Abbott Labs‘ (NYSE:ABT) spin-off process seems to be on the right track as the healthcare conglomerate has closed one of the largest dollar denominated bond deals in the last three years, raising close to $15 billion in debt through its unit AbbVie.  Abbott plans to complete its spin-off by the end of 2012 and create two publicly traded companies: one with diversified medical products, Abbott, and the other one with research-based proprietary pharmaceuticals drugs, AbbVie.
The bond sale will help Abbott retire a major portion of the debt as AbbVie will pay part of the money to pay $8.5 billion in dividends to Abbott.  Currently, Abbott has a net debt load of about $6 billion on its balance sheet. With the spin-off nearing, we find it prudent to take a look at the structure of the “to be created” companies post the spin-off even as our current analysis does not reflect the planned split.
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Abbott: Will Be A Well Diversified Play
The current company, Abbott, will retain a diverse portfolio of health care products including:
- Pharmaceuticals - Generics drugs
- Nutritionals – Pediatric, adult, healthy living and sports nutrition products such as infant formulas, snack bars and meal replacement shakes
- Vascular - Minimally invasive medical devices for heart diseases, strokes, carotid artery diseases, and other serious vascular conditions
- Diagnostics - Systems and tests used for screening for drugs of abuse, cancer, therapeutic drug monitoring, fertility, physiological diseases and infectious diseases such as hepatitis and HIV
While this business will have relatively lower margins, we expect growth to be fairly stable in the long term. This business will have a significant presence in rapidly growing emerging markets like India, China and Russia and should provide a substantial growth opportunity.
In the pharmaceutical business, the company committed to several purchases in the past like Solvay and Piramal to diversify its portfolio of offerings and expand into emerging markets. On a similar note, the company recently opened a nutritional R&D center in India and struck an R&D deal with a Russian group to boost its nutritional business. In the vascular business, the company is developing next-generation Drug Eluting Stent (DES) XIENCE Xpedition, expected to launch in Europe this year and in the U.S. in 2013. Further, the company’s XIENCE PRIME received approval in Japan earlier this year.
Per capita income levels in many emerging markets are rising rapidly, which should lead to better insurance coverage and better healthcare. Additionally, new studies and increased access to information have led to rising health consciousness in these markets. These factors should drive growth for the future “Abbott”.
AbbVie: Dependence On Humira Could Hurt
After the spin-off, AbbVie will retain the higher margin proprietary pharmaceuticals and biologics including primary care and specialty care drugs that prevent and treat conditions such as autoimmune diseases, lipid disorders, kidney diseases, prostate cancer, thyroid diseases and HIV. The company’s prized asset, blockbuster drug Humira, will also be part of AbbVie and will drive growth for the company.
However, our concerns are raised from the significant dependence on Humira. Humira will lose patent protection in late 2016 in the U.S. and mid 2017 in Europe. The company’s current pipeline doesn’t have a very strong potential blockbuster candidate, which could limit its growth potential in the long term. The company also recently announced that its partner Reata Pharmaceuticals is discontinuing a late-stage trial of their potential blockbuster drug for chronic kidney disease and diabetes due to the safety concerns raised by an independent safety committee.
Another worry is the growing competition for Humira. (Read Pfizer Receives Major Boost As FDA Approves RA Drug Tofacitinib) Further, Tricor went off-patent in July 2012 while other drugs regulator Niaspan and Kaletra are seeing a decline in sales due to significant competition.
While after the bond deal AbbVie will be left with a huge pile of debt, we believe, in the short term, the “to be separated” company should be in a comfortable position with significant cash flows from Humira, among others.Notes: