyKnownAs
@BobRoehr
Abbott don’t have any HCV drugs - at least not yet. The HCV pipeline is set to start hitting approvals around 2014 (assuming positive PIII results).
I assume you mean HIV drugs - and they weren’t “bundled” - LPV and RTV were co-formulated as the latter was found to boost the former due to it’s action on CYP3A4 (and thus metabolism). Both were part of PPD, and so wouldn’t be affected by any similar split of the time.
What this does prohibit in the future, is ABTs ability to offer “packages” of services - such as thier Molecular Tests alongside ARVs or similar such deals.
original industry insider
On behalf of the Occupy Wall Street crowd I salute Abbott. One of our key demands is that Corporate America be reconfigured so that no single company has a market capitalization over $10 billion. This is a step in the direction
Miles White, you’re a corporate creep but we salute you anyway.
Searching2000
oii:
Why is today different (ok - your comment re MW more true today) from all of the other days?
original industry insider
What’s most amazing about Miles is that he managed to stay out of the Graybar Hotel.