Abbott Labs‘ (NYSE:ABT) board has approved the separation of the company into two separate publicly traded companies: one, Abbott, with diversified medical products, and the other, AbbVie, with research-based proprietary pharmaceuticals. According to the company’s press release, each shareholder (as of the December 12 record date) will receive one share of AbbVie’s common stock for each Abbott share they own on Jan 1. For fractional shares, shareholders will receive cash. AbbVie will begin trading on Jan 2.  Recently, to necessitate the separation, the company accessed the bond market and closed one of the largest dollar-denominated bond deals in the last three years, raising close to $15 billion in debt through AbbVie.
Our price estimate for Abbott Labs currently stands at $67, and our current analysis does not reflect the planned split. As the spin-off date nears, we once again discuss the detailed structure and prospects of the “to be created” companies following the spin-off.
Abbott Will Be A Well Diversified Play
The current company, Abbott, will retain a diverse portfolio of healthcare products including:
- Pharmaceuticals - Generic drugs
- Nutritionals – 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 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 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 a next-generation Drug Eluting Stent (DES), XIENCE Xpedition, which is 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.
AbbVie: Dependence On Humira Could Hurt
After the spinoff, 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, the blockbuster drug Humira, will also be part of AbbVie and will drive future revenues for the company.
However, even greater dependence on Humira is a concern. 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 lot of very strong potential blockbuster drugs, 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 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 such as Niaspan and Kaletra are seeing a decline in sales due to significant competition.Notes:
- Abbott Board of Directors Approves Separation of AbbVie and Declares Special Dividend Distribution of AbbVie Stock, Abbott Labs Press Release, Nov 28 2012 [↩]