BLOOMBERG: Abbott to Separate Into Two Companies

Date: 19-Oct-2011

By Alex Nussbaum

Abbott Laboratories (ABT), the maker of infant formula, heart stents and prescription medicines, will split in two, following the lead of Pfizer Inc. (PFE) and Bristol- Myers Squibb Co. as optimism about drug companies’ growth wanes.

Abbott, based in Abbott Park, Illinois, said today it will break up next year, with one company focusing on the development and sale of prescription drugs. The other will concentrate on generic medicines, medical devices and infant formulas that come with lower profit margins and less risk.

Chief Executive Officer Miles White said the move will boost the worth of two operations that have been “undervalued” as one. It’s a strategy health-care companies have followed as investors have soured on the growth potential for drugmakers, said Frederick Frank, vice chairman of New York-based investment bank Peter J. Solomon Co.

“People realize that the pure pharma business is high risk as well as high potential and that you have an increasingly complex regulatory climate around the world” slowing drug approvals, Frank said in a telephone interview. “The whole is now worth less than the sum of the parts.”

Pfizer, the world’s biggest drugmaker, said earlier this year that it would sell or spin off its animal-health
and nutritional products units. That followed the 2009 decision by Bristol-Myers to spin off Mead
Johnson Nutrition Co. (MJN), its baby formula maker. Both drug companies are based in New York.

Value Tripled

Mead Johnson, based in Glenview, Illinois, has almost tripled in value since the shares’ debut, the kind of payoff Abbott and Pfizer no doubt are counting on as well, Frank said.

Abbott rose 2 percent to $53.47 at 1:37 p.m. New York time. Before today, the company had gained less than 1 percent over two years, while the Standard & Poor’s 500 Health Care Index rose 10 percent.

The two companies Abbott is creating are “very different” in terms of business model, target markets, distribution chains and other aspects, White said on a conference call with analysts.

“Both will be valued more accurately or, frankly, appreciated more by investors” as separate entities, White said. “I think we’ll see that we attract investors who haven’t been in our company or haven’t invested in our stock as we allow them the choice of these two, distinct identities.”

$18 Billion Revenue

The drug business has about $18 billion in annual revenue, and includes the anti-inflammatory medicine, Humira, which had $6.5 billion in sales last year, Abbott said in its statement. The generics and medical-products company will generate about $22 billion, based on 2011 data.

The pharmaceuticals business probably will be a takeover target, Jeffrey Holford, an analyst with Jefferies Group Inc., said in a note to clients. Holford said he expects another round of consolidation in the drug industry, with Whitehouse Station, New Jersey-based Merck & Co., Basel, Switzerland-based Roche Holding AG (ROG), London-based AstraZeneca Plc (AZN) and Leverkusen, Germany-based Bayer AG (BAYN) as possible purchasers.

Abbott’s drug business would be worth $54 billion, and the device and off-patent business worth $39 billion, Jami Rubin, a Goldman, Sachs & Co. analyst, said today in a note to clients. The two companies may add $7.6 billion in value through cost- cutting following the breakup, she said. That would value the drug business at about the same as Bristol-Myers and just more than Eli Lilly & Co., of Indianapolis.

The shares have suffered from Abbott’s reliance on Humira, the company’s best seller, failing to reflect the entire operation’s value, said Jeffrey Bagley, a portfolio manager at Haverford Financial Services in Radnor, Pennsylvania.

More Investor Interest

The split “is good news,” said Jan David Wald, an analyst at Morgan Keegan & Co. in Boston, in a telephone interview. “You’ll start to see more people interested in the stock, which has languished for years. The two companies each will be more valuable than they are together.

‘‘The medical device business is undervalued because it’s part of pharma,” said Wald, who has an “outperform” rating on Abbott. “The research pharmaceutical business can stand on its own and do rather well because of the pipeline.”

White will head the medical products company, which will keep the Abbott name, while Richard Gonzalez will lead the pharmaceuticals business. The split is expected to be completed by the end of next year, Abbott said.

The medical-products company will sell Abbott’s medical- devices, including the world’s No. 1 heart stent, Xience, diabetes products, diagnostic equipment and generic drugs. Stents generated $2 billion in sales last year.

Similac, Ensure

That company’s biggest unit would be nutritional products including Similac infant formula and Ensure drinks for adults, which generated $5.5 billion for Abbott in 2010.

Along with Humira, the drug business will include the AIDS treatment Kaletra, which generated about $1.26 billion in 2010, as well as products being developed to treat kidney disease and hepatitis C, Abbott said.

Morgan Stanley and Wachtell Lipton Rosen & Katz are advising Abbott on the separation.

Separately, the company reported third-quarter earnings, excluding one-time items, of $1.18 a share, 1 cent more than the average estimate of 17 analysts surveyed by Bloomberg. Net income fell 66 percent, to $303 million, from a year earlier.

The company put $1.5 billion in reserves in the third- quarter for a potential settlement of a federal probe into its marketing of the epilepsy drug, Depakote.

Abbott also raised the lower end of its 2011 forecast, saying profit is expected to be $4.64 to $4.66 a share.

Humira accounts for about 40 percent of the drugmaker’s profit, said Bagley, whose company manages about 1.3 million Abbott shares, in an interview before today’s announcement. The medicine is used to treat rheumatoid arthritis, Crohn’s disease, plaque psoriasis, a kind of arthritis that affects the spine, and juvenile arthritis.

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