Abbott Divides Medical Products and Pharma Units

Abbott Laboratories is splitting itself into two publicly traded companies, separating its medical products business from its research-based pharmaceuticals operations.

The medical products company will consist of Abbott’s generic pharmaceutical, devices, diagnostic and nutritional businesses, and will keep the Abbott name. The research-based pharmaceutical firm, on the other hand, will include proprietary pharmaceuticals as well as biologics, and will be given a new name at a later time, Abbott executives announced in an Oct. 19 news release.

“Today’s news is a significant event for Abbott, and reflects another change in our company’s 123-year history, strengthening our outlook for strong and sustainable growth and shareholder returns,” Chairman and CEO Miles D. White said.

The medical products business generates about $22 billion in annual revenue, according to Abbott estimates. The portfolio for this newly-formed company will comprise branded generic drugs sold outside the United States, adult and pediatric nutritional products (Similac infant formula and Ensure supplements for adults, which generated $5.5 billion last year), core laboratory diagnostics, point-of-care and molecular diagnostics, vascular devices (including the top-selling Xience heart stent), vision care products and medical systems that diagnose and treat diabetes. Executives expect the company to generate nearly 40 percent of its sales in “high-growth emerging markets.”

The research-based pharmaceutical company, by contrast, will focus on various specialty drugs in such areas as immunology, multiple sclerosis, chronic kidney disease, Hepatitis C, oncology and women’s health. It also will include the anti-inflammatory drug Humira and Kaletra, an AIDS treatment that generated about $1.26 billion for Abbott in 2010. Unlike the medical products business, most of the revenue in the pharmaceuticals firm will come from developed markets.

White will remain chairman and CEO of the medical products company while Richard A. Gonzalez, currently Abbott’s executive vice president of Global Pharmaceuticals, will become chairman and CEO of the research-based pharmaceuticals business. Gonzalez is a 30-year Abbott veteran who previously served as president and chief operating officer of the Abbott Park, Ill.-based healthcare conglomerate.

Abbott executives said the split will be completed by the end of 2012. The company has posted declining profits in recent quarters due to restructuring and acquisition charges, though lately it has generated stronger revenue. Abbott’s diverse portfolio has shielded the company from some of the common problems plaguing other drug manufacturers, such as patent expirations and competition from generic-brand pharmaceuticals. And while shares have suffered from the firm’s reliance on Humira (analysts estimate the drug’s sales account for about 40 percent of the company’s profit), Abbott has taken steps in recent years to reduce that dependency, most notably through acquisition.

Still, Abbott’s addiction to Humira for profits has taken a toll on shares, claims Jeffrey Bagley, a portfolio manager at Haverford Financial Services in Radnor, Pa. Before the announcement of the split, Abbott stock rose less than 1 percent over two years, while the Standard & Poor’s 500 Health Care Index rose 10 percent during that same time period.

Splitting the company into two separate businesses could help raise share value and sales, analysts predict. With Johnson & Johnson’s exit from the stent market earlier this year, Leerink Swann LLC analyst Rick Wise believes Abbott could very well increase Xience stent sales, which in turn, should offset lower pricing for the product.

“[The split] is good news,” Jan David Wald, an analyst at Morgan Keegan & Co. in Boston, Mass., told Bloomberg Businessweek. “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 deal will take the form of a tax-free distribution to Abbott shareholders of a publicly traded stock for the new pharmaceutical company. The expected stock distribution ratio will be determined at a future date.

The two companies each will pay a dividend that, when combined, will equal the current dividend at the point when they split, Abbott said.

Besides announcing the company split, Abbott reported third-quarter earnings on Oct. 19, excluding one-time items, of $1.18 a share, one cent more than the average estimate of 17 analysts surveyed by Bloomberg. Net income fell 66 percent to $303 million compared with 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.